NON-DOMICILED UK RESIDENTS AND THE “SEVEN YEAR ITCH”

The proposed changes to the UK tax regime for non-domiciled residents in the UK have received much press. Detailed draft legislation was expected by the 14^th of December 2007 but was postponed to the 14^th January 2008. We now anticipate that there may be a further delay. Therefore at the present time very little detail is known about the package of measures set out by the Government in the Pre-Budget Report on 9 October 2007 except that the new measures are to be effective from 6 April 2008.

What we do know may be summarised as follows:

• Resident non-domiciles who have been in the UK for longer than seven out of the past ten years will only be able to access the remittance basis of assessment on payment of an annual charge of £30,000, unless their unremitted foreign income or gains are less than £1,000;

• Individuals who use the remittance basis of taxation will no longer be entitled to Income Tax personal allowances. Again, this will not apply where the foreign income is less than £1,000;

• The Government will introduce changes to the residence rules so that days of arrival in and departure from the UK will count toward establishing residence. This brings the UK into line with international practice; and

• The Government will amend the current rules to remove flaws and anomalies that allow individuals using the remittance basis of taxation to sidestep UK tax, where it is due on foreign income and gains.

The “Seven year itch”

The UK government has been reviewing the tax position with respect to the regulations on domicile and residence for over a decade. They have now decided that those non-domiciled residents who have lived in the UK for more than seven years should make a greater contribution to the UK economy during their period of residence. These proposals appear to provide the non-domiciled resident with three options:

• Submit to UK taxation on worldwide income and gains on the same basis as a UK domiciled and resident individual; or

• Pay a £30,000 registration fee and forego all personal allowances but continue to benefit from the remittance basis; or

• Leave the UK.

The choice of seven years out of ten is based on a desire to provide an attractive tax environment for non-domiciled individuals to come and work in the UK for the medium term. Initial calculations indicate that for those who wish to remain in the UK and who have unremitted income in excess of £80,000 per annum, the payment of the £30,000 fee may be the preferred option.

In addition the claim is for each individual so that in the case of a husband and wife with joint wealth they would both need to make the claim and each pay the fee of £30,000.

Individuals will have the ability to opt in and out of the remittance basis but it is proposed that anti avoidance legislation will be introduced to ensure that this ability is not abused by, for instance, some form of rolling up of income. Again there are currently no details on this proposed legislation.

Counting days in the UK

According to current practice only whole days are counted towards establishing residence. As a result a non-resident can spend substantial periods of time in the UK without becoming resident and, therefore, without becoming subject to UK tax on their worldwide income and gains. From April 2008, the change will mean that someone who is not resident in the UK but is spending significant time in this country will have both days of arrival in and departure from the UK counted towards establishing residence here.

The requirements for residence remain unchanged being 183 days in any one-year or an average in excess of 90 days per annum over a four-year period. The change proposed is merely in the method of calculating days of residence but it will be material to those people who are regular visitors to the UK.

Correcting flaws and anomalies

The UK Government believe that the current rules are subject to a range of flaws and anomalies which subvert their intention that users of the remittance basis should pay UK tax on foreign income and gains that they bring into the UK.

The changes that are to take effect from April 2008 are:

• The 'ceased source' loophole, where foreign savings and investment income and gains cannot currently be taxed when remitted to the UK if the source of the income or gain no longer exists in that year. For example, with foreign bank interest, tax can be sidestepped by closing that bank account at the end of the tax year, transferring the interest to a new bank account, and then remitting it to the UK tax-free as the source of the interest no longer exists.

• The 'cash only' loophole which means HMRC can currently only tax foreign savings and investment income if it is brought into the UK as cash. If a remittance basis taxpayer turns foreign investment income into an asset outside the UK and then imports that asset, no UK tax can be charged on the income unless and until the asset is sold or turned into cash in the UK.

• The 'claims mechanism' loophole for foreign savings and investment income where income from a year in which a claim to use the remittance basis is made cannot be taxed if it is remitted in a subsequent year in which no claim is made.

• The problems in taxing remittances from 'mixed funds'. There are currently no statutory rules on the treatment of remittances from funds including some combination of relevant foreign income, employment income, capital gains and capital if they are remitted to the UK.

• Alienation of income and gains through offshore vehicles or closely connected persons to avoid tax. The current rules can allow overseas income and gains to be alienated by an individual to some third party, such as an offshore trust or close relative, and then brought to the UK in such a way that the individual whose income or gain it was effectively has the use or enjoyment of it in the UK.

• The fact that certain anti-avoidance legislation, such as provisions introduced to prevent UK residents from making gains tax free in offshore structures, does not work effectively in relation to remittance basis users. This means, for example, that non-domiciled residents can avoid tax on gains accruing in non-resident trusts or companies when they are remitted to the UK.

What does the future hold?

The draft proposals also include a number of possible changes for future consideration. The proposals that would most likely be pursued at a later date appear to be:

• For those resident for ten out of the past 12 years the fee could increase to £50,000 per annum;

• Set an upper time limit for the use of the remittance basis, perhaps in line with the deemed domiciled rules so that those who have been resident for 17 out of 20 years would not be able to benefit from it and would be subject to taxation on their worldwide income and gains.

It is impossible to be certain that these suggestions would ever occur but it is clear that the current thinking from both the Government and the Opposition is that non-domiciled residents should be taxed, directly or indirectly, to a greater level than ever before. The UK may no longer be the world’s favourite tax haven.

What do I do now?

Until we see the draft legislation and how this will impact on the offshore structures that non-domiciled residents have in place it is very difficult to make any firm recommendations. Caversham continue to monitor the situation and are in regular contact with UK tax advisors to identify what actions our customers may wish to consider taking. Any non-domiciled UK residents should discuss these changes with their UK tax advisor to decide what action should be taken in advance of April 2008.

For further information or advice please contact Robert Surcouf in the first instance by email rsurcouf@caversham.com or call +44 1534 874707.

© Caversham 2008

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