remittance basis

UK: Changes to non-domiciled rules in Finance Bill (No 2) 2017

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Changes to the UK non-domiciled rules that were excluded from the Finance Bill 2017 are to be included in the Finance Bill (No 2) 2017. The Bill is to be published and considered by parliament in September 2017 following the summer recess. Updated draft legislation and explanations on the changes to rules on deemed domicile were published in July 2017, and when passed they will take effect from 1 April 2017.

The provisions relating to non-domiciled individuals include the following measures:

Deemed domicile

New deemed domicile rules provide that a non-domiciled individual will be treated as domiciled in the UK for all tax purposes in a tax year if that individual has been resident in the UK for at least 15 of the last 20 years.

The new rules will also provide that a non-domiciled individual who was born in the UK with a UK domicile of origin is to be treated as domiciled in the UK for income and capital gains tax purposes in any tax year in which that individual is UK resident; and the individual will also be treated as domiciled in the UK for inheritance tax purposes after one year of UK residence.

Rebasing relief

Individuals who are deemed domiciled from 6 April 2017 because they have been resident in the UK for 15 of the last 20 years can rebase their foreign located capital assets to market value on 5 April 2017 for purposes of capital gains tax. Consequently on a future sale of a foreign asset only the gain from 6 April 2017 to the date of sale would be liable to capital gains tax. This will apply automatically unless the taxpayer elects for the provision not to apply.

Segregation of mixed funds

Any non-domiciled individual who has been taxed under the remittance basis prior to 2017/18 will be able to rearrange mixed funds held in non-UK bank accounts and segregate them into their constituent parts. This is a transitional arrangement for the 2017/18 and 2018.19 tax years and applies only to nominated transfers of money from a mixed account to another account.

This is a useful measure because income and capital gains taxable under the remittance basis are treated by the law as remitted before non-taxable income. So if there is income taxable under the remittance basis and also non-taxable capital in a bank account any remittance from that account will be treated as a remittance of taxable income or gains rather than of the non-taxable element. By separating out the non-taxable element into a separate account the taxpayer can arrange to remit that non-taxable capital without a tax charge.

Inheritance tax on residential property interests

From 6 April 2017 inheritance tax is to apply to UK residential property interests held indirectly by non-UK domiciled individuals, for example through a non-UK company, and any debt used to finance the property will be subject to inheritance tax in the hands of the lender.

This means for example that any shares in non-UK close companies or interests in overseas partnerships the value of which is derived from UK residential property will come within the scope of inheritance tax. This will apply whether the individual is UK resident or non-resident.

Any debt used to finance the purchase, maintenance or repair of UK residential property will be treated as an asset within the scope of inheritance tax in the hands of the lender. If the lender is a non-UK close company or a partnership then look-through provisions will apply. Any security or collateral for the debt will also be within the scope of inheritance tax as part of the estate of the person providing the security.


UK government considers changes to taxation of non-domiciled individuals

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The second UK budget for 2015 planned for 8 July 2015 could include changes to the UK tax rules for non-domiciled individuals.

Non-domiciled individuals can elect to pay UK income tax on the remittance basis so that UK tax is only paid on foreign income or gains when they are brought into the UK. However for non-domiciled individuals who have been resident in the UK for more than seven out of the past nine tax years there is an annual charge of GBP 30,000 known as the remittance basis charge that they can elect to pay to continue using the remittance basis. For non-domiciled individuals resident in the UK in 12 of the past 14 years the charge is GBP 60,000 for 2015/16 (previously GBP 50,000) and for those resident in 17 of the past 20 years the charge is GBP 90,000 with effect from 6 April 2015.

During the UK election campaign for the 7 May 2015 election the Conservative Party manifesto contained a commitment to raise charges and tackle abuses. If these policies are turned into legislation it could become difficult for some UK residents to retain their non-domiciled status. In any event it is likely to become more costly to retain non-domiciled status.

A consultation on a change to the non-domiciled rules was held following an announcement in the UK’s Autumn Statement 2014. The government considered that the current rules make it too easy for non-domiciled individuals to arrange their tax affairs so that they only need to pay the remittance basis charge occasionally. The current rule is that an individual can opt in or out of non-domiciled status each year and therefore plan when it is appropriate to pay the remittance basis charge.

The government’s policy aim is to require individuals claiming the remittance basis to continue paying the remittance basis charge for a minimum period, perhaps three years, when they have been resident in the UK for at least seven of the past nine years.

One possible change to the rules could be to remove the possibility for a UK resident person to be viewed as non-domiciled only because that person’s father was domiciled in another country at the time of their birth. This issue was widely discussed during the election campaign. If changes were made to this rule the UK tax authority HMRC could argue that these persons have acquired a domicile of choice in the UK and bring them into the normal UK tax regime.

Another possible change to the rules could be to take away non-domiciled status altogether once a person has been resident in the UK for a certain number of years. Other policy options would include changes in the rules to encourage non-domiciled individuals to bring money into the UK. In the current climate the examination of non-domiciled individuals by HMRC is becoming more detailed and non-domiciled status is increasingly likely to be challenged.