Pre Budget Report 2007 - Residence and Domicile
The long awaited attacks on the non domiciliary have arrived. Having rubbished the £25,000 levy put forward by the Conservatives, Mr Darling has announced a £30,000 surcharge for those who will have been resident in the UK for 7 years at 5 April 2008.
The £30K is in addition to the tax that would be payable on the remitted income. There will be frantic calculations as to whether the advice should be to remit now. There is no information currently on if or how that will fit with any double taxation treaties…
There are a number of detailed attacks which have a small effect but cumulatively are pernicious. From 6 April 2008 it will not be possible to combine a claim for personal allowances with the remittance basis unless your unremitted income is less than £1000 per year.
The residence rules got a lot of publicity earlier in the year and despite their protestations at the time the Revenue have now said that after 6 April 2008 the days of arrival and days of departure will be counted as days of presence in the UK. This is bad news for international commuters.
The final sting in the tail is that there are various “corrections to anomalies”. In short these are:
Stopping the manipulation of the remittance basis by claiming it one year and not the next
• Stopping the source ceasing rules
• Reducing the scope for the alienation of income or gains using offshore trusts and companies – we will wait with bated breath for that one…
• Applying avoidance measures which do not currently remittance basis users.
Some of these are are quite scary and there are potentially enormous changes to both existing arrangements and the way in which we plan for non UK domiciliaries.
A consultation is promised but it will perforce be a short one if legislation is to be introduced in FA08 as the consultation papers will not be issued to the end of the year. Far be it from us to suggest this is a cynical attempt to minimise the opportunity for anyone to consider matters properly. We will be posting further details as soon as we can.
http://www.hmrc.gov.uk/pbr2007/pbrn18.pdf.
Will HMRC address the issue of UK airport transits when considering days of arrival and departure counting towards 90 days of residence? Offshore islanders going almost anywhere have to transit through UK airports, often with an overnight stay. It will be very tough if these days are also counted.
As is often the case there was little detail in the Pre Budget Report. Whether HMRC will count "transit" days will not become clear until the draft legislation appears later this year followed by a period of consultation.
In many countries, the US, France etc.included, one could stay up to 6 months before becoming resident. Counting the days of departure and aarrival for the 90 days stay residence rule is driving business people away from the UK
If one chooses to give up the non-domicile option for one year (or more) can one then revert back to it? In other words, someone who has little offshore assets at present but expects that to change in the future may want to declare all worldwide assets (and thus avoid the £30,000) but later revert back to non-domicile status. Will that be possible?
Hi Mark
Many thanks for your comment.
We won't know until we see the rules but we suspect there will be limitations on the ability to opt out again once one has opted into worldwide taxation.
Thanks
Lisa
If a non-domicile person, decides give up the non-domicile option in 2008, and opts to declare worldwide income, is it clear how his investments and income will be taxed for the previous years of residence. i.e if he has kept separate "capital" and "income" accounts for all his years of residence, will the funds in the "income" account which have accumulated over the years all become taxable in 2008?
How about his investments. Will he have to go back over previous years records to work out what capital gains he has made from sales of shares in order to be able to declare them in his 2008 return?
Fenton
The previous income is unlikely to be taxed in one lump in 2008 but we think that future remittances of "old" income will be taxed as and when they are made - we have to wait for the legislation to see for sure.
Capital gains is clearer in that the date of disposal is the key thing so if the disposal is after 5 April 2008 the gain is taxable regardless of when the asset was acquired.
Thanks
Lisa
Clive-December 1, 2007
If a person decides to give up non-domicile status in 2008 will the tax authorities allow non remitted accumulated capital gain losses be carried forward to 2008 and future year gains?
Thanks
Clive
Losses are not usually remittable and as such offshore losses are not relieved against UK gains. The position for unrealised losses may be different and we will have to wait for the detailed legislation to be sure. The prudent course of action is to plan without reference to the losses.
Thanks
Lisa
I have lived and worked in the UK for the last 10 years, paying my UK tax dutifully. I have some properties abroad which i intend to sell and realise the gain when I retire, at which time i might want to leave the UK. I feel that the new rule has it's merits in terms of multi-millionaires, but is quite unfair for someone like me who has worked hard and has chosen to invest abroad because of the lower CGT liabilities there.
If i should choose to leave the UK before April 2008, what will be my tax position. Will I still be considered resident as I have lived 7 out of the last 10 years here?
BTW, do I have to stay away from the UK altogether for the following three years?
Hi Mary
In answer to your first comment...
If you are resident at the time of the sale the cgt is potentially payable.However if you are not resident the gain will only be taxable in the UK if you return within 5 fiscal years.
Thanks
Lisa
Hi Mary
In answer to your second comment...
Rule will be 7 out of 10 years so yes at least three needed to restart the clock.
Thanks
Lisa
Hi Lisa
Can I assume that by 'return' you are referring to becoming resident again after leaving the country, and not visits totally less than 90 days a year?
Mel
Mel
Yes, that is right.
Thanks
Lisa
Now that the draft rules have been published, is it now clear that closing a bank account and remitting the capital (as opposed to the interest)is not taxable?
Does this apply even if the interest was not previously separated into another account - since bank statements can prove what the initial capital was.
Chris
Where the source ceasing rules have been used in the past to convert income into capital there is only protection where these sums are remitted before 5 April. After that date the proposed measure is retrospective to the extent that after 5 April one will look to ascertain what is income and capital in each remittance regardless of whether the source of the income exists.
Where there is a mixed fund the revenue have introduced new rules on this subject setting out the order of priority in determining the components of a remittance. Income will be treated as remitted before capital in the current year and then earlier years (on a LIFO basis) until the account is exhausted.
Thanks
Lisa
Thank you Lisa.
I was really asking about separation of capital from interest rather than source ceasing. The interest has been compounded into the same bank account. If the account is now closed with only the capital being remitted before April- would that be taxable?
Chris
The capital can be remitted tax free before April if it can be clearly and properly identified. If sums come from an account that contains interest at the point of the remittance then the interest will be taxable.
Thanks
Lisa
Does the 7 year rule means 7 continous years or is it cumulative and are years prior to the introdction of this rule counted ?
Ian
The rule will be 7 years out of 9 preceding the year being tested so not necessarily continuous years...Years prior to the announcement do count towards the total.
Thanks
Lisa
Lisa,
I had a look at the draft legislation and am still not entirely sure whether or not there is a last chance to use the source ceasing rule, i.e. cease before 5 April this year and remit next tax year. It would be reasonable to think that the legislation would not allow such a last opportunity. However, are you sure the draft legislation is worded in such a way?
Thanks
Jan
Jan
The legislation as drafted is clear that if there is a remittance of "income" in 2008/09, it does not matter when the source closed, the "income" would be taxed.
HMRC are aware that this is extremely wide and can catch "income" which has been thought to be cleaned capital for many years. We may get some kind of limitation to the provision when the final legislation is produced but I would maintain that the only prudent course of action on the basis of current information is to remit any such cleaned capital before 5 April 2008.
Thanks
Lisa
Suppose a gift transaction is completed overseas between family members (both non-doms). This is then remitted to the UK. Can the donee gift to the original donor without tax being incurred?
am long-standing non-dom, just wonder what happens after April 6 if new legislation is passed as proposed. Can I then bring in any foreign assets without being taxed if I let myself be treated as domiciled and resident?
Richard
If you are taxed on an arising basis in 08/09 going forward that does not stop unremitted income from earlier years being taxed if it is brought to the UK in a later year. The bringing in of assets is specifically included as a remittance after 5 April 2008.
Regards
Lisa
Chris
We don't recommend that - this side of 5 April the danger is that HMRC will treat the original gift as invalid. After 5 April the transaction would result in a tax charge which could possibly be doubled up.
Regards
Lisa
tks Lisa, but this is pretty weird as you are locked into a situation with not much choice, basically a retroactive tax, they either charge you £30000 or tax on old income, guess someone with deep pockets will have to challenge this in court, does not sound like our human rights are worth a lot to our rulers
What is the tax & HMRC reporting position for a transaction before 5/4/2008, between a connected donor and donee,both nondom UK residents,on gifting or selling an overseas dwelling which has accumulated CG but eligible for indexation and taper&letting relief?
In particular what cost basis will the donee have if he choses to sell the property in the future when he will fall into the new legislations?
Furthermore ,what are the implication to IHT, if the donor is not deemed domicile for IHT purposes?.
Thanks in Advance
Zack
Zack
There are a number of issue to consider here, not least the fact that the transaction involves two areas of taxation that are subject to radical changes namely capital gains tax and the taxation of non-domiciled UK residents. The proposed changes are not yet final and further announcements are expected in the Budget on 12 March - revisit this blog for further details on that day.
Without the full details of the transaction, and those party to it, it is impossible to provides a considered response to this query. You mention the availability of lettings relief and this infers some relief as a principal private residence. It is worth remembering that, if the property is jointly owned the maximum lettings relief of up to £40,000 may be increased to £80,000.
I would suggest that you seek formal advice in connection with the transaction as soon as possible.
Thanks
Lisa
Dear Lisa,
What would be the tax position and HMRC reporting requirements for a nondom UK resident on a remittance of a four-digits-sum to the UK, before and after 6/4/2008.
The remittance to be from an account which has not made any gains or income during tax year 2007/08.
Will the individual be required to report and detail the breakdown for capital/gains/income in the said remittance and pay tax for the years prior to 2007/08?
Thanks in advance
Zack
Zach
Either side of 5 April a UK resident is required to report any remittances to HMRC on his tax return and analyse the remittance between income/capital gain and capital. Your affairs sound quite complicated Zack so proper advice is better than the generalisations which I can do here.
Thanks
Lisa
Consider a gift made abroad which includes gains. If there is no plan to bring this back to the UK immediately, is there any advantage in gifting before April?
Andrew
To be certain of coming within existing rules you need to gift and the remittance needs to be made before 5 April. After 6 April, there is a greater chance of the gift being taxable in the donor's hands but we won't know for sure until we see the Budget announcements and Finance Bill.
Thanks
Lisa
Dear Lisa,
I have read the following in the FT.
Quote
Michael Snyder, chairman of the City of London's policy and resources committee, said the chancellor had given ground on all the issues on which the City had lobbied, apart from the charge itself. Since overseas income under £2,000 a year will be ignored, the number of people affected will be much smaller, reducing it to something relevant mainly to the very wealthy.
Unquote
Do you concur with above?
Or wIll these people need to pay taxes on arising basis on income&gains between £0-£2,000?
Thanks in Advance
Zak
This follows on from the previous entry (6 March)after having read the Budget notes at http://www.hmrc.gov.uk/budget2008/notes-pdf.htm
Consider a gift (which includes gains/interest) to an unconnected person completed overseas from a non-dom who in 2008/9 chooses not to pay the £30k charge.
Is it still advantageous to make this gift (and also possibly remit?) before 6 April? (For instance, might the gift be liable to CGT if made after 6 April?)
Consider a gift made abroad which includes gains. If there is no plan to bring this back to the UK immediately, is there any advantage in gifting before April?
Zak
Concur in part - certainly the increase in the exemption from £1000 to £2000 will take some people out of the equation but I am not certain it will confine matters only to the wealthy as the commentator says. The technical position is that if you have offshore income and gains of less than £2000 in a year you can claim the remittance basis for that year without paying the £30K or losing your personal allowances. The income will then be taxed in the usual way if it is brought to the UK.
thanks
Lisa
Andrew
Until we see the Finance Bill, we cannot be sure about gifts made before 5 April. Certainly gifts made after 5 April are at risk so as there would not appear to be an obvious downside to making a gift now - that would seem wise.
Thanks
Lisa
someone from the channel islands whom has lived in england for over 17 years, paid all there taxes in england. is now currently semi retired has now to make a choice before 5th april whether to leave his wife and family and go back to the ci or find the money to pay £30,000. luckily the persons wife is english or it would be £60,000. then there is the nightmare of previous investments, if declaring worldwide income and bring it back to england.
so all of those people who now pay taxes and nic whom spend a lot of money in england. could move away and the country loses all of that money could far out weight the 600 million that the budget will supposedly recover. yet how much will the country lose in total revenue and taxes should they decide to leave england
An overseas investment has been crystallised at a loss by a resident nondom. Does it make any difference if it is brought back to the UK before or after April 6? (Assuming the 30k charge is not to be paid).
Chris
If the loss has already been crystallised then it does not matter when the proceeds are brought back to the UK as there is no tax and no tax relief. After 5 April there is intended to be a limited relief for foreign losses but the final details will be published in the Finance Bill. If the asset is merely standing at a loss there is probably some merit in deferring crystallisation until after 5 April in the hope that you could come within those rules.
Thanks
Lisa
Hi
I've been a non-dom in the UK for more than 7 years.
To avoid the 30k payment, do I need to do something now about giving up my status, before April 5th, or do I wait for the 08-09 tax return for that?
many thanks
Vittorio
No, it is nothing to do now the election, it will be as part of your 09 tax return.
Thanks
Lisa
Hi,
I am long term UK resident Non Dom. I have significant accumulated capital gains which I do not need to remit to UK.
Just wanted to confirm my understanding on the rules going forward and appropriate action before APril 5th.
Is it correct that capital gains o disposals post 6th April 2008 will be all accumulated gains (from original purchase date). This in effect means that capital gains rules are retrospective!
If so is it not just wise to crystalise these gains (without remitting them) before April 5th and in future only pay capital gains only on gains made post 6th April 2008. I have done this for all assets with signficant gains.
Is this too simple and is there a catch? What is best advice.
Thank you
James
For gains in your personal hands nothing has changed except that if you wish to claim the remittance basis in future and you have been UK resident for more than 7 years you must pay £30K remittance basis charge(RBC). The rules relating to the charge are complex and you may need specific advice. If you carry on on the remittance basis then the position is as you are - tax when you bring the gains in. If you are not paying the RBC you will be taxed on a worldwide basis and then - yes , the gains are calculated on the difference between purchase price and proceeds. Certainly if you are in a position to realise gains before 5 April there would be no harm in that. Also remember that you can elect for which years you pay the RBC so you may find that you need only pay it in years in which you realise a substantial gain.
thanks
Lisa
Lisa,
Thank you so much for your answer.
Just to clarify, my offshore income/capital gains will never be sufficient to make it worthwhile to pay the RBC, especially as the capital tax rate has been cut to 18%. Also I will have UK income and gains and it would therefore not be sensible to give up personal allowances which I believe are lost when one chooses to be taxed on the remittance basis. Hence, I will always be choosing to be taxed on an arising basis.
Assuming I have realised all gains pre-April 5th 2008 and now start repurchasing financial assets(offshore unit trusts and stock/shares)from 6th April 2008, I will have effectively created a new capital base for future capital gains! Of course, all gains realised before 5th April 2008 cannot be remitted without triggering a capital gains charge on the amount remitted. The question then is ...if/when these gains are remitted in the future and I choose not to pay RBC, will the capital gains rate be calculated at the old rate (up to 40% or max 24% on assets held for over 10 years) or post 6th April 2008 rate of 18%. Are there any special rules or do normal capital gains rules apply to these pre-April 2008 gains.
Thank you so much for your advice and this very informative website and comment section.
James
Tax rate on remittances next year will be 18% even if gain realised previously. Thanks for your kind words.
Regards
Lisa