Unlike some other tax jurisdictions, residence, ordinary residence and domicile status assume considerable significance when it comes to an individual’s liability to UK tax. UK residents not domiciled in the UK (‘non-doms’ for short) are treated to some special rules on their overseas income and gains. Whilst the Finance Act 2008 (FA 2008) fundamentally changed the course of non-dom taxation, the Finance Act 2012 (FA 2012) introduced further changes and added some sweeteners as well.
Normally, UK residents are liable to pay UK tax on their worldwide income and chargeable gains on ‘arising’ basis. In other words, if you are tax resident in the UK you are liable to pay UK tax on your income earned and gains made wherever in the world. However, if you’re resident but not domiciled in the UK you could opt for your overseas income and gains to be taxed in the UK on ‘remittance’ basis. What it means is that you will be taxed on your foreign income and gains only to the extent to which they are remitted over to, or received in, the UK.
The changes made by FA 2008 and FA 2012 mean that now we have three broad classes of non-domiciled residents for tax purposes:
1) Those resident in the UK for at least 12 of the last 14 years
Unfortunately the law assumes that the longer you’re resident in the UK the richer you get overseas!! Accordingly, if you have been resident in the UK for at least 12 out of the last 14 years and if you wish to pay UK tax on remittance basis, you will need to cough up a remittance basis charge (RBC) of £50,000. In effect this is a charge for not paying tax on your worldwide income and gains on an arising basis. This is in addition to any tax that you might have to pay on your UK income and gains and on the amount remitted to the UK. But, the RBC could be nominated against tax due on your unremitted overseas income and gains, so to that extent they are not taxed again.
Let us consider a scenario where you are a 40% tax payer and you have an overseas income totaling £225,000. If you remit £100,000 you will pay £40,000 (£100,000 @ 40%) straight away. Over and above that you will also pay the RBC of £50,000 because you have been resident in the UK for at least 12 of the last 14 years. However, this RBC could be nominated against your unremitted income of £125,000. Should you bring this £125k over to the UK in later years you don’t need to pay any more tax because the RBC has sufficiently covered the tax due (£125,000 @40%. Should you have an unremitted income of £300,000, you will be liable to pay tax on £175,000 (i.e. £300,000 – £125,000) whenever that is remitted to the UK. However, the RBC of £50,000 would care of part of the tax due i.e. on £125,000 income.
The consequence of this change is that from April 2012 if you have been resident in the UK for at least 12 years you should opt for remittance basis only if your overseas income is more than:
a) 50,000/45% – £111,111 for those paying the additional rate of tax,
b) 50,000/40% – £125,000 for those in the higher tax rate, and
c) 50,000/20% – £250,000 for those paying basic rate of tax.
(For simplicity this illustration considers overseas income only, whereas both income and gains are taxable)
2) Those resident for at least 7 out of the last 9 years
The tax exposure for those in this category will be on identical lines as above except that the RBC payable is limited to £30,000. Therefore, you should opt for remittance basis only if your overseas income is more than:
a) 30,000/45% – £66,667 for those paying the additional rate of tax,
b) 30,000/40% – £75,000 for those in the higher tax rate, and
c) 30,000/20% – £150,000 for those paying basic rate of tax.
3) Those resident in the UK for less than 7 years
You have the option of either paying UK tax on your worldwide income and gains or you could opt for the remittance basis. Should you opt for the remittance basis you will need to pay UK tax in the year in which the money is received in the UK.
Making a claim
In order to benefit from the remittance basis, every tax year you will need to make a claim on your tax return. You do not need to make a claim in the following circumstances: a) Your unremitted ‘relevant’ overseas income and gains is less than £2000; OR b) if you meet all the following conditions: (i) you have no ‘UK income or gains’ for the tax year other than taxed investment income of no more than £100 gross; (ii) you have no ‘relevant income’ or ‘gains’ remitted to the UK in the tax year; and iii) you have been resident in the UK for not more than six years or you are less than 18 years of age
• An individual who claims the remittance basis for any tax year is not entitled to any personal reliefs (e.g. personal allowance) for that tax year and is not entitled to the annual exemption for capital gains tax.
• The remittance basis applies to foreign capital gains and income. It cannot be claimed for gains or income in isolation.
• The remittance basis can be claimed on a tax year basis i.e. you could opt to claim remittance basis for a particular year but could choose to pay tax on ‘arising’ basis the next year.
• The definition of what constitutes ‘remittance’ is very wide and includes virtually anything a ‘relevant person’ brings in, receives in the UK.
Unremitted income and gains
So what about the unremitted foreign income and gains? Whether or not you opt for the remittance basis, as a non-domiciled tax resident you are liable to disclose your unremitted overseas income and gains over £2,000. Where do not opt for the remittance basis you’re liable to pay tax on arising basis. Should you wish to pay tax on arising basis, you could claim a credit (Foreign Tax Credit Relief) for all or part of the foreign tax paid against any UK tax due. In many cases this will be covered by a Double Taxation Agreement (DTA) with the country in which you have paid the foreign tax. Where no treaty exists, the UK rules allow unilateral tax credit relief. So, in many cases you will find choosing the ‘arising’ basis a better option, the only change being some additional accounting computation work.
The FA 2012 sweetener
Even if you opt for the remittance basis, you could still escape UK tax on the remittance made under a new law effective April 2012. Called Business Investment Relief, if the qualifying conditions are met, such remittances will not constitute ‘remittance’ and will not, therefore, be taxed. Broadly the conditions are:
a) The remittance must be in the form of an investment (in the form of shares or a loan) in to a ‘qualifying company’ that meets the eligibility conditions for the relief
b) The investment must be made within 45 days of your foreign income and gains being brought to the UK
c) No relevant person is able to obtain benefits, either directly or indirectly, that are attributable to the investment
d) You must make a claim for the relief from UK tax on your Self Assessment tax return in the year of investment
e) Upon disposal of the investment the proceeds (up to the amount of the investment) should be taken offshore or be re-invested in another qualifying investment within 45 days.
And then of course, as with any piece of tax legislation, there is the universal tail-end rider: the investment must not be made as part of a scheme or arrangement, the main purpose of which is tax avoidance.
Eligible trading company: In order to claim this relief the target company should be a private limited company:
a) Carrying on a commercial trade, or
b) One that is preparing to do so within 2 years of remittance, and
c) Carrying on commercial trade is what it does or substantially does
There are then elaborate anti-avoidance rules, called chargeable events, that would reverse the relief unless mitigation steps are taken.
HMRC does offer an advance assurance scheme where the remittance basis user could make a request to HMRC for opinion on whether a planned investment would be treated as a qualifying investment under the business investment relief provisions.
Watch this space for detailed analysis of the business investment relief provisions.