The Chancellor has announced further details of the new regime to apply to non-domiciled individuals. Most importantly, he has confirmed that it will go ahead from 6 April as planned. However, he has also included a number of changes to the proposals, and there will be winners and losers from this.
The existing system
At the moment, non-domiciled individuals enjoy a remittance basis for the taxation of overseas income and gains. Such income and gains are taxed only when brought into the UK, and there is legislation designed to counter attempts to enjoy the benefits of income in the UK without crystallising a tax charge. Non-domiciliaries have always paid tax immediately on UK income and gains.
In addition, non-domiciled individuals enjoy favourable treatment for capital gains tax purposes where they establish a trust or company resident abroad.
The proposals
The announcement in October and subsequent draft legislation and guidance notes envisage a charge of £30,000 p.a. for individuals wishing to claim the remittance basis for 2008/09 onwards. This applies to individuals who have been resident in the UK for seven out of the previous nine years, so that individuals who became resident in the UK before 6 April 2002 are potentially affected.
If the remittance basis is claimed, UK tax is calculated without the benefit of personal allowances for income tax purposes and the annual exemption for capital gains tax purposes.
The definition of remittance and the anti-avoidance measures designed to prevent its circumvention are to be significantly tightened, as are the anti-avoidance rules which allowed individuals to escape capital gains tax on gains within overseas trusts and companies.
What has changed?
The first change is an increase to the de minimis level of income under which the new rules will not apply. Individuals who have income and gains which are less than £2,000 pa will continue to enjoy the remittance basis without the loss of personal allowances and annual exemptions and without paying £30,000 p.a. This limit was to be £1,000 pa when the rules were initially announced.
The measures to close loopholes in the remittance basis are very much along the lines expected. Planning techniques involving closing bank accounts and remitting the income in the following tax year, gifting income to your spouse before he or she remits it, and the importation of assets acquired abroad out of overseas income, will still be closed. However, the closure of the importation loophole will only apply to assets acquired on or after 12 March 2008. In addition, where individuals have existing overseas loans, the interest on which is being funded from overseas income, such loans will not be brought within the definition of remittance. New loans will be caught.
Most importantly, the proposed changes to offshore trusts and companies will be severely scaled back.
As originally proposed, a taxpayer who sets up an overseas trust would be potentially taxable on its gains as and when they were realised. This would put a non-domiciled taxpayer in the same position as a UK domiciled taxpayer. The Chancellor has backed away from this move: there is to be no tax charge on non-domiciled settlors of overseas trusts. Instead, the capital gains are to be taxable upon beneficiaries (possibly the settlor himself) when capital is distributed by the trustees. This charge is to be on a remittance basis, irrespective of the location of the asset which gave rise to the gain.
The changes actually make it more attractive to set up and maintain overseas trusts, in that you will be taxed more favourably on gains held within a trust than you would on gains held personally or through an overseas company you own directly. A gain on a UK asset will be taxed immediately if held personally or through such a company but only on a remittance basis if held through a trust.
A further concession is that trustees will have the opportunity to elect for assets to be rebased at 5 April 2008, so that any gains arising prior to this date will not be taxable when distributed to beneficiaries. This is again not available to individuals on assets held directly.
Non-domiciled beneficiaries will not be taxed on capital distributions in future if matched to gains realised before 6 April 2008 or those deemed to arise on rebasing. This applies even if they are not claiming the remittance basis at the time. However, if they become UK domiciled as well as UK resident in the future, they will face a charge on such gains.
A consequence of this latter change is that gains distributed by trustees will now be matched to gains arising to the trustees on the last in first out basis. This will actually produce a benefit for UK domiciled beneficiaries, as the rules previously provided for matching on a first in first out basis. As the tax charge on gains distributed to beneficiaries increases if they are not distributed promptly, this potentially reduces the tax charge which UK domiciled beneficiaries will face.
The Chancellor has already bowed to pressure on the level of disclosure required of non-domiciled individuals in relation to their non-UK assets. He has now done the same for overseas trusts established by non-UK domiciliaries. Settlors and beneficiaries will not need to disclose information on the trusts itself beyond their normal self assessment disclosures, although some disclosure may be required if the trustees make a rebasing claim or the beneficiaries face an enquiry into their return.
One of the greatest sources of annoyance with the £30,000 charge has come from US citizens who face paying a tax charge that they would not obtain relief for against US taxation. The Chancellor has sought to overcome this problem by allowing taxpayers to “allocate” the charge to unremitted income or gains, with the charge becoming an income or capital gains tax charge. This would potentially be subject to relief against overseas tax under a Double Tax Agreement. However, it is far from clear whether full credit will be available in the US because of the size of the charge and the limits on double tax relief under this particular treaty.
