Non-domicile tax charge on unremitted income and gains

This year’s budget saw the UK Chancellor Alistair Darling unveiling plans for a fixed annual charge of £30,000 on long-term residents claiming non-domicile status. The measures form part of the Finance Bill, which is making its way through both houses of Parliament. Final approval is expected this month – July – but the measures will apply from the start of this fiscal year on 6 April 2008.

Essentially, non-domiciled individuals, or ‘non-doms,’ are resident in the UK but have strong affiliations with another country where they were either born or their parents were born. They must also have an intention to leave the UK at some time in the future and live in that other country.  (A person’s domicile is particular to them and will need to be determined by an examination of their personal circumstances – professional tax advice should be sought.) 
 
Historically UK resident non-doms were allowed a special tax status. There are an estimated 120,000 registered non-doms in the UK. With a recorded spending of £17bn last year, they are considered an elite group with expertise vital to the UK economy.
 
Up until 5 April 2008 a non-domiciled person could keep their overseas income and capital gain out of the UK tax net merely by not bringing such income and gains into the UK (often referred to as the ‘remittance basis’). Now, however, if you are non-domiciled but resident in the UK for seven out of the past 10 years, you will have to consider carefully whether to continue to elect for the remittance basis.
 
For example, if you have, say, £500,000 income overseas, you may be liable to 40% tax on that income, which would be £200,000. To keep this overseas income out of the UK tax net, you will now have to pay the new charge of £30,000.

It is important to note, however, that the old rule of tax on remittance stays unchanged – a non-dom resident in the UK, even if they have paid £30,000 – will be liable to tax on any income or gains he is bringing into the UK.
 
Who is likely to be affected?
The people who will be affected by the new legislation will be UK residents who are not domiciled in the UK as well as those persons who are resident but not ‘ordinarily resident’ in the UK.
 
It has been the case for many years, that if you are a non-domiciled UK resident, you will not pay tax on your overseas income and gains unless you bring them to the UK. This is the remittance basis of taxation, which you must claim yourself via your self-assessment tax return.
 
From 6 April 2008, non-UK domiciled adults who have been resident in the UK for seven out of the past 10 years but still want to claim this remittance basis of taxation, will have to pay a £30,000 annual tax charge, unless their overseas income and gains in that particular year are less that £2,000.
 
This charge is in addition to any tax due on UK income and gains or on foreign income and gains remitted to the UK. It applies per person as opposed to household - to each tax payer who wants to benefit from the remittance basis, including children of 18 years and over if they are in receipt of overseas income.
 
Your choice of paying is not a permanent choice – each new tax year you can decide again whether or not to pay. Whether it makes sense to pay the charge in a particular year will likely depend on how much you are earning abroad that year. As a rough estimate, to justify paying the £30,000 fee your offshore income would have to exceed £80,000. If you do claim, note that you will lose your personal tax allowances for the year and the £9,200 exemption from capital gains tax (CGT).
 
The £30,000 annual tax charge will be payable through the self-assessment system. If you pay the £30,000 charge from an offshore source directly to HM Revenue and Customs by cheque or electronic transfer, the £30,000 will not itself be taxed as a remittance. But if you bring these funds into the UK to pay the charge from the UK, they will be taxed as a remittance at that point.
 
Could non-doms find themselves paying tax twice in two countries?
If you have income in one country and are resident in another, you may be liable to pay tax in both countries under their respective tax laws. To avoid ‘double taxation’ in this situation, the United Kingdom has negotiated double taxation treaties with more than 100 countries. Each treaty is called either a ‘Double Taxation Agreement or Convention’, depending on the wording of the treaty.
 
To avoid double taxation, the original proposals were amended so that the £30,000 charge is now imposed on specified income or capital gains abroad and should be treated as such for the purposes of the Double Taxation Agreements. (This may, however, not apply to certain countries, so it is always best to seek independent advice on your tax status).
 
What else does the new law affect?
The budget’s measures go beyond the £30,000 charge; other elements may pose larger problems. For example, if you buy an asset on your holiday – say an expensive souvenir such as an artwork or a car – from your overseas money you may have a substantial tax bill when you bring it back to the UK.
 
Some changes affect the taxation of trusts. Whether you are a settler of a trust or a beneficiary of a trust, it may be wise to obtain further advice on your situation. If you hold property in the UK that you wish to sell at some stage, or live in a property that is owned by a trust or company abroad, you should also talk to your independent advisers about your options.
 
However, this legislation does not impact inheritance tax rules. If you have been in the UK for less than 17 years you will not pay UK inheritance tax on your overseas assets. This will not be affected by whether or not you claim the remittance basis.
           
HSBC Bank plc provides a variety of specialised services for your non-dom status needs with regards to this new taxation legislation.
 
Within HSBC Private Bank, our specialists in Global Wealth Solutions are excellently placed to offer wealth planning solutions, including the use of trusts, corporate vehicles and life insurance policies to hold assets. Our staff hold recognised qualifications and possess many years of experience. Working with you and your advisers, our experts can assess your long-term goals and help protect your wealth now and in the years to come.
 
And with a presence in all major finance centres of the world, the group can help develop in-depth local and international solutions tailored to your situation.
 
If the non-dom status and effects of the new legislation apply to you, speak with your independent UK tax adviser about any possible restructuring from which you might benefit.


 
* This article is for general information only and is not personal advice. You should seek independent professional advice if you believe these changes may affect you.
 
*Please note that some information applicable to non-domiciled individuals in this article may change with any amendments to the Finance Bill, which is currently expected to be passed in July 2008.

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