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Budget 2008 – Residence and Domicile Changes18 March 2008
The Chancellor's Pre Budget Report of 9 October 2007, proposed changes to the taxation rules for residence and domicile. Draft legislation was subsequently published and consultation periods commenced.
The 2008 Budget last week included some amendments to the draft legislation, and a statement from the Chancellor to say that there should be no further revision of these proposals in this or the next parliament. Individuals should now review their affairs ahead of the proposed legislation which is to be included in the 2008 Finance Bill later this year, but will take effect from 6 April 2008.
The proposed legislation is complex and the purpose of this note is only to broadly outline the main proposed changes and to add a few suggestions for planning that clients may wish to consider before and after 6 April 2008.
Residence
Under the initial proposals, days of arrival and departure from the UK were from 6 April 2008 to count towards the test as to whether a person is resident in the UK for any tax year. This rule has been relaxed slightly from the draft legislation to only apply to days where an individual is present in the UK at midnight. Such days will now be included as present in the UK for the purpose of determining residence.
A new temporary non residence rule is to be enacted which states that an individual who leaves the UK for less than 5 years and during this period remits foreign income or gains earned whilst resident, will be taxed when they return to the UK as if the remittance was made on the date of return.
Domicile and The Remittance Basis
A non UK domiciled individual who has been resident in the UK for 7 out of the previous 10 tax years immediately preceding the tax year under consideration, will incur a £30,000 per annum tax charge if that individual wishes to claim the remittance basis of taxation for foreign income and gains. Should this be the case, the remittance basis will now need to be expressly claimed.
An individual can elect to claim the remittance basis one tax year and the arising basis the following year i.e. to declare worldwide income and gains, whether or not remitted. Therefore, annually, an individual can choose the basis of taxation which is most beneficial to them.
There is an exemption for small levels of foreign income and gains. This means that individuals with unremitted income and gains of less than £2,000 per annum do not need to pay the £30,000 tax charge if they claim the remittance basis of taxation.
Following initial doubts as to whether the £30,000 charge will be relievable under double tax treaties, the 2008 Budget confirmed that the charge will now be treated as a tax charge on unremitted foreign income and gains. Thus broadly the tax charge should now be creditable against tax suffered in a foreign jurisdiction.
A new definition of remittance is being proposed. Subject to limited exceptions a remittance will arise if money or other property or gains are bought, received or used in the UK for the benefit of an individual or their immediate family. The definition of “immediate family” differs from the definition of “relevant person” which was outlined in the draft legislation published, and will be limited to spouses or civil partners, cohabitants living together as spouses or civil partners, children and grandchildren, as well as certain companies and trusts.
This wider definition of remittance may also mean that assets brought to the UK which were purchased with foreign income or gains on or after 12 March 2008 could become assessable to tax. This may also extend to any services provided in the UK to an individual paid for from foreign income or gains. As stated above there are limited exceptions to this covering personal effects and certain works of art brought to the UK for public display.
The draft legislation proposed that untaxed offshore income and gains used to repay offshore loans where the funds were advanced to the UK would be taxable by way of the repayments being deemed a remittance. In the Budget it was announced that a grandfathering provision would be included for the repayment of existing loans secured on UK residential property, stating that the repayments will not be treated as a remittance until the earlier of the loan being repaid, terms or amounts varied, or 5 April 2028.
Where a remittance is made from a ‘mixed’ account, the proposed legislation provides that the funds are treated in a set order, broadly taxing income before gains and capital.
From 6 April 2008, income and gains remitted to the UK will not escape taxation under the previous ‘source ceasing’ principle.
Personal Allowances and Exemptions
From 6 April 2008, if an individual in any one tax year elects to claim the remittance basis of taxation despite the new tax charge, they will lose their Income Tax personal allowance and annual exemption for Capital Gains Tax purposes.
Offshore Companies and Trusts
Following intensive lobbying, the Chancellor, in the Budget has partially revised the proposed changes, seeking to bring the rules on taxation of offshore companies and trusts in line with personal ownership.
From 6 April 2008, UK participators of offshore companies will be taxed on chargeable gains accruing to the company irrespective of the individuals domicile status.
Under current law, non UK domiciled individuals who are settlors or beneficiaries of certain offshore trusts are exempt from Capital Gains Tax irrespective of whether capital or benefits are received in the UK. This is being amended resulting in non UK domiciled beneficiaries being subject to tax.
Beneficiaries of offshore trusts who are non UK domiciled and receive capital distributions or benefits (e.g. cheap loans or discounted use of property) from an offshore trust will now be chargeable to Capital Gains Tax on the remittance basis on all UK and offshore assets. This could therefore put such trusts in a worse position than owning the assets personally.
It is proposed that trustees will be able to make irrevocable elections to rebase assets held in trust as at 6 April 2008 in order to avoid a non UK domiciled beneficiary being subject to tax on pregnant gains accruing before 6 April 2008.
Finally, there are changes to the disclosure requirements of settlors and beneficiaries of offshore trusts. Compared to the initial proposals these have been are relaxed, but more information may be needed by HMRC if trustees elect to rebase trust assets.
Planning Opportunities
The commentary above gives a brief summary of the proposed changes. Whilst the legislation is not yet enacted, and it will not be until the summer of 2008, any changes are to be effective from 6 April 2008. Individuals should therefore review their circumstances now and consider whether any planning ought to be put in to place pre and post 6 April 2008. Some generic planning ideas may be as follows:
This note is only to act as a very broad summary of the main forthcoming taxation changes to residence and domicile legislation. It is recommended that individuals seek detailed advice ahead of 6 April 2008.
If you have any questions in respect of the changes, please contact Mark Stemp, Helen Beaumont or David Nash at Chancery.
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