Offshore Services - United Kingdom

Introduction

The October 2007 Pre-Budget Report introduced a number of changes to the taxation of UK-resident non-domiciled individuals. Previously, such persons had been taxed on the remittance basis - that is, they were subject to UK income tax and capital gains tax on their UK income and gains, but paid tax on foreign income and gains only to the extent that they remitted them to the United Kingdom. This contrasts with the principle applied to UK-resident domiciled individuals, who are subject to tax on their worldwide income and gains on an arising basis.

The draft legislation regarding the changes to the residence and domicile rules has been published and no further significant changes are expected before the legislation comes into force on April 6 2008. This update summarizes the main changes.

Non-domicile £30,000 Charge

A UK-resident non-domiciled individual will be liable to pay a £30,000 annual charge if he or she:

• opts to pay tax on the remittance basis;
• has been resident in the United Kingdom for seven of the preceding nine years; and
• has unremitted foreign income and gains of £1,000 or more.

Such individuals will be liable on the following terms:

The £30,000 charge is an additional charge and will not be creditable against any tax due on UK income or gains or on foreign income and gains remitted to the United Kingdom. 

An individual opting to be taxed on the remittance basis will lose his or her personal allowance for income tax and the annual exempt amount for capital gains tax.

Individuals may opt to be taxed on the arising basis for one year and on the remittance basis for the following year.

Foreign tax authorities of individual treaty partners will be required to decide whether the tax will be regarded as if it were a tax for foreign tax credit purposes under a double tax agreement.

No higher charge will apply to individuals who have been resident in the United Kingdom for over 10 years, although the government is still consulting on this issue.

Offshore Trusts and Companies

Settlors

The legislation has been extended so that a non-domiciled settlor who retains an interest in a settlement will be taxed on gains made by the settlement which arise from assets in the United Kingdom. This provision will not apply to gains realized before April 5 2008. Gains on assets outside the United Kingdom will be subject to tax if remitted by the settlor or the trustees. If not remitted, such gains will be attributed to any capital payments made to the beneficiaries.

Beneficiaries

A UK-resident non-domiciled beneficiary who receives a capital payment or benefit from an offshore trust will be subject to tax to the extent that there are gains in the settlement. This rule applies regardless of whether the beneficiary remits the funds to the United Kingdom and also applies to gains that arise before April 6 2008. In addition, the supplementary charge of 10% a year (up to a maximum of six years) will apply to the number of years between the realization and distribution of the gain.

Notification requirements

The legislation that requires a settlor of a trust to notify Her Majesty's Revenue and Customs (HMRC) of the date of settlement and the names and addresses of the trustees has been extended to include UK-resident non-domiciled settlors. Such settlors must now notify HMRC within three months of creating the settlement or within 12 weeks of becoming resident or domiciled in the United Kingdom. This rule also applies to trusts created before April 5 2008 and includes trusts established when the settlor was non-resident. Disclosure of such a trust must be made by April 5 2009 if created before April 6 2008 by a non-domiciled settlor who is a UK resident.

Offshore company gains

With effect from April 6 2008, rules which attribute gains of non-resident closed companies to UK-resident and domiciled shareholders will be extended to UK-resident non-domiciled shareholders if the asset which gives rise to the gain is in the United Kingdom. If the asset is outside the United Kingdom, the gain will be taxed on the remittance basis.

Residence

With effect from April 6 2008, days of entry to and exit from the United Kingdom will be counted as days of residence. The published guidance on this rule - it is not statutory - will be amended accordingly. 

Remittance

Source-ceasing rules

At present, no tax liability can arise if the source of the income ceases before the year in which the income is remitted. Thus, it is relatively easy to close a bank account and remit the income it has produced in the following tax year. This rule has been abolished and it seems that taxpayers will be unable to avoid liability in this way, even where the source of the income ceased before the preceding year.

Meaning of 'remittance'

The legislation defines a 'remittance' as

"any money or other property brought to or received or used in the United Kingdom by or for the benefit of a relevant person, or any service provided in the United Kingdom to or for the benefit of a relevant person."

This new definition means that if, for example, a non-domiciled person purchases a car overseas with foreign income and brings the car to the United Kingdom, this will be a taxable remittance.

The term 'relevant person' covers:

• a spouse or civil partner - individuals living together as husband and wife or as civil partners will be treated as if they were married or in a civil partnership;
• a relative or a relative of a spouse or civil partner;
• a trust of which the individual or someone connected with him or her is the settlor;
• a company under the control of the individual; and
• a person with whom the individual is in partnership.

Remittance from mixed accounts

A statutory basis for identifying funds transferred from a mixed account will prioritize each category with which the transfer is to be matched. As it is rare to make a remittance from a mixed fund, the impact of this change is likely to be limited.

Alienation of income and gains

Previously, if a non-domiciled person made a gift of foreign income or gains outside the United Kingdom to a third party, the latter could remit the gift to the United Kingdom tax free. The new provisions ensure that where a person makes such a gift to a relevant person, the donor will be taxable on income or gains gifted if the donee remits them to the United Kingdom as if the donor had done so.

Temporary Non-residence

A new anti-avoidance measure applies where an individual has been resident in the United Kingdom for four of the seven years before departure and subsequently becomes non-resident for less than five full tax years. Income remitted during this period of non-residence - whether it arose during the year of departure or an earlier year of UK residency - will be taxed in the year of the individual's return.

Comment

The legislative changes are extensive and far-reaching. All non-domiciled individuals should be prepared to review their affairs, as they may need to implement a number of planning mechanisms before April 6 2008.

International Law Office