New Rules For Non-Domiciliaries

Non-domiciled UK residents have up to now enjoyed major benefits regarding the tax treatment of their foreign income, gains and assets compared to their domiciled counterparts. On 9th October 2007, after significant pressure not least from the official opposition, the Chancellor clamped down on non-domiciliaries by invoking a price for the privilege. The main features of the proposed new legislation, intended to take effect from 6th April 2008, are as follows:

• An annual levy of £30,000 to be charged on individuals using the remittance basis.

• The withdrawal of personal allowances for such individuals.

• The abolition of the source ceasing rule

These are set out in further details below.

Annual Levy

Many non-doms currently take advantage of the remittance basis to either avoid income tax on income and CGT on gains, or to manipulate the timing of the tax on such income/gains. So by leaving and spending foreign income and proceeds on gains outside the UK, they can avoid paying tax on these. From 6th April 2008, a charge of £30,000 per annum will be raised for non-doms who wish to continue to claim the remittance basis. This will apply to non-doms who have been tax resident for 7 years. It is further intended that the £30,000 charge will increase from after the 10th year of residence to an as yet undetermined amount. Those wishing to avoid the charge can simply opt to be taxed on worldwide income and gains, remitted or unremitted.

Personal Allowances

Anyone resident in the UK is entitled to a personal allowance. The basic personal allowance is currently £5,225. For a 40% taxpayer, the effect of the personal allowance is a reduction in income tax of £2,090. From 6th April 2008, anyone claiming the remittance basis will not be able to claim the personal allowance. Non-doms who have less than £1,000 of unremitted foreign income will be permitted to retain their personal allowance. This also applies to, where relevant, the blind person's and married couple's allowances.

Source Ceasing

This is a much-used method of avoiding income tax on remittances. Currently, offshore investment income is taxed in the year of remittance but only if the source of that income exists at the time of remittance. Consequently, many non-doms, for example, close a bank account in one year and open a new account simultaneously, containing both the capital and income from the old account. They then remit from this account in the following tax year. As the source of the interest (the original bank account) no longer exists, the remittance is treated as capital and therefore not taxed. This "source ceasing" rule will be abolished from 6th April 2008.

Residence

A further proposed change concerns the counting of days spent in the UK to determine tax residence. An individual is considered tax resident if he spends more than 182 days in any tax year in the UK or more than 90 days per annum on average over the last 4 tax years. Currently, it is the practice to count completed days only, i.e. to exclude the days or arrival and departure. The proposed legislation will count any part of a day in the UK towards the 182 day or 90 day rule. This will in particular affect individuals who make numerous trips to the UK in a year.

Future Strategies

• It should be pointed out that there is still a raft of advantages to being non-domiciled and individuals should still pursue this status with no less vigour than before.

• For individuals who come to the UK or have recently arrived in the UK, the situation for their first 7 years of residence is exactly the same as before, i.e. highly tax advantageous.

• There is a window of opportunity for non-doms to act up until 5th April 2008, so as to organise their affairs advantageously. Possible considerations include:
  
  - structuring the ownership of foreign assets by use of a trust or similar,
  - remitting source ceased income,
  - changing the nature of overseas investments from income-producing to capital roll-up
  
• The proposed legislation is simply that - proposed. It is possible that changes may be made to the above prior to 6th April. So any planning should be viewed in this light.

• The announcement makes no mention of Inheritance Tax. In the continued absence of such an announcement, it is worth remembering that for non-doms who have been tax-resident in the UK for less than 17 out of the last 20 years, foreign assets do not come within the IHT charge. Non-doms who fail this test will be "deemed domiciled" for IHT purposes and subject to tax on worldwide assets.

Call to Action

For further advice on the above or any of the other matters contained in the Pre-Budget Report, please do not hesitate to contact your usual Lawrence Grant partner.