New Rules For Non-Domiciliaries

The main features of the new legislation which are currently in effect are as follows:

An annual levy of £30,000 to be charged on individuals using the remittance basis.
The withdrawal of personal allowances and the annual capital gains tax exemption for such individuals.
The abolition of the source ceasing rule.

These are set out in further detail below.

Annual Levy

Many non-doms have taken 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 could avoid paying tax on these. From 6th April 2008, a charge of £30,000 per annum is levied for non-doms who have been tax resident for more than 7 out of the past 9 years and is payable with effect from the 8th year of said period of residence. Those wishing to avoid the charge can simply opt to be taxed on worldwide income and gains, remitted or unremitted.

Personal Allowances/ Exemptions

Anyone resident in the UK is entitled to a personal allowance. The basic personal allowance is currently £6,475. For a 40% taxpayer, the effect of the personal allowance is a reduction in income tax of £2,590 or £3,237.50 for a 50% taxpayer. Anyone currently claiming the remittance basis will not be able to claim the personal allowance. Non-doms who have less than £2,000 of unremitted foreign income will be permitted to retain their personal allowance. This also applies to, where relevant, the age allowance, the blind person’s allowance and the married couple’s allowance. Additionally, taxpayers using the remittance basis will lose their annual capital gains tax exemption (currently £10,100).

Source Ceasing

This is a much-used method of avoiding income tax on remittances. Pre-6th April 2008, offshore investment income was taxed in the year of remittance but only if the source of that income exists at the same 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 would then remit from this account in the following tax year. As the source of the interest (the original bank account) no longer existed, the remittance was treated as capital and therefore not taxed. This “source ceasing” rule was abolished from 6th April 2008.

Residence

A further 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 years. It was the practice to count completed days only, ie. to exclude the days or arrival and departure. From 6th April 2008, presence in the UK at midnight (with certain exceptions) will count as 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 almost the same as before ie. highly tax advantageous. The only difference is that such individuals lose their personal allowances and capital gains tax exemption if they use the remittance basis.
Non-doms, particularly those who have been UK resident for more than 7 out of the 9 years should consider the following:

structuring the ownership of foreign assets by use of a trust or similar,
changing the nature of overseas investments from income-producing to capital roll up,
becoming non-resident for at least 3 years (this will restart the 7 year clock),

The rules for non-doms in relation to Inheritance Tax did not alter. 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 IHT on worldwide assets.

Call to Action

For further advice on the above please do not hesitate to contact your usual Lawrence Grant partner.