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The test for UK residence
The Government has made some major changes to the test for UK residence.
When deciding an individual’s residence status, days of arrival in and
departure from the UK will be counted as days of presence in the UK with
effect from 6 April 2008. This will impact those who are not currently UK
resident purely on the basis that they are excluding days of arrival and
departure in their test for residence.
Taxation of UK resident but non-UK domiciliaries
Following the announcement of a review of the taxation of non-UK
domiciliaries in 2003, the Government has made some major, although not
entirely unexpected changes to the taxation of UK resident non-UK
domiciliaries. The new rules – outlined below – will take effect from 6
April 2008.
The changes include an ‘additional tax charge’ of £30,000 for individuals
who have been in the UK for seven years or more and want to continue using
the remittance basis of taxation. The seven year time limit runs from the
first year of residence in the UK, i.e. if the individual has already been
UK resident for five years, the new rules will apply after a further two
years.
Where an individual decides not to use the remittance basis (and not to pay
the additional tax charge) he or she will be taxed on their worldwide income
and gains whether or not they are remitted to the UK.
Entitlement to personal allowances will be removed for individuals resident
in the UK who are using the remittance basis, subject to a de minimis level
of unremitted foreign income of less than £1,000.
In addition, a number of alterations will be made to the remittance basis of
taxation: -
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The ‘source ceasing’ rule is to be removed with
effect from 6 April 2008. This means it will no longer be possible to
cease a source of income in one tax year and remit funds tax-free in the
following tax year.
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It will no longer be possible to remit income
arising in one year tax-free the following year by claiming the
remittance basis in the first year but not the second.
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Further changes will mean an extension to the
definition of remittance of relevant foreign income.
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There will also be a tightening of the rules
relating to the use of offshore trusts and companies to convert taxable
income and gains to non-taxable payments in the hands of non-domiciliaries.
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A general extension of anti-avoidance legislation,
which currently does not catch individuals taxed on the remittance
basis.
There will be consultation on the detail of the changes based on draft
legislation due to be published later this year. The Government also intends
to consult on whether individuals who have been resident in the UK for more
than ten years should be charged an even higher amount by way of the
‘additional tax charge.’
Our view
The new rules represent a major change in the position of non-domiciled
taxpayers. Going forward, such taxpayers will need to calculate whether they
are better off paying the £30k annual charge or giving up the benefits of
their status in relation to their foreign income and gains. For the
so-called "super-rich" that will be an easy decision as they will prefer to
pay the annual charge. For the less wealthy it will sometimes be a marginal
decision. For many the most crucial aspect will be the additional
legislation promised to clear up "anomalies arising from the remittance
basis”. |
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