Chapter 7 - The Advantages of Being Non-Domiciled

7.1 NON-UK DOMICILIARIES

Individuals who are UK resident/ordinarily resident but also retain a foreign domicile can enjoy preferential tax treatment in a number of respects.

The type of person who can exploit these tax breaks is typically someone who was born outside the UK but currently lives here. Their children are usually also able to take advantage of these tax-planning opportunities.

The main tax benefit is that overseas income and capital gains can be subject to UK income tax and capital gains tax on the 'remittance basis'. This means that tax is paid only when the funds are brought into the UK. This is a fantastic tax break because it means that your investments can grow tax free for many years and potentially indefinitely.

However, there are a number of important changes regarding the use of the remittance basis, which will apply for income and capital gains arising after 5th April 2008.

In this chapter, we will take a detailed look at the impact of these changes. For many non UK domiciliaries they are of crucial importance. It is worth noting though that these new changes will only affect income tax and capital gains tax.

The inheritance tax position remains exactly the same and inheritance tax, being based on domicile, would not normally apply to overseas assets of non UK domiciliaries.

You would need to watch out for the 'deemed domicile rules' covered elsewhere in this book. They can result in a non-domiciliary's worldwide estate being subject to inheritance tax if they are UK resident for 17 out of the last 20 years.

7.2 THE REMITTANCE TAX CHARGE EXPLAINED

Before 6th April 2008 if you were UK resident but non UK domiciled (or non ordinarily resident) you could be taxed on overseas income and/or capital gains under the remittance basis of tax. As we have seen, this means that you are only taxed on overseas income when you bring it into the UK and on overseas capital gains when you bring the proceeds into the UK.

This has led to the development of many strategies to sidestep the rules by bringing overseas cash into the UK, without triggering the remittance rules.

The alternative to the remittance basis is the arising basis which is how the vast majority of UK residents are taxed. Under this, you are taxed on your worldwide income and capital gains irrespective of whether you keep the income or proceeds overseas or not.

Summary of the New Rules

As from 6th April 2008 if you are entitled to use the remittance basis of tax (for example, if you are a non UK domiciliary) and decide to use it, you will usually now have to claim it in your tax return. This in itself is not a big issue but when you make a claim for the remittance basis of tax there are two key drawbacks:

• Firstly, you will lose certain UK tax allowances.

• Secondly, if you have been UK resident for more than seven of the past ten years you can only claim the remittance basis if you pay an annual £30,000 tax charge.

  From 6th April 2012 this charge rises to £50,000 once you have been UK resident for at least 12 or more of the previous 14 years.

This will have a major impact on whether many non UK domiciliaries will use the remittance basis or not. Some of the key points that you should bear in mind are:

Annual Claim

You can assess on an annual basis whether you want to claim the remittance basis or not. Therefore, in each tax year you'll review your position taking account of the overseas income and gains and choose either the remittance or arising basis. If you opt for the remittance basis, you will then need to take account of the loss of UK allowances and whether you will need to pay the £30,000/£50,000 tax charge (so it would need to be worth your while).

£30,000 Annual Tax Charge

This charge was first announced in the 2007 Pre-Budget Report, however the March 2008 Budget and 2008 Finance Act significantly changed its operation (along with many of the other original proposals).

It is crucial to note that new rules state the £30,000 charge is to be regarded as a tax on overseas unremitted income or capital gains rather than just a standalone tax charge. It is essentially a 'minimum tax charge' on overseas unremitted income or capital gains. It will, however, be payable in addition to income tax or capital gains tax on remittances in the year.

What has changed is that you will now need to elect what overseas income or capital gain the £30,000 tax charge relates to. Any future remittance of that income or gain would then not be subject to UK tax again (as it has already been subject to UK tax). You can choose whether the £30,000 tax charge is levied on:

• Unremitted non-UK source income, or
• Unremitted non-UK source capital gains, or
• A combination of these.

The £30,000 tax charge is calculated on the amount of unremitted overseas income or gains that would give rise to a £30,000 liability, after taking into account overseas losses, taxes and allowances.

This certainly complicates matters, and now there will be a system of pools and specific rules to keep track of:

• The amount of unremitted overseas income and capital gains which the £30,000 charge has been levied on.
• The amount and type of overseas unremitted income and gains that have not been taxed.
• The overseas tax on the overseas income and gains.

To prevent the assumption that the income remitted to the UK was income that had already been subject to the £30,000 tax charge, note a number of new ordering provisions.

These will treat remittances as being from income or capital gains that have not been subject to the £30,000 charge since 6 April 2008 (or when you become UK resident if later) before then moving on to the exempt income and gains.

It is only when you have remitted all of your 'untaxed' overseas income and gains that you will then be able to remit the 'taxed' income and gains (which will then be tax free in the UK).

Example

If you had overseas income of £100,000 and were taxed at the higher rate, you would need to pay £40,000 income tax under the arising basis. If you retained that income overseas, you may decide to claim the remittance basis.

In this case you would need to pay the £30,000 tax charge as well as any tax on any remittances in the tax year. If there were no other remittances in the tax year the remittance basis may therefore, be preferred as you would be saving yourself £10,000 in tax.

You would also elect for the £30,000 to be based on the relevant overseas income. Assuming that this represented the £100,000 of overseas unremitted income (after taking account of foreign taxes, etc.) you could remit this £100,000 in the future free of UK tax. However this £100,000 could only be remitted once you had remitted all other non taxed income and capital gains (calculated since the first day of UK residency or if later 6 April 2008).

Essentially, you would need to compare the UK tax on the overseas income with the £30,000 tax charge. If it were less, you would be better off opting for the arising basis.

£50,000 Annual Charge

The new £50,000 charge applies from 6th April 2012 for any non UK domiciliaries who have been resident in the UK for at least 12 of the previous 14 tax years. It operates in exactly the same way as the £30,000 charge.

Impact on Domicile Status and Inheritance Tax

There is no change to the domicile rules and no change to the inheritance tax regime for non UK domiciliaries. The changes are to the remittance basis -- and not solely to non UK domiciliaries. (They, therefore, also apply to non UK ordinarily resident individuals).

Remitting Previous Income or Gains

If you opt for the arising basis, this means that you are subject to tax on all your overseas income and gains -- whether brought back to the UK or not.

If you are taxed on the arising basis, you could not then be taxed on any remittances of previous years' income or gains (as that income or gain did not arise in the current tax year). However, the new rules introduce provisions so that any remittance of previous years' income or gains will be taxed whether you are taxed on the arising or remittance basis.

Example

Peter is a UK resident, non UK domiciliary and elects for the remittance basis in 2012/2013. He has overseas unremitted income of £200,000, pays the £30,000 tax charge and retains all his overseas income outside the UK. He will need to also elect for some of the overseas income to have been subject to the £30,000 tax charge.

For 2013/2014 he then abides with the arising basis as he has no overseas unremitted income. If he remits £10,000 of his income from 2012/2013, that £10,000 will be subject to UK tax in 2013/2014 irrespective of the fact that he is being taxed on the arising basis.

Remittance Basis and Allowances

Anyone who is non UK domiciled or non UK ordinarily resident can opt for the remittance basis. This would need to be via a claim on the new tax return (unless the overseas unremitted income and gains are less than £2,000).

If you make the claim, you will then lose the ability to claim your:

• Personal allowance
• Blind person's allowance
• Married couples reductions
• CGT annual exemption
• Tax reductions for life insurance payments

Note that the annual exemption is lost even on UK assets if the remittance basis is claimed.

Low Overseas Income Exemption

There is an exception to the requirement to actually claim the remittance basis of tax. If you have overseas income or capital gains that aren't remitted to the UK of less than £2,000, there is no need to make a claim in your tax return.

In this case, you will be entitled to use the remittance basis automatically if you are non UK domiciled. The benefit is that, as there is no claim, there is also:

• No loss of the above allowances, and
• No requirement to pay the £30,000/£50,000 charge.

When Income and Gains Are Remitted to the UK

The new legislation classes income or gains as remitted to the UK broadly if two conditions are satisfied:

• Cash or other property is brought into the UK for the benefit of a non domiciliary or their 'immediate family'.
• The property that is brought into the UK is (or is derived from) the income or capital gain.

This is also widened to include the case where foreign income or proceeds are used outside the UK to satisfy a debt which is in respect of UK property.

It is therefore a very wide definition of 'remittance' and will catch most methods of bringing cash into the UK including using overseas credit cards, using cheques drawn on overseas banks and bringing physical assets into the UK.

The legislation provides a measure of relief so that money brought into the UK to pay the £30,000/£50,000 charge will not itself be taxable. This is an extension of the 'no tax on tax' principle and is a welcome clarification.

In order to benefit from this rule, you will need to avoid the cash actually being paid into your bank. The Revenue will therefore require payment directly to them either via a bank transfer or an overseas cheque.

There is also an art exemption which allows a non UK domiciliary to bring art works into the UK for public display without incurring a charge to tax under the new remittance rules.

As of April 2012, there is a new 'Business Remittance Exemption'. This means that non doms will be able to bring in unremitted income and gains without triggering an income tax or CGT charge, providing the funds are to be used for "commercial investment in UK businesses".

Changes to Overseas 'Alienation' of Assets

One of the key changes in the new provisions is the set of rules attacking 'alienation' of assets or income overseas.

The original proposals applied where the non domiciliary, or a person connected with them, brought the income or gain into the UK. This was a very wide definition.

However, the 2008 Finance Act has stated that it will now only apply to the non UK domiciliary or 'relevant people' and where they benefit from the overseas income or gain.

Essentially the new provisions therefore ensure that where overseas income or assets with gains are transferred to certain family members overseas before being remitted to the UK the non-domiciled 'gift or' could be taxed.

There will be a tax charge if amounts received in the UK are derived directly or indirectly from the original income or gains (as they usually will be).

End of Cessation of Source Rule

A popular tax planning 'ruse' for non UK domiciliaries was to rely on the 'cessation of source' rule to remit income free of UK income tax. This relied on the archaic rule that income could not be classed as remitted if the source of that income was not in existence in the tax year it was brought into the UK. This led to non domiciliaries closing bank accounts in one year and remitting the accumulated interest free of income tax in a later tax year.

As from 6th April 2008 the new legislation ends this technique for avoiding remittances. For anyone interested in the 'obituary' for this technique, the relevant extract in the legislation states:

"…(2) For any tax year in which (a) the individual is UK resident, and (b) any of the relevant foreign income is remitted to the United Kingdom, income tax is charged on the full amount of the relevant foreign income so remitted in that year.

(3) Subsection (2) applies whether or not the source of the income exists when the income is remitted…"

Returning to the UK and the Remittance Basis

Anyone who leaves the UK for fewer than five tax years could also be taxed on unremitted overseas income arising before they left the UK. The income tax charge would arise by treating income they remitted during the years of absence as remitted in the year of return (when it would then be taxed).

There is a separate provision that will charge proceeds from capital gains remitted whilst the period of non residence does not last for more than the five tax year requirement as remitted in the tax year of your return.

Disclosure for Non UK Domiciliaries after 6th April 2008

When the original draft legislation was released there was widespread concern that non UK domiciliaries would be forced to disclose income and capital gains for a number of previous years.

This was not popular as many non UK domiciliaries prize confidentiality just as highly as tax savings. The prospect of having their overseas income and assets disclosed to overseas tax authorities in accordance with the UK's double tax treaty network was a serious bone of contention.

The Revenue released a statement in February 2008 to clarify the disclosure position after 6th April 2008. They said:

"...those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances..."

This was also confirmed in the March 2008 Budget. The statement provides some reassurance to non UK domiciliaries that they will not need to disclose the source of overseas income and gains. However, if they do claim the remittance basis, it is expected that the Revenue could raise an enquiry to gather details of the overseas source in any case.

7.3 PLANNING FOR THE £30,000 TAX CHARGE

Because you can choose whether or not to claim the remittance basis, anyone with no overseas income would clearly not be looking to claim it.

Similarly, anyone with overseas income that was fully remitted to the UK would not usually claim the remittance basis (in order to save themselves the annual £30,000 tax charge).

If a non domiciliary does have overseas income which is to be retained overseas and they have been resident in the UK for eight or more years, they need to weigh up the tax on the overseas income under the arising basis and compare this to the tax charge under the remittance basis, as well as the £30,000 tax charge.

Example

Phillipe is a non UK domiciliary and has been UK resident for more than eight tax years but fewer than twelve tax years. (Remember, the £30,000 charge only applies after you have been resident in the UK for more than seven tax years, but less than 12 tax years).

He has overseas investment income of £100,000. If he were a higher rate taxpayer and he elected for the arising basis of tax he would pay income tax on this of £40,000. This applies irrespective of the amount of income he actually brings into the UK. However, as he's a non UK domiciliary he has the option of claiming the remittance basis. If he remitted £50,000 of the £100,000 income he would pay income tax only on the £50,000 remitted to the UK.

Therefore, his income tax charge would be £20,000. However he would also have to pay the £30,000 annual tax charge which would take his total tax bill to £50,000 (The assumption is that the remitted income is not used to pay the £30,000 annual tax charge).

Although he would need to allocate some of the overseas unremitted income to the £30,000 tax charge, in this case he would be better off being taxed on the arising basis, paying the £40,000 tax bill. He could then remit all the proceeds with no further tax charge.

If he had remitted none of the income he would again need to compare his position under the arising basis of tax (£40,000) with his position under the remittance basis. In this case the remittance basis would incur no tax charge as there is no income remitted. Although there would still be the £30,000 tax charge to pay, Phillipe may decide to claim the remittance basis and save himself £10,000.

He would then elect the overseas income on which the £30,000 was based and could remit this at some point in the future free of UK tax.

It should also be remembered that if the remittance basis is claimed, there is a loss of the personal allowance (and other allowances such as the CGT annual exemption). These would need to be factored into the calculation.

Essentially though, if the UK tax on the overseas income was less than £30,000, you would opt for the arising basis. For example, in terms of tax on income for a higher-rate taxpayer, it would generally only be if unremitted overseas income exceeded £84,440 that it would be worthwhile to opt for the remittance basis. This would then compensate for the loss of the personal allowance (£9,440 in 2013/14) and would cover the additional £30,000 tax charge.

If you were a high income earner and taxed at 45% (from 6 April 2013) you would only need to have foreign unremitted income exceeding £66,667 to make it worthwhile. (You would lose the personal allowance in any case due to having income substantially above £100,000).

It is this type of analysis that non UK domiciliaries will need to perform on an annual basis to determine: what is the best option? Of course, where the overseas income is large, claiming the remittance basis may be far and away the best option. This will apply particularly to capital gains on overseas assets where large sums can be involved. In this case, paying a £30,000 tax charge could represent only a very small proportion of the actual proceeds.

7.4 PLANNING FOR THE £50,000 TAX CHARGE

Exactly the same analysis will apply to the new £50,000 charge, once a non-dom has been UK resident for 12 tax years.

You will therefore have:

• The first 7 years of UK residence would incur no charge is payable
• The next 5 years of UK residence where £30,000 is payable
• If you remain UK resident, you will then have to pay the £50,000 charge.

Of course in all cases you could just opt for the arising basis, pay tax on your worldwide income and avoid any remittance charge.

Once you have to pay the £50,000 remittance basis charge, your break-even point will obviously change significantly.

If you have just overseas capital gains, the break-even point as a higher-rate taxpayer would be £178,571:

£178,571 x 28% = £50,000

In addition, when you add the £10,600 annual CGT exemption, the minimum overseas gain you would need before it is worth paying the £50,000 tax charge would be £189,171.

If you have no other taxable income, any capital gains are taxed at 18% up to £32,245 (the basic-rate band for the 2013/14 tax year). Above this they are taxed at 28%.

In this case, you would need to have unremitted gains of at least £200,687 before it would be worthwhile to claim the remittance basis and pay the £50,000 tax charge.

If you have unremitted income, it is likely that you would be paying income tax at the additional rate (45% for 2013/14) on at least part of your income before it would make sense to claim the remittance basis and pay the £50,000 tax charge. Of course, if all your income was taxed at 45%, you would need to have £111,111 of unremitted income before it would be worthwhile.

If there was no other UK income, then you would need to have unremitted income of around £141,000 before claiming the remittance basis and paying the £50,000 charge made sense.

Of course the good thing about the remittance provisions is that you can swap between the remittance basis and arising basis as you please.

Therefore, even with over 12 years of UK residence, just one year of exceptional foreign income or capital gains could make claiming the remittance basis worthwhile.

7.5 CAPITAL & INCOME ACCOUNTS

Traditionally non UK domiciliaries have been advised to use separate capital and income accounts to maximise the benefit of the remittance rules.

In this case, at least three overseas bank accounts would be used:

• The first account for your existing capital.
• The second account to deposit the proceeds of any asset disposals.
• The third account to contain the interest from the first two accounts, along with any other foreign source income.

The point of this exercise is to segregate your foreign income and gains.

If you want to bring money into the country, you should first remit funds from the first bank account. This can usually be done tax free.

If further funds are required, then withdrawals can be made from the second account, which would effectively subject the withdrawals to capital gains tax. Finally, withdrawals from the third account would be subject to income tax.

Another advantage of utilising these accounts is that, for inheritance tax purposes, the foreign bank accounts of a non-UK domiciliary will usually be outside the scope of UK inheritance tax.

Example

Hercule, who was born in Belgium, has been offered a contract of employment with a UK company. It is envisaged that he will be in the UK for five years before returning to Belgium.

Hercule has significant assets in France and has decided to dispose of his main residence before he commences his UK employment. Any proceeds of this sale should be put into overseas account 1. After the commencement of his contract, he hears that the Belgian property market is about to collapse and he decides to sell his other Belgian property. If he claims the remittance basis the proceeds of this sale should go into overseas account 2. Furthermore, any overseas income that he earns, for example rental income from his properties or interest on his overseas bank accounts, should be deposited in overseas account 3 if he is claiming the remittance basis. (If he were not claiming the remittance basis, there would be no benefit in separating the income or proceeds other than making it easier to identify income and capital gains).

Hercule may never need to use any of his foreign income/proceeds during his period of stay in the UK, in which case none of the foreign income/gains would be taxable. If he does require any funds they should be remitted in the following order:

• Account 1 -- Not subject to UK capital gains tax as the assets were disposed of before Hercule was a UK resident.
• Account 2 -- Subject to UK capital gains tax on the remittance basis, as the disposal occurred while Hercule was UK resident but non-domiciled and the remittance basis was claimed. Capital gains tax is usually preferable to income tax as there are more reliefs available.
• Account 3 -- Subject to UK income tax on the remittance basis as overseas income of a UK resident/non-domiciliary.

After the 2008 tax changes, splitting out income and capital is still advisable in any case, if only for ease of reporting. Any capital acquired before you became UK resident or that represented gifts or inheritances from family members should be remittable to the UK free of any tax charges even under the new rules. (In other words, even on the arising basis, it would not be subject to tax).

However, any income generated on this credited to a separate income account would be subject to UK tax if the arising basis was adopted. You could claim the remittance basis on this, but this would only be advisable if either the income was large or there were other unremitted income or gains which offset the £30,000/£50,000 tax charge.

7.6 MARRIED COUPLES

The £30,000/£50,000 annual tax charge for anyone who claims the remittance basis could mean that married couples need to undertake some careful tax planning in respect of their overseas assets.

Under these rules, a non domiciliary with overseas income has two choices:

• Claim the arising basis and pay tax in the UK on the overseas income as it arises.
• Claim the remittance basis, pay the £30,000/£50,000 tax charge and only pay tax on overseas income remitted to the UK.

If a married couple hold overseas income producing assets jointly, they could choose the arising basis, with each person being taxed in the UK on half of the overseas income, or they could each claim the remittance basis (assuming they're both non UK domiciliaries), pay a double £30,000/£50,000 tax charge (one each) and only be taxed on their remittances.

This double tax charge for the remittances raises the breakeven point for married non UK domiciliaries significantly.

Another option would be for one to opt for the remittance basis, retain income abroad and pay the £30,000/£50,000 charge. The other could then opt for the arising basis and bring their share of the income into the UK.

In cases where some of the income is to be retained abroad, this is likely to be a good option, unless the overseas income generated is very substantial.

The other option would be to transfer the overseas assets into the name of one of the spouses. This would then allow the remittance basis to be claimed and only one £30,000/£50,000 tax charge to be levied. This may be the preferred option if the overseas income is substantial and does not need to be remitted back to the UK.

7.7 RESIDENCE

The £30,000 charge will only apply where you have been resident in the UK for more than seven tax years (in other words, eight or more tax years) out of the past ten tax years.

The £50,000 applies from 6th April 2012 to any non UK domiciliaries who have been resident in the UK for at least 12 of the previous 14 tax years.

This will therefore make your residence status crucially important.

In addition it doesn't apply just to complete tax years. Where there are any 'split years' of UK residence, they will count them towards the seven year limit.

So if you arrived in the UK in June 2013 and were classed as resident from that point, tax year 2013/14 would be classed as a year of residence when assessing whether or not you are subject to the £30,000/£50,000 annual tax charge.

7.8 INCOME-FREE INVESTMENTS

You could hold overseas investments that don't provide income but instead provide a capital return on disposal or redemption.

You could therefore simply claim the arising basis whilst a UK resident which would avoid the £30,000/£50,000 tax charge and ensure there was no direct income tax or capital gains tax charge (as there would be no income or gain). You could then crystallise the capital gain when non resident.

This could include using offshore funds or simply overseas shares or investments with a low dividend yield or income return. These types of investments are likely to prove popular with UK non domiciliaries.

7.9 THE NEW REMITTANCE TAX RULES -- FAQS

Will I Have to Pay the £30,000/£50,000 Tax Charge If I'm A Non UK Domiciliary?

Not necessarily. This is not a charge on non domicile status but rather a minimum tax charge on non UK domiciliaries where they have overseas income and gains that aren't brought back to the UK.

You will only have to pay the £30,000 tax charge if you are:

• a non UK domiciliary
• who has lived in the UK for more than 7 of the last 10 tax years
• and who claims the remittance basis.

If you don't claim the remittance basis or haven't lived here for the 7 year period, you won't have to pay the £30,000 tax charge.

Similarly, the £50,000 charge only applies to non UK domiciliaries who have been resident in the UK for at least 12 of the previous 14 tax years and who claim the remittance basis.

It is also worth noting that anyone under 18 years of age doesn't have to pay the £30,000/£50,000 tax charge.

If I Want to Use The Remittance Basis Will I Always Have to Claim It?

Usually yes. It is usually only if you have unremitted overseas income or gains of less than £2,000, that no claim will be necessary.

In this case, the remittance basis will apply automatically. The income/gains of up to £2,000 can be retained overseas free of UK tax without suffering the £30,000/£50,000 annual charge or the loss of UK allowances.

The provisions will also be extended to ensure that the remittance basis applies automatically where a non-dom has total UK income or gains of no more than £100 which have been taxed in the UK, provided they make no remittances to the UK in the same tax year.

How Will I Claim The Remittance Basis?

If you do want to claim the remittance basis of tax, you will need to complete a section in the residence and remittance pages on your tax return.

Will I Always Lose My Personal Allowance/Annual Exemption?

If you claim the remittance basis, you will usually lose the personal allowance (including the blind person's allowance) and the CGT annual exemption.

There is an exception to this where the unremitted overseas income or gains are less than £2,000. In this case, the allowances won't be lost.

Does The Loss Of The Annual Exemption Only Apply to Overseas Gains?

If you do claim the remittance basis and lose the annual exemption, it will not be available for offset against UK or overseas gains.

I Have Overseas Income - Should I Claim The Remittance Basis or Not?

Generally speaking if you are subject to the £30,000 tax charge, are a higher-rate taxpayer and the overseas unremitted income is less than £84,440, it may be worthwhile sticking with the arising basis in 2013/14. In this case, the UK tax on the overseas income (less the tax saving from being able to use the UK personal allowance) will be less than the minimum £30,000 tax charge payable if you claimed the remittance basis.

Can I Still Avoid Remitting Income by Gifting Cash to Family Overseas?

The legislation has clamped down on this practice. In the past, it was possible to gift cash to family members overseas who would then bring the cash back into the UK.

The new legislation looks to class this as a remittance if the transfer into the UK was by or for the benefit of your immediate family. This includes your spouse or civil partner, unmarried partners and children and grandchildren under the age of 18.

If you wanted to use this technique now, you would need to transfer to family members who are not included in this definition and ensure that you or your immediate family (or connected companies or trusts) could not benefit from the transfer.

Is It Still Worth Having Capital and Income Accounts?

Yes it is, if you are or may opt for the remittance basis in the future (and pay the £30,000/£50,000 annual charge).

If you are opting for the arising basis, all income or gains in that year would be taxed and the capital/income accounts would have no impact on this other than making reporting easier.

Any income credited to the income account would be taxed as would any capital gains in the capital account.

If you were taxed on the arising basis and could use the remittance basis in the future, it would be advisable to keep UK taxed income or gains out of the overseas capital and income accounts to avoid mixing up taxed overseas income or gains with unremitted and untaxed overseas income or gains.

Can Pre-existing Capital Still Be Brought Into The UK Free of Tax?

Yes, it should be, and this should be kept in a separate account.

Can I Avoid The £30,000/£50,000 Tax Charge by Losing UK Residence?

Yes. You can use the remittance basis without paying the £30,000 annual tax charge until you have been a UK resident for more than 7 in the past 10 tax years.

Once you exceed this, you will need to either stop using the remittance basis or pay the £30,000 in addition to tax on anything remitted (other than to pay the £30,000 tax charge).

The £50,000 charge kicks in from April 2012 once you have been UK resident for 12 tax years or more out of the last 14.

Is Non UK Domicile Status Still Beneficial for Tax Purposes?

Yes. It has numerous inheritance tax advantages as well as allowing the option of claiming the remittance basis. There is also the option of retaining income or gains of up to £2,000 per tax year overseas free of UK tax.

Can I Use Reinvested or Deferred Overseas Income to Avoid Paying UK Tax?

Yes you can. If you invest in overseas investments with a low income yield there would be no income to tax, and the arising basis could be used, saving the £30,000/£50,000 tax charge.

Providing the income was below £2,000, the remittance basis could even be used to retain the income overseas without it being taxed.

The investments could then be sold free of CGT after departure from the UK.

7.10 GIFTING ASSETS ABROAD TO AVOID THE REMITTANCE RULES

In the past a common method for non UK domiciliaries to avoid the remittance rules was to gift overseas assets to a family member who could then bring the asset into the UK. The remittance basis effectively states that income and capital gains from overseas assets are only taxed to the extent that the overseas income or proceeds are brought into the UK.

By transferring the asset to a third party, who then brought it into the UK, this ensured that the non domiciliary had not made any remittance so there would be no UK tax on the income or gains remitted. In order for this to be successful, it was essential that:

• The transfer was a genuine transfer and was made 'with no strings attached'. Therefore there would need to be legal documentation evidencing the transfer (e.g., a deed of gift) with the giftee having full legal and beneficial ownership.
• The transfer was made overseas. If there was any argument that an agreement was made in the UK for the transfer the Revenue could argue that there was a remittance by the non domiciliary.

The new legislation which applies from 6th April 2008 has tightened up this rule but there are still lots of opportunities. It will class income or gains as remitted to the UK broadly if two conditions are satisfied.

• Cash or other property is brought into the UK for the benefit of the non domiciliary or 'relevant persons'.
• The property that is brought back to the UK is (or is derived from) the income or capital gain.

This is also widened to include the case where foreign income/proceeds are used outside the UK to satisfy a debt which is in respect of UK property (this therefore combats a non domiciliary obtaining an overseas loan, spending the funds in the UK, and then clearing the debt with overseas income or gains).

Of key importance in the new provisions is the fact that income or gains are classed as remitted not only if they're brought back by the non domiciliary, but also if they're brought back into the UK for the benefit of any 'relevant people'.

So the overseas gift would still be caught by these rules if you transferred to a person overseas who wasn't a 'relevant person' if any relevant person could actually benefit when the gift was brought back into the UK. For instance, if you gifted overseas cash to your niece, although this is not a transfer to a 'relevant person', if she later used the cash to buy you a new car in the UK or to pay some of your UK bills, this would still be classed as a remittance.

Who Are Relevant People?

The definition of 'relevant people' includes:

• The non domiciliary
• Their spouse or civil partner
• They can be considered partners if they are unmarried, provided they are living together as though they were married or in a civil partnership.
• Their children and grandchildren aged under 18

Unmarried couples aren't usually caught within these definitions, but they are for this purpose.

There are still a number of family relationships that aren't caught by the new remittance tax rules.

These include:

• Adult children
• Adult grandchildren
• Uncles
• Aunts
• Brothers
• Sisters
• Nephews
• Nieces
• Cousins
• Separated couples
• Divorced couples

In addition, close friends wouldn't fall within these rules.

Trustees

Relevant people include trusts where any of the individuals caught by the provisions above (spouses, minor grandchildren, etc.) are a settlor or beneficiary.

Therefore simply transferring overseas assets to a trust you set up wouldn't avoid the remittance provisions if the gains were remitted back to the UK.

If you are thinking of gifting cash or other assets overseas before having them remitted to the UK, it's important to ensure that the transfer is not to a 'relevant person' and that no relevant person can benefit from the gifted assets. The best option here would be to use family or close friends who do not fall into the definition of relevant person.

7.11 HOW THE REMITTANCE BASIS APPLIES TO OVERSEAS GAINS

As stated above, capital gains in respect of assets situated outside the UK can be taxable on the remittance basis if a non domiciliary makes the necessary claim. Any capital losses are not usually allowable.

However, the 2008 Finance Act introduced provisions so that if the arising basis is chosen, overseas capital losses can be offset as normal against other capital gains. The caveat here is that the remittance basis must not be claimed at all to get relief for the losses.

There is also a new regime that allows non domiciliaries to elect for foreign losses to be offset against capital gains (both UK and overseas) even though they're using the remittance basis. These are complex provisions which we've looked at in detail in our non-domicile tax guide: Tax Saving Tactics for Non-Doms.

In terms of capital gains where the overseas gain is significant, the tax saved by retaining proceeds abroad could easily outweigh the £30,000/£50,000 tax charge for using the remittance basis.

Example

Steve, a non-UK domiciliary, has been living in the UK for eight years and is therefore classed as UK resident. He has overseas assets that originally cost him £1,000,000 and he is planning to sell them for £1,500,000.

If Steve claims the remittance basis the gain of £500,000 (less any reliefs) will not be subject to UK capital gains tax -- provided the proceeds of £1,500,000 are not brought into the country, and for example, deposited in a UK bank account or used to settle UK debts.

If only part of the proceeds is remitted, then based on the legislation and revenue guidance, the remittance is first classed as capital gain before underlying capital. For example, if £150,000 of proceeds is remitted to the UK, all would be taxable. Of course, any tax payable on the remittance is in addition to the £30,000 remittance tax charge.

7.12 BUYING PROPERTY OVERSEAS

For those who are UK resident and ordinarily resident but non-UK domiciled, purchasing overseas property can offer a number of attractive tax breaks. For income tax and capital gains tax purposes the remittance basis can apply. This means that any rental income obtained from the overseas property will be exempt from UK tax, provided the income is not remitted to the UK.

In addition, when the property is eventually sold, no UK capital gains tax will be payable unless the funds are brought into the country.

The drawbacks to non-doms achieving these tax benefits are:

£30,000/£50,000 Tax Charge

If you have been UK resident for more than 7 of the last 10 tax years, you will need to pay the £30,000 tax charge for the privilege of using the remittance basis.

This will be treated as a £30,000 tax charge on the overseas rental income and would then allow a proportion of the income to be remitted free of tax in the future. However, unless the rental income was substantial or there was other significant overseas unremitted income, it's unlikely that the remittance basis would be claimed in the first place.

A substantial capital gain on overseas property could easily make paying the £30,000 tax charge worthwhile.

Once you've been UK resident for 12 years the £50,000 charge kicks in. Even this could be worth paying if the gain retained abroad was substantial.

Overseas Tax Position

The benefit of the remittance basis is for many, more apparent than real. Overseas tax is likely to be payable, unless the property is purchased in a tax haven of some kind. Most double tax treaties state that immovable property can be taxed in the country in which it is located. (In other words, the overseas jurisdiction) as well as the owner's country of residence. Therefore for a non-UK domiciliary investing in overseas property it is overseas tax that will have the biggest impact.

For example, in Spain sales of property by non-Spanish residents are taxed at 21%.

The gain is calculated as the difference between the sales price and the original purchase price, including any investment made or improvement work carried out. There is also an adjustment to take account of inflation. In addition, the purchaser must retain 3% of the price and pay this as tax on behalf of the non-resident.

The non-UK domiciled UK resident investing in Spain will also need to pay any local taxes relating to the property, as well as other domestic taxes. For example, Spain has reintroduced a wealth tax, which could tax the value of a non-resident's Spanish assets above €700,000.

In France, as a non-resident, the UK resident non-domiciliary pays capital gains tax on the gain which results in the disposal of French property. This is usually deducted from the sale proceeds by the 'Notaire' who pays it to the local tax authorities.

At present, EU residents pay capital gains tax at the rate of 19%.

It is possible to deduct costs such as original purchase costs (notaire's fee, estate agent's fee) and the cost of renovation work (but not simple redecorating costs), provided that these haven't also been offset against any rental income.

The amount of the taxable gain is then subject to taper relief if it has been owned for more than five years. For each year that the property has been held beyond this initial five-year period, the gain is reduced by 10%. (For ten years of ownership, the reduction is thus 50%). Therefore, if a property has been owned for more than 15 years, the relief is 100% and no capital gains tax is payable.

Just as in the UK, there are a number of exclusions and exemptions, and if you are considering purchasing a property in any overseas jurisdiction, it is essential to obtain tax advice from a tax specialist in the country in question.

The only sure-fire way for a non-domiciliary to avoid overseas capital gains tax altogether is to purchase overseas property in a country that:

• Levies no capital gains tax, for example the Isle of Man.
• Levies no taxes at all, for example, a tax haven such as Monaco or the Bahamas.
• Has specific exemptions to exclude any gain from a tax charge (for example, Italy or France).

Inheritance Tax

Again, from a UK tax perspective, there would be no UK inheritance tax impact. As a non-UK domiciliary, your taxable estate would include only your UK assets. However, overseas tax would be payable, unless the property was located in a country that did not levy inheritance tax.

Use of Trusts

As a non-UK domiciliary, an offshore trust could be created. For inheritance tax purposes, the trust would not be subject to UK IHT if the assets of the trust were overseas assets.

From an income tax and capital gains tax perspective, the trustees should not be liable to UK income tax on overseas income or UK capital gains tax, if the trust was non-resident.

However, another effect of the April 2008 tax changes is that many of the UK anti-avoidance provisions that were not applied in the past to non UK domiciliaries now do apply. These have the effect of attributing and deeming gains of offshore trusts to non UK domiciled trust beneficiaries in various circumstances.

Provided the overseas jurisdiction did not levy capital gains tax, there would also be no overseas tax charge (for example in the Isle of Man).

7.13 THE EFFECT OF UK DOMICILE STATUS ON UK INHERITANCE TAX

If you are a foreign national living and working in the UK you are likely to have a non UK domicile of origin. On the assumption that you have not made the UK your domicile of choice, you would therefore be a non UK domiciliary for tax purposes.

You can however be deemed to be a UK domiciliary for inheritance tax purposes only. This would only occur after you have been UK resident for at least 17 tax years.

Assuming you have not been UK resident for the last 17 years, you will therefore be non UK domiciled.

If you are non UK domiciled and have a UK domiciled spouse, the usual rules relating to transfers between spouses don't apply.

In particular, spouses who are both UK domiciled can pass assets between themselves without the transfers being taken into account for inheritance tax purposes.

In the case of a transfer from a UK domiciled spouse to a non UK domiciled spouse, this exemption has traditionally been restricted to £55,000. Any amounts above this would usually be treated as potentially exempt transfers (PETs).

As such if the UK domiciled spouse survived for seven years from the date of the transfer, it would be excluded from his or her estate for inheritance tax purposes.

If however the UK domiciled spouse was to die within those seven years, the amount transferred would be included in the estate. This would be subject to the standard inheritance tax rules and deductions, and the nil rate band (currently £325,000) would be available for offset.

It was announced in the March 2012 Budget that the Government is to increase the £55,000 inheritance tax exemption for transfers from a UK domiciled spouse to a non-domiciled spouse from 6 April 2013.

New rules

Under the new rules, from 6 April 2013, the exemption between spouses will increase to the level of the prevailing IHT nil-rate band (currently £325,000 and fixed until at least 2017). In addition, non-UK domiciled spouses will be given the option to benefit from an uncapped spouse exemption by making an election to be treated as UK domiciled for IHT purposes.

An election will allow a non-UK domiciled individual to receive assets from their UK domiciled spouse on death free of IHT, but comes at a price: the worldwide estate of the non-UK domiciled individual will be brought within the IHT net. If no election is made, only the UK assets of a non-domiciled individual are liable to IHT.

Election

The election must be made by the non-UK domiciled spouse (the "Electing Spouse") and can be done during the lifetimes of both spouses (a lifetime election) or after the death of the UK domiciled spouse (a death election). It cannot be revoked whilst the Electing Spouse remains UK resident, but will automatically cease to have effect once that spouse has been non-UK resident for three consecutive tax years either from the date of the election (in the case of a lifetime election) or from the date of death of the UK domiciled spouse (in the case of a death election).

The election will not affect the Electing Spouse's domicile status for the purpose of the remittance basis applicable for income tax and capital gains tax. The election will have effect for IHT purposes only.

Impact of Claim for Arising Basis

After April 2008 you can elect to be taxed on the arising basis for income and capital gains tax purposes.

By claiming the arising basis you will be taxed on your worldwide income and capital gains irrespective of whether they are remitted to the UK or not.

Many non UK domiciliaries will opt for this treatment as their overseas income or gains are not sufficient to cover the annual £30,000 or £50,000 tax charge they would otherwise have to pay.

However the claim to be taxed on the arising basis from April 2008 will only have an effect for income tax and capital gains tax.

For inheritance tax purposes the position would remain as above and any transfers from the domiciled spouse to you would be restricted to £55,000.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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