The 2012 Changes to the non dom rules (Increase in RBC to £50,000 and new remittance exemption).
Last weeks's Budget brought in some potentially significant reforms to the non dom rules from April 2012.
The Budget Notes state that they plan to:
remove the tax charge when non-domiciles remit foreign income or capital
gains to the UK for the purpose of commercial investment in UK businesses;
simplify some aspects of the current tax rules for non-domiciles to remove
undue administrative burdens; and
increase the existing £30,000 annual charge to £50,000 for non-domiciles who
have been UK resident for 12 or more years and who wish to retain access to
the beneficial tax regime (the remittance basis). The £30,000 charge will be
retained for those who have been resident for at least seven of the past nine
years and fewer than 12 years.
They will be consulting on the nature of these changes and plan to issue a consultation document in June. It could therefore be that these provisions will be substantially watered down or even changed completely. The implementation could also be delayed (although I'd say this was less likely).
On the plus side they have said that there will be "… no other substantive changes to these rules for the remainder of this Parliament…"
Will it apply to connected and unconnected businesses?
Will it just apply to companies or other unincorporated businesses
How will they define "business"? Will it for instance include property investment activities. Although this is not a trade it can be a business.
What kind of investment will be permitted? Just share investments, loans, preference shares etc
Obviously if you could transfer funds to invest in your own businesses, this would be a very attractive exemption. This would be especially the case if UK property businesses could qualify.
Reduce Admin
Again, no further details as of yet but if they could look to reduce the administrative aspects of administering mixed funds and nominated income accounts this would be very attractive for non doms.
Increase in RBC to £50,000
The increase in the RBC to £50,000 means that there will be a hierarchy of non doms.
Non UK domiciliaries who have been UK resident for more than 7 of the last 9 tax years will be subject to the new £30,000 remittance tax charge, if they claim the remittance basis.
You'll then have a further class of non doms who have been UK resident for 12 or more years who will be subject to a £50,000 RBC charge.
You'll therefore have:
The first 7 years of UK residence where no RBC is payable
The next 4 years of UK residence where the £30,000 RBC is payable
If you remain UK resident you'll then have to pay the £50,000 RBC charge.
Of course in all cases you could just opt for the arising basis, be taxed on your worldwide income and not have to pay any RBC charge at all.
'When is it worthwhile for a non-dom to claim the remittance basis and pay the £30,000/£50,000 charge?'
As there's a choice whether the £30,000 or £50,000 charge is paid or not (as you can always opt to be taxed on the arising basis and avoid it) it's useful to consider the break-even point at which it's worthwhile opting for the remittance basis.
Here are the general rules:
If you have just overseas capital gains, the break-even point as a higher-rate taxpayer would be £107,143. This is calculated as:
£107,143 x 28% = £30,000
In addition, the annual exemption of £10,600 would be lost by claiming the remittance basis. When you add this to the calculation, the minimum overseas gain you would need before it is worth paying the £30,000 tax charge would be £117,743.
Note that what we are talking about here is not an overseas capital gain of £117,743 but an overseas UNREMITTED capital gain of £117,743.
Any gain that is remitted back to the UK would be taxed in addition to the £30,000 tax charge, so you would need to have an overseas gain that was kept abroad of at least £117,743.
Note that the above assumes that you have other UK or overseas remitted income that uses up your basic-rate band.
If you have no other taxable income, any gains would be taxed at 18% up to £35,000 (the basic-rate band for the 2011/12 tax year). Above this they would be taxed at 28%.
In this case you would need to have unremitted gains of at least £130,242 before it would be worthwhile claiming the remittance basis and paying the £30,000 tax charge:
Overseas Gain = 130,242
Less Annual Exemption= -10,600
Gain = 119,642
Tax at 18%= 6,300
Tax at 28%= 23,700
Total tax= 30,000 If you have other taxable income (i.e., UK income or overseas remitted income) which uses up your basic-rate tax band you would be taxed on any overseas income at 40% if you opt for the arising basis. Therefore you need to have overseas unremitted income of £82,475 before paying the £30,000 tax charge makes sense. In other words: Overseas Income = 82,475
Less Personal allowance = -7,475
Income = 75,000
Tax at 40% = 30,000 If you had overseas unremitted income of more than £82,475 the £30,000 tax charge is less than the tax you would pay if you opted for the arising basis. If you had other taxable income in excess of £150,000, you would need to have overseas unremitted income of at least £60,000 to make paying the £30,000 charge worthwhile. You would lose the benefit of the personal allowance, whether or not you claim the remittance basis, and would be taxed at 50% (£60,000 x 50% = £30,000). £50,000 RBC Once you have to pay the £50,000 RBC though your break even point will obviously change a lot. If you have just overseas capital gains, the break-even point as a higher-rate taxpayer would be £178,571. This is calculated as: £178,571 x 28% = £50,000 In addition, when you add the annual exemption of £10,600 to the calculation, 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 gains would be taxed at 18% up to £35,000 (the basic-rate band for the 2011/12 tax year). Above this they would be taxed at 28%. In this case you would need to have unremitted gains of at least £201,671 before it would be worthwhile claiming the remittance basis and paying the £50,000 tax charge: If you have unremitted income it's likely that you would be paying income tax at the additional rate (50%) on at least part of your income before it would make sense to claim the remittance basis and pay the £50K tax charge. Of course if all your income was taxed at 50% you'd need to have £100K of unremitted income before it would be worthwhile. If there was no other UK income then you'd need to have unremitted income of £142,500 before claiming the remittance basis and paying the £50K RBC 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 12 + years of UK residence, just one year of exceptional foreign income or capital gains could make claiming the remittance basis worthwhile.
Thoughts on the non dom changes
New Remittance Exemption The new remittance exemption 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". The devil will be in the detail with this exemption. One of the fundamental problems with the current remittance regime for non doms is that as it taxes remittance basis users when foreign income and gains are brought to the UK, this acts as a disincentive to inward investment. The new exemption will therefore look to combat this. The type of issues that will be crucial when considering just how the relief can be utilised by non doms will include:Overseas Gain = 130,242
Less Annual Exemption= -10,600
Gain = 119,642
Tax at 18%= 6,300
Tax at 28%= 23,700
Total tax= 30,000 If you have other taxable income (i.e., UK income or overseas remitted income) which uses up your basic-rate tax band you would be taxed on any overseas income at 40% if you opt for the arising basis. Therefore you need to have overseas unremitted income of £82,475 before paying the £30,000 tax charge makes sense. In other words: Overseas Income = 82,475
Less Personal allowance = -7,475
Income = 75,000
Tax at 40% = 30,000 If you had overseas unremitted income of more than £82,475 the £30,000 tax charge is less than the tax you would pay if you opted for the arising basis. If you had other taxable income in excess of £150,000, you would need to have overseas unremitted income of at least £60,000 to make paying the £30,000 charge worthwhile. You would lose the benefit of the personal allowance, whether or not you claim the remittance basis, and would be taxed at 50% (£60,000 x 50% = £30,000). £50,000 RBC Once you have to pay the £50,000 RBC though your break even point will obviously change a lot. If you have just overseas capital gains, the break-even point as a higher-rate taxpayer would be £178,571. This is calculated as: £178,571 x 28% = £50,000 In addition, when you add the annual exemption of £10,600 to the calculation, 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 gains would be taxed at 18% up to £35,000 (the basic-rate band for the 2011/12 tax year). Above this they would be taxed at 28%. In this case you would need to have unremitted gains of at least £201,671 before it would be worthwhile claiming the remittance basis and paying the £50,000 tax charge: If you have unremitted income it's likely that you would be paying income tax at the additional rate (50%) on at least part of your income before it would make sense to claim the remittance basis and pay the £50K tax charge. Of course if all your income was taxed at 50% you'd need to have £100K of unremitted income before it would be worthwhile. If there was no other UK income then you'd need to have unremitted income of £142,500 before claiming the remittance basis and paying the £50K RBC 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 12 + years of UK residence, just one year of exceptional foreign income or capital gains could make claiming the remittance basis worthwhile.