Why non-doms don't need to hold nominated income in a separate account from April 2012

If you are subject to the £30,000 or £50,000 tax charge the tax legislation states that you need to make a nomination of your overseas income or gains. You need to nominate some foreign income or gains, but you do not necessarily need to nominate the full amount. Therefore if you are a higher-rate taxpayer you would usually need to nominate around £75,000 (ignoring foreign taxes etc) to give rise to a £30,000 UK tax charge. What if you only nominate, say, £30,000 of overseas income? Well, in that case HMRC would deem you to have nominated an additional £45,000 of foreign income for the purposes of the £30,000 tax charge. This additional 'deemed amount' would not be actual income and could not be remitted tax free in the future. There is a minimum 'actual' nomination of £1 meaning that you could nominate just £1 of foreign income if you wish. HMRC would then deem the income required to give rise to a £30,000 tax charge. You could use this technique to potentially avoid the statutory ordering rules for nominated income by nominating only a small amount of foreign income which would never be returned to the UK. After all for most people it's much easier to avoid remitting £1 rather than £75,000. So for tax year 2012/13 you could establish a separate overseas account that would generate a small amount of income and/or gains. You would need to ensure that the amount transferred is sufficient to ensure that at least £1 of income/gains arises in tax year 2012/13. You would then nominate this £1 which would be classed as an insufficient nomination and you would be deemed to have nominated income of £75,000 for the purposes of the £30,000 tax charge. However, this £75,000 is not actual income and could not be remitted. Therefore the ordering rules above would not apply in relation to this deemed £75,000 (only to the actual amount nominated). As such you should be able to keep this £1 overseas and remit funds from other accounts without this money being artificially classed as income. As from 6 April 2012, the first £10 of nominated income and gains can be remitted to the UK tax free. This means that provided a non-dom nominates less than £10 of their foreign income and gains there may be no need for them to maintain a separate bank account purely for the purposes of nominating income and gains. In many cases though having a separate bank account to hold the nominated income may represent good planning. Example Let's assume Jerry has to nominate income or gains for the purposes of the £30,000 tax charge. He has substantial overseas income and gains. Jerry nominates £107,000 of foreign gains in Account A in year 1. This represents his nominated capital gains. A couple of years later he remits £100,000 of these gains to the UK. If he had not remitted all his other unremitted income and gains (which would then have been taxed in the UK) this would be classed as a remittance of his nominated gains and the special ordering rules apply. These would then deem the remittance of £100,000 to be income from his other offshore accounts even though what he actually remitted was capital gains. If, for instance, he is a high earner he could be subject to 50% income tax on the income remittances from his other accounts. This is despite the fact that he is actually remitting capital gains which may be taxed at 28%. In order to avoid these special ordering rules Jerry would need to keep the £107,000 gain outside the UK and not remit it until all of his other income and gains have been remitted. Given that it's such a large amount of money this may be difficult (eg he may need the funds to purchase a UK property). As an alternative to making the £107,000 nomination for Account A, Jerry could have arranged for a small amount of his investment income to be crystallised in a new account (Account B). Assuming he transferred a nominal amount of capital into this account (eg, £100) this would generate interest income in Account B of perhaps £1. He could then nominate this £1 in Account B as his actual nominated income. For periods before 6 April 2012, providing he retained this £1 outside the UK he would avoid the special ordering rules for nominated income. As such he could transfer the gain in Account A back to the UK which would be subject to CGT at 28%, as opposed to being deemed to be income and taxed at 50%. As from 6 April 2012 even if Jerry was to remit this £1 back there shouldn't be any adverse tax consequences as this is below the new £10 de minimis limit. Therefore although it would have been important for Jerry to use the separate bank account with £1 of nominate income for periods before 6 April 2012, after this date it would not be strictly necessary.

About the Author

The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA). 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. Google+