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BUDGET 2008 NEWS |
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Non-domiciles Residence and domicile changes Days of residence Further to the changes previously announced in the pre-budget report on 9 October 2007 and the draft legislation issued on 18 January 2008, there are modifications announced to the method of calculation of days of residency for UK tax purposes.
A day will only count towards UK residency if the individual is present in the UK at midnight. An additional transit exemption has been announced for passengers travelling through the UK. Where someone is in transit and travels from the point of arrival to the point of departure through the UK, that day will not count as a UK resident day, provided that the individual does not undertake activities which are to a substantial extent unrelated to their journey. The exemption is to protect travellers from generating a day of residency where their journey entails travelling between UK airports, train stations or ports. The restriction on activities means that the transit exemption would not apply for days when business meetings were held between arrival and departure; any such days would count as UK resident days.
New tax charge As previously announced, the personal allowances for income tax and the annual exemption for capital gains tax will be withdrawn where a UK resident non-domiciled person chooses to claim the remittance basis. Where a non-domiciled individual has less than £2,000 of unremitted foreign income and gains, (increased from the initial announcement of £1,000), the allowances can be retained. Individuals can choose annually whether to claim the remittance basis or be taxed on their world-wide income and gains.
The charge to retain the remittance basis after 7 years of UK residency (out of the previous 10), is confirmed as £30,000 per annum, but a concession is announced for non-domiciled children under the age of 18. The charge will only apply to children in the year when they become 18.
Details of the payment of the remittance charge (£30,000) have been announced. Where the charge is paid by cheque or by electronic means from an off-shore source, the payment itself will not be taxed as remittance. If the £30,000 is repaid, however, it will be taxed as a remittance at that point. HMRC have announced that the charge will either be income or capital gains tax, rather than a stand-alone charge. This means that if the income or capital gains to which the charge relates are later remitted to the UK, they will not be taxed again. HMRC will publish rules determining the ordering of payments. The charge will therefore be eligible for relief under double taxation agreements and to cover gift aid donations.
Remittance basis and foreign dividend income HMRC has announced that foreign dividend income taxed on the remittance basis in the UK will be liable at 40% for higher rate taxpayers from 6 April 2008. Currently foreign dividend income taxable on the remittance basis is taxable at 32.5% and the new legislation will reinstate the tax treatment previously applying.
Remittances of works of art HMRC has announced the introduction of a new scheme for works of art brought into the UK for public display or educational purposes. The scheme will allow works of art which have been purchased overseas from unremitted untaxed employment income, capital gains or relevant foreign income to be brought into the UK for public display without giving rise to a tax charge under the remittance basis. Provided that the conditions are fulfilled, the importation may be temporary or indefinite.
Remittance basis charge Aspects of the remittance basis have been tightened up. HMRC has confirmed that the previous announcements concerning the source ceasing rules will take effect from 6 April 2008. Where the remittance basis has been claimed in a year, income of that year will be liable to tax if it is remitted to the UK, even where the source of the income ceased in a previous year.
The remittance basis is being extended so that the conversion of unremitted relevant foreign income into other property or services derived from that income, will give rise to a tax charge, as a remittance, if such property or services are brought into the UK. There will be exemptions for
· personal assets costing less than £1,000; · assets brought into the UK for repair and restoration; · assets in the UK for less than a total 9 month period and · assets brought into the as works of art for public display.
Grandfathering provisions will apply to assets held on 11 March that were purchased out of untaxed relevant foreign income, even where such assets are currently outside the UK and are subsequently brought into the UK. In addition, any asset in the UK on 5 April 2008 will be exempt from a charge under the remittance basis so long as it remains in current ownership, even if it is exported and later re-imported. If such an asset is sold in the UK it will trigger a tax charge as a remittance. The changes will not apply to employment income and capital gains rules that already tax the remittance of non-cash assets.
HMRC has confirmed that foreign savings and investment income arising during a year when the remittance basis is claimed will be taxed whenever remitted to the UK, whether or not a claim to be taxed under the remittance basis is made in the year of the remittance. This blocks the ability to claim the arising basis of taxation and bring previously unremitted foreign savings and investment income to the UK without triggering a tax liability.
There will be new provisions introduced to determine the tax treatment of the remittance of a “mixed fund”. The new provisions will establish how much of a transfer from a mixed fund is treated as the individual’s income or gains. HMRC has said that the new rules will be more comprehensive than the draft legislation published on 18 January.
The draft legislation concerning the alienation of assets abroad will be amended. Where a non-domiciled or not ordinarily resident individual arranges for money or property to be brought into the UK following the alienation of such assets abroad, the transferor will be taxed on the remittance basis. The definitions applying to the transferees in the legislation will change. The rules will apply where · an individual makes a transfer of assets to his “immediate family” (defined as spouse, civil partner, co-habitee living as spouse or civil partner, and their children or grandchildren under age 18, or · a transfer to a close company or companies that would be close if they were resident in the UK, if the individual or a member of his family is a participator.
Consequently, the transferor will be taxed under the remittance basis. This prevents the alienation of assets abroad and subsequent remittance of funds to the UK tax-free by immediate family members.
Where a non-domiciled individual elects to be taxed on their world-wide income and gains, it will be possible to claim relief for losses arising on the disposal of assets held outside the UK. Hitherto, the remittance basis applied automatically for capital gains tax purposes and it was not possible to remit a loss on the disposal of a foreign asset. The new provisions will give relief for world-wide losses where a non-domiciled individual is taxed on their world-wide gains and has not claimed the remittance basis from 2008-09. Individuals who claim the remittance basis will be able to elect into a separate regime for relief of foreign losses, but that election will be irrevocable. HMRC will require details of unremitted capital gains as part of the requirements of the election. Further legislation in this area is expected.
Off-shore trusts Amendments have been introduced to the tax treatment of non-domiciled beneficiaries of off-shore trusts. The new legislation will
· tax non-domiciled beneficiaries of non-UK trusts on the remittance basis for capital gains tax on UK and off-shore situated assets; · allow trustees to make an irrevocable election to rebase assets held to their value at 6 April 2008; and · no longer require disclosure to HMRC about trust assets or details of the trustees provided taxpayers have made a correct return of their tax liabilities. Note that additional information may be required where a re-basing election is made or if HMRC choose to enquire into a beneficiary’s tax return.
These changes give effect to the re-assurances issued by the acting chairman of HMRC, Dave Harnett, in February, namely that the intention was not to tax historic trust gains, and have been made in response to lobbying by professional bodies and interested parties. HMRC has also issued a supplementary document detailing the changes to the taxation of beneficiaries of non-resident trusts.
Off-shore mortgages Amendments have been made to the proposals regarding off-shore mortgages. The draft legislation issued in January proposes that repayments of loans borrowed from off-shore banks will be taxable as remittances where the property is situated in the UK. HMRC have announced that grandfathering provisions will be introduced to protect existing arrangements. Where interest payments are made on existing UK residential property mortgages, these will not be treated as remittances for the remaining lifetime of the mortgage or until 5 April 2028, whichever is the shorter. These provisions will prohibit the ability of non-domiciled individuals to re-arrange residential property mortgages without triggering a remittance charge.
Anti-avoidance changes HMRC has confirmed that changes will be made to the draft legislation to tax non-domiciled participators of foreign companies on the gains accruing to the company. The draft legislation was announced on 18 January and HMRC have said that this will be subject to minor changes as a result of consultation.
HMRC has also confirmed that the accrued income scheme will now apply to non-domiciled individuals. The draft legislation in this area was published on 18 January.
HMRC has announced that legislation will be introduced to prevent the avoidance of income tax by non-domiciles transferring assets abroad. It is anticipated that the legislation will be similar to that already applying to UK domiciled individuals. If the remittance basis is claimed, it will apply to those using it.
HMRC has also announced the introduction of amendments to the legislation taxing employment related securities (“ERS”) for resident but not ordinarily resident employees. There will be an apportionment of the ERS income where the employee is taxed on the remittance basis, to ensure that only the proportion relating to overseas duties will be subject to income tax when it is remitted to the UK. Securities acquired or options granted before 6 April 2008, will not be affected by the changes.
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