Budget Notes

BN104 RESIDENCE AND DOMICILE: CLOSING LOOPHOLES IN THE REMITTANCE BASIS

Who is likely to be affected?

1. UK residents paying tax on the remittance basis.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to remove various loopholes and anomalies which allow remittance basis users to remit income and gains to the UK without paying tax on them.

Operative date

3. The majority of these changes will have effect on and after 6 April 2008. However some have effect on and after 12 March 2008. Operative dates are provided below.

Current law and proposed revisions

4. There will be a number of changes made to the way the remittance basis works. An explanation of the current remittance basis rules and how they will change follows.

'Ceased source'

5. Foreign savings and investment income are not currently taxed when remitted to the UK if the source of the income no longer exists in that year.

6. Legislation will be amended so that where the remittance basis has been claimed for 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 has ceased in a previous year. The legislation to achieve this was published in draft on 18 January 2008.

'Cash only'

7. Relevant foreign income can only currently be taxed if it is brought into the UK as cash. If a remittance basis taxpayer turns relevant foreign income into an asset outside the UK and then imports that asset, no UK tax can be charged on the income unless and until the asset is sold or turned into cash in the UK.

8. Legislation will be changed so that money, property and services derived from relevant foreign income brought into the UK will be treated as a remittance and will be taxed as such.

9. There will be exemptions for personal effects (that is, clothes, shoes, jewellery and watches), assets costing less than £1,000, assets brought into the UK for repair and restoration and assets in the UK for less than a total nine month period purchased out of relevant foreign income. There is also a new exemption from a remittance basis tax charge for works of art brought into the UK for public display. That is explained in BN105.

10. Any asset purchased out of untaxed relevant foreign income which an individual owned on 11 March 2008 will be exempt from a charge under the remittance basis, for so long as that individual owns it, even if that asset is currently outside the UK and later imported. Any asset in the UK on 5 April 2008 will also be exempt from a charge under the remittance basis, for so long as the current owner owns it, even if that asset is later exported and the re-imported. The existing charge that arises if such an asset is sold in the UK will remain.

11. The current rules for employment income and capital gains already tax assets when they enter the UK where they were purchased out of untaxed foreign employment income or capital gains. Those rules remain unchanged.

'Claims mechanism'

12. Foreign savings and investment income arising in a year in which the remittance basis is claimed are not currently taxed if remitted in a subsequent year in which no claim to the remittance basis is made.

13. Legislation will be introduced so that foreign savings and investment income arising in a year in which the remittance basis is claimed will be taxed if it is remitted to the UK, irrespective of the year in which it is remitted and whether or not a claim to the remittance basis is made in the year in which the remittance is made. The legislation to achieve this was published in draft on 18 January 2008.

Mixed funds

14. There are currently no statutory rules on the treatment of remittances from funds which include some combination of untaxed relevant foreign income, employment income, capital gains, taxed income or gains and capital.

15. Legislation will be introduced to lay down clear statutory rules for determining how much of a transfer from a mixed fund is treated as the individual's income or chargeable gains, and the manner in which these amounts are chargeable to tax. These rules will be more comprehensive than the rules in the draft legislation published on 18 January 2008.

Alienation

16. The law currently allows overseas income and gains to be alienated by a non-domiciled or not ordinarily resident individual to a third party, such as an offshore vehicle or a close relative. That alienated income or gains can then be brought into the UK in such a way that the individual whose income or gain it originally was has the use or enjoyment of it in the UK without attracting a charge to tax.

17. Legislation will be introduced that will have effect where an individual arranges for money or property to be brought into the UK, or services and benefits to be provided in the UK, that were funded out of untaxed foreign income or gains. Where that individual, or their immediate family, benefits in any way then that individual will be taxed on that money, property, services or benefits under the remittance basis rules of taxation.

18. The definition of an individual's "immediate family" will be different from the "relevant person" definition proposed in the draft legislation published on 18 January 2008. It will be limited to spouses, civil partners, individuals living together as spouses or civil partners and their children or grandchildren under 18. It will also cover close companies, or foreign companies that would be close if in the UK, of which any of them are participators and trusts of which any of them are settlors or beneficiaries.

Non-resident trusts

19. There will be extensive changes to the capital gains tax regime for non-resident trusts. The new rules will be different from the changes detailed in the draft legislation published on 18 January 2008.

20. Non domiciled beneficiaries of non-resident trusts who claim the remittance basis will, from 6 April 2008, be taxed on the remittance basis on all UK and offshore assets.

21. Trustees will be able to make an irrevocable election to rebase assets held as at 6 April 2008 for the purpose of excluding any part of a chargeable gain relating to the period before 6 April 2008 from being taxed on non domiciled beneficiaries.

22. Settlors and beneficiaries of non-resident trusts will not be required to disclose information to HMRC about trust assets in relation to which a remittance arose, or details of the trustees, provided they have made a correct return of their tax liabilities.

23. Beneficiaries of non-resident trusts may be required to provide additional information to HMRC where the trustees choose to make an election to rebase trust assets or where HMRC enquire into a beneficiary's tax return.

24. Full details of the new rules are set out in the supplementary document "Residence and Domicile: Taxation of distributions to beneficiaries of non-resident trusts." One of the changes comes into effect on 12 March 2008 (see paragraph 11(d) of the document).

Non-resident companies

25. Anti-avoidance legislation designed to prevent UK residents from realising chargeable gains free of tax through a holding in a non-UK resident company does not currently have effect for non-domiciled individual participators.

26. The legislation will be amended so these anti-avoidance rules ensure that UK participators of foreign companies will be taxed on the chargeable gains accruing to the company irrespective of the participator's domicile. The legislation to achieve this was published in draft on 18 January 2008 although some minor changes will be made as a result of the consultation.

Transfer of Assets Abroad

27. Anti-avoidance legislation designed to prevent individuals from avoiding income tax by transferring assets abroad will be amended to ensure these anti-avoidance provisions apply to non domiciled individuals. The remittance basis will apply to remittance basis users.

Accrued Income Scheme

28. Currently, income tax charges under the Accrued Income Scheme apply to domiciled individuals but not to the non-domiciled.

29. Legislation on the Accrued Income Scheme will be amended so that the income tax charge has effect for non-domiciled individuals as well as domiciled individuals. The legislation to achieve this was published in draft on 18 January 2008.

Capital Gains Tax Losses

30. Currently, non-domiciled individuals get no capital gains tax relief for losses arising offshore as the remittance basis of taxation is compulsory for them with respect to capital gains tax. From 6 April 2008 individuals will be able to elect in and out of the remittance basis on a year by year basis so a non-domiciled individual could pay capital gains tax on unremitted foreign gains in a year they are taxed on the arising basis.

31. Legislation on capital gains tax will be amended so that non-domiciled individuals taxed on the arising basis who have not claimed the remittance basis from 2008-09 will get relief for foreign losses. Individuals who claim the remittance basis from 2008-09 will be able to elect into a regime that enables them to get relief for their foreign losses in the UK in years they are taxed on the arising basis. That election will be irrevocable and as it will require non-domiciles to disclose details of unremitted capital gains the election will be optional.

Offshore Mortgages

32. Currently individuals paying tax on the remittance basis who borrow money from a non-UK institution can repay the interest on that loan out of untaxed foreign income without giving rise to a tax charge on the remittance basis, even if the loan is advanced into the UK. The draft legislation published on 18 January 2008 proposed that repayments on such loans would be treated as a remittance on or after 6 April 2008.

33. The legislation in the Finance Bill 2008 will include grandfathering provisions such that untaxed relevant foreign income used to fund interest repayments on existing mortgages secured on a residential property in the UK, will not be treated as a remittance on or after 6 April 2008. This grandfathering will have effect for repayments for the remaining period of the loan, or until 5 April 2028, whichever is shorter. In addition if the terms of the loan are varied or any further advances made after 12 March 2008 then the repayments will be treated as remittances from that point.

Further advice

34. If you have any questions about this change, please email offshorepersonal.taxteam@hmrc.gsi.gov.uk or telephone 020 7147 2762. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk