Payne Hicks Beach

Payne Hicks Beach

11 August 2011

Reform of the taxation of non-domiciled individuals

Private Client solicitor Freddie Bjørn considers the recent HMRC consultation document which seeks comment on a variety of proposals aimed at reforming the taxation of non-domiciliaries.


On Friday 17 June the Government issued a consultation document seeking feedback on proposed changes to the taxation of non-domiciliaries ("Non-Doms"). The Consultation focuses on three main areas of reform: a new £50,000 remittance basis charge ("RBC"), a relaxation of the remittance rules in respect of investment into UK companies and the simplification of the remittance basis of taxation.

1. £50,000 RBC

Following an announcement in this year's Budget the Government has confirmed that as of 6 April 2012 the RBC will be increased to £50,000 for those Non-Doms who have been resident in the UK for 12 of the past 14 years and who want to continue to enjoy favourable tax treatment whilst resident in the UK. As with the current £30,000 RBC (payable by individuals who have been resident for 7 of the past 9 years) payment of the charge will mean that the individual in question is not liable to tax on overseas income and gains unless they are remitted to the UK.

Whilst the Government has asked for comment on the impact of the increased RBC it seems unlikely this will prompt too much debate given that the new RBC will adhere to the current RBC rules.

2. Investment into UK companies

The basic premise is summarised in the consultation document as follows: "in order to encourage investment in a broad range of businesses the Government proposes to allow tax-free remittances for investment in [Qualifying Businesses]".  Consequently, an individual, trust or company whose investment would have been subject to the RBC (at either level) will be able to remit funds (of any amount) to invest in a UK company without triggering a UK tax charge.

The Government proposes that the definition of Qualifying Businesses should include businesses carrying out trading activities and businesses undertaking the development or letting of commercial property (using the accepted meaning of these terms). However, the Government is considering the extent to which other types of business should be included or excluded and whether to include investment in listed or quoted companies (for which it puts forward arguments both ways).

Unsurprisingly the Government is keen to prevent tax avoidance based on these new rules and consequently it has confirmed that amongst other things: i) the holding and letting of residential property and the leasing of tangible moveable property will not be included within the definition of Qualifying Business; ii) the new rules will only apply to investment into companies (and not partnerships, trusts or sole traders) and  iii) remitted funds must be removed from the UK or reinvested within two weeks of the individual receiving money generated by the disposal of an investment (to prevent a taxable remittance arising at that date). The Government is seeking comment on whether the two week period is appropriate and it is likely this will be extended given that the timescale appears unrealistic for removing or reinvesting the funds in question. It is important to note that the investment does not 'cleanse' the remittance.  Consequently unless the funds are taken back overseas within the time eventually specified they will constitute a remittance and will be taxed accordingly.

In summary the Government is consulting on the extent to which other types of business should be included or excluded; whether to include investment in listed or quoted companies; whether the two week removal or reinvestment period is appropriate and whether the proposal will be an 'effective means of encouraging investment in the UK'.  Whilst these new proposals are likely to encourage overseas investment in UK businesses, which is the express aim, the Government must strike a balance between keeping the legislation free of complication whilst at the same time preventing abuse (which they are unsurprisingly concerned about). Consequently it will be interesting to see the extent to which the consultation results in significant changes to the proposals and which areas these focus on. If the proposal is to achieve its stated aim it is important that investors do not have to take extensive legal advice every time they remit in order to invest.

3. Simplification of the RBC

The Government has identified four areas where simplification of the RBC is required.

a. Nominated Income - due to quirks of the system, it is currently advisable to have a nominated sum of income or gains to which the RBC attaches. This involves the Non-Dom setting up a new segregated offshore account with sufficient funds to generate annual interest of at least £1 which is never remitted to ensure that the unfavourable rules which apply to the remittance of nominated income are not triggered. However, the Government is proposing to simplify the regime so that it will no longer be necessary to keep such an account, and this is understood to be the case even for US taxpayers following the IRS ruling on 11 August 2011 to the effect that a foreign tax credit in respect of the RBC will be permitted. 

b. Foreign currency bank accounts - In order to relax the onerous rules relating to capital gains on non-Sterling currency, which currently treat the withdrawal of funds from foreign currency bank accounts ("FCBA") as a part disposal on which a capital (currency) gain or loss can arise, the Government proposes that all sums within an individual's FCBA will be removed from the scope of capital gains tax (regardless of domicile).

c. Taxation of assets sold in UK - Certain assets (acquired with funds not taxed in the UK) can be brought into the UK without triggering a remittance (e.g. works of art, antiques, jewellery and assets worth less than £10,000). However, if these assets are subsequently sold in the UK, UK tax is payable both by reference to original untaxed moneys and any gain realised on sale. In order to promote sales by Non-Doms in the UK (for example through UK auction houses) the Government intends to introduce a provision which would remove the tax charge arising as a result of the remittance providing that all of the proceeds from any sale are taken out of the UK within two weeks of the money being received by the seller. However, any capital gain arising on the sale would be taxed as normal.

d. Employees with duties in the UK and Overseas - The Government intends to incorporate into statute Statement of Practice 1/09 which provides a relaxation of the mixed fund rules for employees who are: resident but not ordinarily resident in the UK, taxed on a remittance basis and carry out duties in the UK and overseas under a single contract of employment.  The new legislation 'will provide expatriate employees and their employers with greater clarity and certainty'.

The proposals for simplification are both welcomed and, many feel, overdue. However, at present the Government does not appear to have fully ironed out the issues which paragraphs 3 (a)-(c) are attempting to tackle. Consequently it is hoped that following the consultation comprehensive changes will be made to the current proposals to ensure that the simplification does not turn into a piece meal process strung out over the coming years.

If the Government wishes to fulfil its stated aim of attracting more foreigners to come to live and invest in the UK, there is an urgent need to simplify the current rules, particularly if the cost for some longer term Non-Doms is to increase to £50,000.


For further advice relating to the taxation of both domiciled and non-domiciled individuals please contact Private Client partner Alice Palmer on apalmer@phb.co.uk or Freddie Bjørn on fbjorn@phb.co.uk.



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This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

The firm is authorised and regulated by the Solicitors Regulation Authority: SRA Number 00059098

© 2013 Payne Hicks Beach

10 New Square, Lincoln's Inn, London WC2A 3QG

DX 40 London/Chancery Lane
Tel: 020 7465 4300 Fax: 020 7465 4400 www.phb.co.uk

This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

The firm is authorised and regulated by the Solicitors Regulation Authority: SRA Number 00059098

© 2017 Payne Hicks Beach

 

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