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TAXATION OF NON-DOMICILED INDIVIDUALS - CONSULTATION

On Friday 17 June two separate consultation documents were published by HM Revenue & Customs, outlining proposed reforms of the taxation of non-domiciled individuals and the introduction of a Statutory Residence Test. Both were originally announced in the 2011 Budget, and this note covers the proposals for the former.

It should be remembered that the consultation documents are merely step 2 of a 5 stage process, in advance of the reforms being implemented from April 2012 and this current consultation process will run for 12 weeks to 9 September 2011.

The general objective as suggested by HM Treasury is to both encourage non-domiciled individuals to invest and carry on business in the UK, in addition to ensuring a fairer tax contribution, where the individuals have been resident for many years. The proposed policy changes can be summarised into 3 main categories as follows:

• It was confirmed that the higher charge of £50,000 will be introduced with effect from 6 April 2012, for those non-domiciles who have been UK resident for at least 12 of the previous 14 years prior to the year of claim.
• The £30,000 RBC will be retained for those non-UK domiciled individuals who have been resident for at least 7 of the 9 years prior to the year of claim, but fewer than 12 years.
• Currently UK resident non-domiciles who choose to claim the RBC lose their entitlement to UK personal allowances and the annual capital gains tax exemption and this will continue to be the case.

Under existing rules overseas income or capital gains remitted to the UK, by resident non-domiciles paying the RBC, are liable to UK tax regardless of the purpose of the remittance.

However, to encourage investment in the UK, the Government proposes to allow tax-free remittances for investment in a very wide class of qualifying businesses. The only stipulation appears to be that the business is carrying out a commercial trading activity in the UK, including the development or letting of commercial property.

To avoid any abuse of the system, investment in residential property is to be restricted to situations where the activity falls within the definition of “trading activity”, for example, investing in a business that builds and develops residential property would qualify. Similarly, investment in nursing homes and hospitals, providing a commercial trade is carried out, will be permissible.

Furthermore, the Government is also considering whether or not the new incentives should apply to investment in companies listed on a recognised Stock Exchange or similarly regulated markets such as AIM and PLUS Quoted.

There will be no lower or upper limit for the purpose of investment in the UK, nor restriction where the individual is connected to the business. However, the proposals suggest that where the investment is subsequently disposed the proceeds of the sale must be taken out of the UK within 2 weeks of the individual receiving the funds.To ensure interaction with the RBC the business investment scheme relief will only apply to those who physically pay the RBC. Individuals who choose to be taxed on their worldwide income as opposed to paying the RBC will by definition not benefit from the business investment incentive.

The Government has recognised that the current RBC rules can be complicated in practice and therefore 4 areas have been identified to simplify the rules summarised as follows:

• Nominated Income

  It is proposed that individuals should be able to remit the first £10 of their nominated foreign income or capital gains for the purposes of the RBC, without becoming subject to the adverse identification rules.

• Foreign Currency Bank Accounts

  The Government also proposes that all sums within an individual’s foreign currency bank account will be removed from the scope of CGT, and this will apply to both non-UK domiciled and UK domiciled individuals alike.

• Taxation of Assets Remitted and Sold in the UK

  Under existing rules, assets purchased using foreign income or gains and then remitted to the UK are normally taxable, with limited exemptions for certain assets. However these exemptions are currently not available when the asset in question is sold in the UK.

  The Government therefore proposes to build on existing exemptions and introduce a new provision which will remove the tax charge of remitting an asset to the UK, which is subsequently sold, providing any proceeds from the sale are subsequently taken out of the UK within 2 weeks of the funds being received.

• Statement of Practice 1/09

  This statement of practice, introduced in 2009, affects “not-ordinarily resident” employees taxable on a remittance basis on duties performed outside the UK. Currently SP1/09 is very widely used by expatriate employers and employees, and is considered important to business. Consequently the Government is seeking to put this concessionary tax practice on a statutory footing, to provide both employers and employees with greater clarity going forward.

The above summary is merely highlighting the salient points of a 30 page consultation document and if you would like to discuss any points please do not hesitate to contact the team at Saffron.

June 2011