A review of the taxation of non-domiciliaries has been expected ever since the Coalition Government published its Programme for Government in May 2010. Predictions have ranged from of an abolition of the remittance basis for RNDs, to an increase in the amount of the charge.
How it works at present
The current rules applying to the tax treatment of UK resident non domiciliaries have been in operation since 6 April 2008. The big change that took effect from this date was that in order to benefit from the beneficial tax treatment of non-UK source income and gains that are not brought into the UK, it has been necessary to pay a fee – known as a remittance base charge – of £30,000.
This applies where the individual is over age 18 and has been UK resident for seven out of the previous nine tax years.
Those electing for the remittance basis automatically lose their entitlement to UK personal allowances and the capital gains tax (CGT) annual exemption. In practice, of course, the loss of the personal allowance is of less importance following the decision to phase this out where income exceeds £100,000.
Naturally, an individual’s non-UK source income and gains must be of fairly significant magnitude to justify the payment of £30,000: a very rudimentary calculation based on a fairly adventurous current rate of return of 3% for a 50% taxpayer, for example, suggests that capital would need to be £2m.
The favourable tax treatment under the remittance basis includes the facility of not having to disclose non UK source income and gains not remitted to the UK, and the absence of UK tax on the overseas income and gains. The remittance basis may also apply without payment of £30,000 in cases in which an individual’s unremitted overseas income for the year is less than £2,000.
What is being proposed?
The March 2011 Budget proposals are that from 6 April 2012, those RNDs who have been resident in the UK for 12 years or more will continue to be able to benefit from the remittance basis of taxation, but at the higher cost of £50,000 a year – in addition to tax due on income or gains arising in or remitted to the UK.
The lower £30,000 charge will be retained for those RNDs who have been resident in the UK for more than seven years but fewer than 12 years. This proposed new charge for those potentially affected will mean that using the same rudimentary assumptions above, the capital would need to be in excess of £3m. There may, therefore, be those “at the margin” for whom it may not be beneficial to continue with the remittance basis.
Taking the decision
The decision as to whether to claim the remittance basis can be made annually, and the deadline is the Self Assessment filing date of 31 January, following the end of the preceding tax year. This enables planning to take place on an annual basis.
The advantage to this is that it gives individuals an opportunity to maximise their offshore income in one year, when paying the charge, and minimise income/gains in another year in order to not pay the charge.
Also announced in the March Budget was that from 6 April 2012, RNDs will be able to remit foreign income or gains to the UK for “commercial investment in UK businesses”, with no charge to UK tax. At the time of writing, we await the publication of a consultative document that is expected to detail the extent of the commercial investments permitted, and whether UK tax-advantaged investments will be permissible.
That such a financial incentive is being proposed demonstrates the Government’s commitment to encourage inward investment by RNDs, and could be seen as an intention not to introduce a more wide-ranging reform of the way that RNDs are taxed in the UK. Indeed, the Government confirmed that there will be no other substantive changes for the remainder of this Parliament.
Professional advice recommended
As is generally the case for anyone faced with complex tax matters, UK resident non-doms are wise to obtain professional advice before deciding whether or not to elect for the remittance basis.
Take, for example, the case of an RND who has a fairly low level of unremitted overseas income, and who thus could, in theory, benefit from these rules.
If that same person happened to be in receipt of pensions from abroad, he or she would normally benefit from a 10% deduction that applies in such a case. But if the ‘remittance basis’ were claimed, that deduction would not be available – and instead the individual would be taxed on the full amount of the pension.
It is a case, therefore, of looking at the overall tax position to make a fully informed decision.
Then too, there are a large number of RNDs whose level of wealth simply does not justify the payment of £30,000, but who nevertheless will be seeking to reduce tax, and who may also wish to retain assets outside of the UK for other reasons. They will often not be deemed domiciled for inheritance tax (IHT) purposes, and therefore will seek to minimise the assets retained in the UK in order to reduce the size of the estate subject to IHT.
Offshore single premium investment bonds can be suitable vehicles in appropriate circumstances (depending on the source of funds), as no income is technically produced until required by the client, and because it is possible to withdraw up to 5% per annum of the initial amount invested with no tax liability at the time of withdrawal.
Based on present rates of investment return, a 5% withdrawal will generally allow the withdrawal of most if not all of the income return on an investment.
Depending on the individual’s risk tolerance, consideration can then be given to other investments that minimise the liability to tax. For example, a low income producing investment with capital growth may be appropriate. This is because even though there will be tax due on the income, the timing of the realisation of the capital gain is within the RND’s control.
He or she therefore could choose to realise the gain in a year when, based on that individual’s circumstances, the annual CGT exemption may be available, there may be other losses (to set against the gain), and/or other income is low.
It may also be possible to defer the realisation of the gain until the individual is non-UK resident. For those same RNDs whose wealth does not justify the payment of £30,000 and who are deemed domiciled for IHT purposes, other considerations apply.
These individuals are liable to IHT on worldwide assets in any event, so there is no IHT advantage in keeping investments offshore, and tax efficient UK investments can be considered instead, such as certain National Savings certificates, individual savings accounts, pensions and even more adventurous structures, such as venture capital trusts, enterprise investment schemes and Business Premises Renovation Allowances.
