Considerations for non-UK domiciled individuals prior to 6 April 2009

6 April 2009 marks the anniversary of the introduction of the changes to the UK taxation of non-UK domiciled individuals. Is there anything which should be considered before the end of the tax year?

What changes were introduced?

In contrast to UK domiciled, UK resident individuals who are taxable on their worldwide income and gains (arising basis), individuals who are not domiciled nor ordinarily resident in the UK may be taxed on certain types of foreign income and gains only when they are remitted to the UK (the remittance basis).

The Finance Act 2008 introduced changes meaning that from 6 April 2008, individuals wishing to take advantage of the remittance basis will need to make a claim for this basis to apply. For those over the age of 18 who have been UK resident for more than seven out of the previous nine years, this is likely to result in the individual being required to pay a £30,000 charge in order to claim the remittance basis, known as the remittance basis charge or RBC.

Another change from 6 April 2008 is that a claim for the remittance basis triggers the loss of personal income tax and capital gains tax allowances.

The new rules are complex and likely to cause significant complications for those to whom the new regime applies. However, the basic principle behind the rules is that income or gains which are used in any manner or form in the UK by, or for the benefit of a remittance basis taxpayer, their spouse, minor children or any other 'relevant person', or bought to the UK by any structure for their benefit will give rise to a tax liability. There is, however, still the potential to mitigate any tax liability by careful planning and structuring, both prior to 6 April 2009 and in the coming tax year.

Should I pay the £30,000 remittance basis charge?

There are some specific circumstances where a claim is not required, for example where the individual's unremitted income and gains for the year is less than a de minimis level of £2,000.

For those individuals only eligible to take advantage of the remittance basis of taxation if they pay the RBC, for some it will be obvious that paying the £30,000 RBC and claiming the remittance basis will be beneficial. Similarly for others, the costs will clearly outweigh the benefits. The decision as to whether to do so can be an annual decision which for 2008/09 will not be required to be made before 31 January 2010. However, advance consideration of the issues, and structuring of sources of income/gains is likely to be advantageous, particularly for those where the decision is not clear cut.

Where several family members are affected by the RBC it may be possible to use careful structuring to arrange funds so that they are held by only one family member, and not spread amongst them, to mitigate the RBC so that only a single payment will be required.
Those individuals who pay the £30,000 RBC must nominate foreign income and gains that the charge will relate to in order to claim a 'tax credit' against any foreign tax liability. If nominated income or gains are remitted, there are strict rules determining the order that income and gains are treated as remitted which are likely to cause considerable practical difficulties, particularly if nominating a source of income which at the time of nomination, is included in a bank account that pools various sources of income and gains. It may, therefore be prudent to consider setting up a new bank account prior to 6 April 2009 into which any nominated funds can be placed, thus protecting the other sources from tainting.

What about other planning?

There is still planning that can be put in place before 6 April 2009, for example ringfencing of pre 5 April 2008 income and gains to ensure that sources are not tainted by any income and gains arising after this date as there remains some flexibility for remittance planning in respect of this income.

The use of investment products (including deferred interest bank accounts, offshore life bonds etc) may mitigate the impact of the new regime. There is still time to put such products in place for this tax year, or alternatively in preparation for the next tax year. Financial advice should be sought before making such investments.

Under the new regime, from 6 April 2008 losses generated on foreign assets by non-UK domiciled individuals claiming the remittance basis will now be allowable losses for UK tax purposes if an additional irrevocable election is made. There is a set order in which the foreign capital losses are allowable for offset against gains, which if the election is made, will also apply to UK losses. Clearly in some situations the ability to set foreign losses against gains will result in a tax saving. For others, making the election could result in UK losses being wasted, as they could be set against foreign gains which are not remitted. The decision as to whether to make such an election should be considered carefully.

Do these changes effect anyone else?

The new taxation rules extend to resident but non-UK domiciled beneficiaries of offshore trusts. From 6 April 2008, where a remittance basis claim is not made, nor a £30,000 RBC paid, as appropriate, such beneficiaries will be taxable immediately on income and capital payments attributed to them. As with individuals there is various planning which can be undertaken to mitigate the effect of the new regime, however advice should be sought before implementing this.

Antonio Risorto, Senior Tax Manager at Grant Thornton says: "The new rules for the taxation of non-UK domiciled individuals have now been in place for almost a year and although complex there is growing clarity as to what non-UK domiciled individuals should be doing with their personal assets. Many such individuals took advantage of the pre 6 April 2008 planning window before the new regime came into play. However, there are still decisions to be made and in may cases planning to be undertaken before 6 April 2009."

Please contact us if you would like further advice on any of the above.