UK: Finance Bill 2012: Reform Of The Taxation Of Non-Domiciled Individuals

Last Updated: 17 January 2012

For more information on the Finance Bill 2012 click the links below:

The Autumn Statement Key

Announcements for Private Clients

On 6 December 2012, the Treasury published draft legislation for Finance Bill 2012. Certain parts of the Finance Bill 2012 were covered in a separate article released last week. This article deals with the parts of the legislation which will implement changes to the rules for non-domiciled individuals who pay UK income and capital gains tax on the "remittance basis". These are summarised below.

Non-domiciled clients and the remittance basis

The draft legislation includes measures to increase the remittance basis charge ("RBC") from £30,000 to £50,000 for those who have been resident in the UK for 12 of the last 14 years. This measure was announced at this year's March Budget as a likely introduction in 2012 and so this is no surprise. The new charge will work much as the current £30,000 charge works.

Long-term resident non-domiciled individuals will be able to choose whether to pay the RBC and claim the remittance basis on a year by year basis, and thus be subject to income tax and capital gains tax (CGT) on their non-UK income and gains only if remitted to the UK, or alternatively be liable to UK tax on their worldwide income and gains. The RBC will not apply to individuals under 18 or those with unremitted income and gains of less than £2,000 in a tax year.

Remittances for commercial investments in the UK

As a measure to encourage business investment in the UK, non-UK domiciled individuals who claim the remittance basis of taxation will be able, as from 6 April 2012, to remit non-UK income and gains into the UK free of tax, provided the purpose of the remittance is to make a "qualifying investment". For these purposes, a qualifying investment is an investment in an unlisted UK company or in a company listed on an exchange regulated market which carries out commercial trading activities (including the development or letting of commercial property). Any gains arising on the investment in the UK will be subject to CGT in the normal way.

There is no minimum or maximum level of investment but certain anti-avoidance measures are included in the draft legislation to prevent abuse of the relief. Such measures include the following requirements:-

  • The qualifying investment must be made within 45 days of the funds being remitted to the UK. Failure to invest in time will result in the remittance becoming chargeable under the normal rules.
  • The investment must not result in the individual receiving a benefit which arises other than purely by virtue of the investment being made.
  • In the event of an employee (or other connected person) of a company making a qualifying investment in that company, the investment must be on commercial terms.
  • Upon disposal of the qualifying investment, the individual will be treated as having made a potentially taxable remittance unless the proceeds are transferred back outside the UK or reinvested in another qualifying investment within 45 days of the disposal.

Simplification of treatment of nominated income

In the context of the RBC, the current rules provide that non-UK domiciled remittance basis users must nominate an amount of their non-UK income and gains to be deemed to be taxed on an arising basis so that the RBC is a recognised tax charge for the purposes of the UK's various double tax treaties. The nominated income or gains amounts are currently required to be identified under a complex process, pursuant to which they are then treated as unavailable for remittance before all other non-UK income and gains have been remitted.

Under the new legislation, an individual will be able to nominate a small amount of non-UK income or gains without being subject to the complex identification rules. The purpose of the new legislation is purely to simplify the nomination of income and gains rules where possible.

Taxation of assets remitted to and sold in the UK

New rules are to come into effect dealing with the sale in the UK of certain so-called exempt assets that have been remitted to the UK by non-UK domiciled individuals without such remittance giving rise to a charge to UK income tax or CGT. Such exempt assets include, for example, works of art which are made available for public access, items of jewellery brought to the UK for personal use and items that are under repair or restoration.

Under the new rules, exempt property which ceases to be exempt as a result of being sold in the UK will not be subject to a tax charge provided, inter alia, that the sale proceeds are transferred out of the UK soon after the sale.

Capital Gains Tax – Foreign Currency Bank Accounts

Because of the difficulties of calculating gains and losses and keeping track of records and currency fluctuations over long periods, often in relation to relatively small capital amounts, it is proposed that any gains made on withdrawals from foreign currency bank accounts shall be exempt from CGT.

Statutory Residence Test

As previously reported, it was announced on 6 December 2011 that the expected statutory residence test will be postponed until 6 April 2013, in order to allow more time to finalise the details. This is disappointing and prolongs the period of uncertainty for clients who do not live in the UK full time, or have left the UK but perhaps retain some connections here. The delay goes to show the complexities in this area which will clearly take further time to resolve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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