Author: Vincent Chung

The UK continues to offer significant tax advantages for individuals who are resident but not domiciled in the UK. This is due to the availability of the remittance basis of taxation. The availability of the remittance basis for longer term residents was restricted from April 2017 and additional details are available on request.

Non-UK domiciliaries who are resident in the UK (whether on a short-term basis or a long-term basis) should take specialist advice from a firm such as Dixcart, which has expertise in this area,  ideally before they become UK resident.

Advantages Available Through the Use of the UK Remittance Basis Of Taxation

• The remittance basis of taxation allows UK resident non-UK domiciliaries, who retain funds outside of the UK, to avoid being taxed in the UK on the gains and income that arise from those funds. This is as long as the income and gains are not brought into or remitted to the UK.

In addition, clean capital (i.e. income and gains earned outside of the UK before the individual became resident, that have not been added to since the individual became resident in the UK) can be remitted to the UK with no further UK tax consequences.

What is the UK Remittance Basis of Taxation?

Generally, the remittance basis applies in the following circumstances:

• If unremitted foreign income is less than £2,000 at the end of the tax year (6 April to the following 5 April), the remittance basis applies. The remittance basis automatically applies without a formal claim and there is no tax cost to the individual in the UK. UK tax will be due only on foreign income or gains remitted to the UK. 
• If unremitted foreign income is over £2,000 then the remittance basis can still be claimed, but at a cost:-
  1. In all cases the individual will lose the use of his or her UK annual tax free personal allowance and capital gains tax exemption.
  2. Individuals who have been resident in the UK for less than 7 out of the prior 9 tax years do not have to pay a Remittance Basis Charge in order to use the remittance basis.
  3. Individuals who have been resident in the UK for at least 7 out of the prior 9 tax years have to pay a Remittance Basis Charge of £30,000 per annum in order to use the remittance basis. This remains the annual charge until they have been in resident the UK as specified in point 4 below.
  4. Individuals who have been resident in the UK for at least 12 out of the prior 14 tax years must pay a Remittance Basis Charge of £60,000 per annum in order to use the remittance basis.
  5. Anyone who has been resident in the UK in more than 15 of the previous 20 tax years will not be able to enjoy the remittance basis, and will therefore be taxed in the UK on a worldwide basis for income, and capital gains tax purposes.

Identifying Income and Chargeable Gains

The starting point is to identify what type of income and/or chargeable gain is covered by the rules. In some cases this is relatively straightforward. For example, if an individual’s sole source of foreign income is interest arising on a foreign deposit account, then the interest is clearly the individual’s foreign income. However, in reality, matters are often more complex.

The concept of income and chargeable gains includes not only income from sources owned by the individual personally, or gains realised from personally held assets, but also income and gains treated as being received by the individual.

There are many scenarios that might be included in the latter category and some examples are detailed below:

• Income arising in non-UK structures (i.e. trusts and companies) of which the individual is the settlor/transferor (i.e. the person who created the structure or, in some circumstances, who added property to it) where the income is treated as theirs;
• Gains deemed to be those of the individual by being attributed to him through certain closely held foreign corporations – note that these provisions generally only apply where the individual’s ability to participate in the gains and income of the company (normally through a shareholding) amount to a participation of more than 25%; and
• Certain types of deemed income – including on the disposal of non-reporting status offshore funds (i.e. most hedge funds), or income deemed to arise under the “accrued income scheme”, or gains from the disposal of other securities, known as deeply discounted securities.

Having identified what constitutes the individual’s “income and chargeable gains”, it is necessary to track the income and chargeable gains in order to see if they have been remitted to the UK.

Definitions: Remittance, Relevant Persons and Relevant Debt

The legislation creates a broad meaning for remittance and a wide class of persons capable of triggering a remittance. It is important to fully understand the definitions that apply to: “remittance”, “relevant persons” and “relevant debt”. Please contact Dixcart for this detailed information.

The Remittance Rules in Practice

The remittance rules are designed to stop an individual and any “relevant person” using unremitted foreign income or gains to finance an item of UK expenditure without a remittance occurring.

As a result, and subject to the exceptions outlined briefly below, the purchase of any asset in the UK, the payment for any service in the UK, the importation of any asset into the UK by an individual or by a “relevant person” using the individual’s income or chargeable gains, will be deemed to be a remittance.

Example 1:

John purchases a work of art at an auction in Switzerland. John does not have sufficient clean capital to fund the purchase, so he uses overseas income in order to do so. He then brings the art to the UK and displays it in his  house. “Property” has been “brought to” and “received in” the UK by John; therefore this is treated as a remittance of the income used to purchase the picture.

Example 2:

Brian and Claire are husband and wife. Their child David is at school in the UK. The school bills Claire for David’s school fees. Brian gives foreign investment income to Claire to finance the payment of the school fees. Claire is a “relevant person”. Claire has received income which she then spends in the UK by paying David’s school fees. A remittance by Brian is deemed to have occurred.

Example 3:

The facts are the same as in example 2 above, except the school has a foreign bank account into which it invites non-UK domiciled parents to pay the school fees. In this case, no money or other property is “brought to”, or “received” or “used in the UK”. However, a service (in other words the education of David) is provided in the UK to David, who is a relevant person (i.e. Brian’s minor child). Therefore the payment of the school fees by Claire is deemed to be a remittance by Brian.

Exceptions to the Remittance Rules

• Under an exception introduced from 6 April 2012, no tax charge arises on remittances to purchase certain UK investments (this includes the purchase of an interest in a commercial property business).

In addition, there are other exceptions to the remittance basis of taxation.  One of these is exempt property, which includes:

• Clothing, footwear, jewellery and watches if they are for the personal use of a “relevant person”.
• Property where the amount of foreign income or gains (that would otherwise be deemed to be remitted) is less than £1,000. “Property” for these purposes does not include “money” or any negotiable instrument (e.g. travellers cheques).

The Mixed Funds Rules

Since 6 April 2008 new rules have applied which create an order of priority of distribution from “mixed funds” to determine the type of monies that have been remitted to the UK.

Effectively, each account that contains “mixed funds” has to be analysed to determine the type of funds held in that account. This exercise must be undertaken for each tax year in which amounts have been credited to the account. The account will therefore contain a number of layers, each of which will contain a different composition of income and gains as defined in the mixed funds rules. The purpose of the mixed funds rules is to identify the type of funds being remitted to the UK.

This can give rise to complex situations and, wherever possible, we advise individuals coming to the UK to structure their affairs in a suitable manner before becoming resident in the UK. Dixcart is experienced in providing this type of advice.

The simplest way would be to establish three accounts outside of the UK:

1. Capital arising before the individual became resident in the UK, from which remittances can be made tax free;
2. Capital with capital gains arising after the individual became resident in the UK – remittances from this account will attract tax at 20% on the proportion remitted to the UK (with gains being taxed in priority to capital at the same 20% rate); and
3. Other – this would include income; such as interest paid on the first account, deemed income and capital that has become mixed with other sums, except gains.

The intention would be that the individual would keep the capital in account 1, free from any further additions. These amounts could then be remitted to the UK without any further UK tax charge. 

If the capital in account 1 was subsequently exhausted, remittances should then be made from account 2, ensuring a lower tax rate than if amounts were taxed as income from account 3.

Temporary Non-Residence in the UK

Non-UK domiciliaries who have unremitted foreign income and gains, and who cease to be resident in the UK, will need to leave the UK and be non-resident for at least five complete years, if they wish to use the non-UK income and gains, that they held prior to becoming non-resident, to fund UK expenditure during their absence from the UK.

The most likely example of the funding of UK expenditure during an individual’s absence would be the repayment of a debt incurred during the individual’s period of residence in the UK. If the individual returns to the UK to become resident within the five year period, pre-departure non-UK income and gains which have been remitted to the UK will be taxed.

In addition, dividends or loans from closely held companies, certain employment income, pension income and chargeable event gains from certain insurance policies will be taxed on return to the UK after a period of temporary non-residence.

Major reforms regarding how UK tax resident, non-UK domiciliaries (“non-doms”) are to be taxed will be implemented from April 2017.

The changes will impact on individuals who have been tax resident in the UK for 15 years or more.

The Attractive Remittance Basis of Taxation will Continue for Many Non-UK Domiciliaries

The availability of the remittance basis of taxation for non-UK domiciled individuals who have been resident in the UK for fewer than 15 years will continue. The availability of the remittance basis allows for some interesting tax planning opportunities.

The New “15 year” Rule and Implications Regarding Income Tax and Capital Gains Tax

The current position for UK tax resident, non-domiciled individuals is that they can elect to pay UK income and capital gains tax on foreign source income and gains only to the extent that those monies are remitted to the UK. If the monies are not remitted to the UK, no UK income or capital gains tax is payable.

Since 2008, individuals resident for 7 years or more have had to pay an annual charge for the use of the remittance basis.  As long as the annual charge has been paid, the remittance basis has remained available.

• It is now proposed that, from April 2017, anyone who has been tax resident in the UK for 15 of the previous 20 tax years will become “deemed domiciled” for tax purposes.  This will mean that these non-dom individuals will no longer have the option to use the remittance basis of taxation and will be taxed on a worldwide basis.

For income and capital gains tax purposes it is therefore important to consider planning opportunities prior to April 2017.

Deemed Domiciled – the Concept and Inheritance Tax

For inheritance tax purposes, a similar “deemed domiciled” rule already exists. The current rule is that an individual becomes deemed domiciled for inheritance tax once tax resident in the UK for 17 of the previous 20 tax years.

From April 2017 there will also be an impact on the inheritance tax payable on  estates.  Deemed domiciled will be triggered, as above, by being tax resident in the UK for 15 of the previous 20 tax years and the full worldwide estate of a deemed domiciled individual will be subject to UK inheritance tax. In contrast only the assets of a UK non-dom’s estate situated in the UK will be subject to UK inheritance tax at 40%, for the first 15 years of UK tax residence. 

The concept of “deemed domiciled” for tax purposes therefore already exists, and anyone triggering the current inheritance tax potential liability or the changes to the rules coming into force in April 2017, should definitely consider inheritance tax planning opportunities as soon as possible.

UK Tax Residence and the Possibility of “Resetting” the Clock

The proposed new “deemed domiciled” 15 year rule is based on the tax residence of the individual non-dom.  Individuals should consider their tax residence position and endeavour to spend less time in the UK to terminate their UK tax residence status and to thereby potentially avoid becoming deemed domiciled, if they wish to do so.

As detailed above, the proposed rule is that an individual will be deemed domiciled in the UK if tax resident in the UK for 15 of the previous 20 tax years.  Through appropriate planning, ceasing to be UK tax resident for 6 years will mean that  individuals will lose their deemed domiciled status.  Should they then wish to return to being a UK tax resident, they will have reset the year count for the deemed domiciled test.

Additional detail regarding the factors affecting UK resident and non resident status can be found in the following Dixcart Article: The UK Resident/Non Resident Test

TAX PLANNING OPPORTUNITIES

Individuals Seeking to Lose their UK Tax Residence for the Requisite 6 Year Period

A Planning Example

Mr and Mrs Taxpayer spend between 125 and 140 days per year in the UK and have done so for 14 years (all of which they have been UK tax resident).  While in the UK they stay in an apartment they own in London.  For the rest of the year they mainly live in Spain.  They are non-doms for UK tax purposes.  They do not have children.

Mrs Taxpayer is a consultant and spends the equivalent of one day per week (i.e. 52 working days) providing consultancy services to UK based clients while they are in the UK.

UK tax residency considerations will take into account the following factors:

• Mr and Mrs Taxpayer currently spend more than 120 days in the UK per year;
• Each spouse is UK tax resident;
• They have both spent more than 90 days in the UK in the previous 2 tax years;
• They have an apartment available to them while they are in the UK; and
• Mrs Taxpayer works in the UK for more than 40 days per year.

Mr Taxpayer is UK tax resident and has 3 connecting factors. Mrs Taxpayer is UK resident and has 4 connecting factors.

They both realise that under the new “deemed domiciled” rule, from April 2017 they will be taxed in the UK on a worldwide basis and similarly will be subject to UK inheritance tax on a worldwide basis.  This would be a significant cost to them and they would therefore like to reconsider their UK tax residence position.

They would both, however, still like to spend time in the UK, particularly Mrs Taxpayer who does not intend to cease her UK consulting work.

To cease their UK tax residence, both their day count in the UK and their “connecting factors” as specified in the UK Resident/Non Resident Test need to be considered.

Question – Is it possible to maintain the same day count?

Answer – If they wish to retain the same day count in the UK, they would both need to remove all connecting factors.  This is not possible as they have already triggered the connecting factor of more than 90 days in the previous 2 tax years.  It is therefore not possible to maintain this day count.

Question – if all connecting factors are retained, how many days would they need to drop their day count to?

Answer – Mr Taxpayer would need to reduce his day count to below 90 days.  Mrs Taxpayer to below 46 days (which would prevent her from working her current number of days in the UK).  It is worth noting that if they drop to this level, after 2 years, they will no longer trigger the “90 day” connecting factor and after 3 years they will be considered to be “arrivers” so additional planning options might be available at this time.

Question – how many days can they spend in the UK each year?

Answer – the connecting factors and their status as “arrivers” or “leavers” will change over the years and therefore each year will need to be considered separately.  If they are not prepared to sell the apartment, and/or for Mrs Taxpayer to stop working as many days while in the UK; the table below shows the maximum number of days they could spend in the UK and at the same time lose their tax residence status for the requisite 6 year period (assuming Mrs Taxpayer works all the days she is in the UK for the first 2 years).

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Mrs Taxpayer	45	45	90	90	90	90
Mr Taxpayer	90	90	120	120	120	12

Question – how would their day count change if Mrs Taxpayer ceased working in the UK?

Answer – this would mean she would lose one of her connecting factors.  Their day count would therefore mirror each other’s:

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Mrs Taxpayer	90	90	120	120	120	120
Mr Taxpayer	90	90	120	120	120	120

Question – if Mrs Taxpayer does not want to reduce the number of days she works in the UK  but they sold their apartment and stayed in a hotel while in the UK, would this change their position?

Answer – yes, as long as care was taken to ensure that this placed them in a position to avoid the accommodation connecting factor, they would both have lost one of their connecting factors:

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Mrs Taxpayer	90	90	120	120	120	120
Mr Taxpayer	120	120	120	182	182	182

The Positive Effects of Tax Planning

The example of Mr and Mrs Taxpayer illustrates the complexities of the statutory residence test and how, for a married couple, joint planning is crucial. 

It also highlights how a single change (in this example, Mrs Taxpayer not working in the UK, or the apartment being sold) might mean that their UK day count need not change significantly for them to become non-UK tax resident for the requisite 6 years. 

• At the end of this 6 year period they would be able to return to being UK tax resident and would not become deemed domiciled for a further 15 years. This would mean that they would therefore not be taxed on a worldwide basis for this additional 15 year period.