Statutory Residence Test –delayed introduction
In the March 2011 Budget the Government announced its intention to introduce a statutory residence test (SRT) to take effect from 6 April 2012 after a consultation period.
The Government has now announced that the consultation had raised a number of important issues requiring careful consideration to ensure that the legislation achieves its objective to provide certainty. As a result, a second round of consultations is being considered that will delay the introduction of the SRT until the 2013 Finance Bill and take effect from April 2013.
The Government stated that it remains its intention to introduce an SRT in the form stated in the consultation paper. Any reform to “ordinary residence” might also be introduced at the same time in 2013.
Although it is disappointing that there will be a delay of a year, it is encouraging that the proposed test is likely to be in significantly the same form as that outlined in the consultation paper. In the meantime, individuals and professionals will have the continued uncertainty of interpreting the existing law and practice.
Non-Dom Investment Relief
The March 2011 Budget also included the Government’s announcement of its intention to reform the taxation of UK resident non-UK domiciled (“non-dom”) individuals. Part of the reform included a proposal to introduce tax relief to non-domiciled investors who bring into the UK, overseas funds to invest in UK businesses.
The stated objective of the proposal was to encourage active investment in the UK in a broad range of businesses to promote economic recovery.
The consultation process, which started in June this year, completed in September. The Government has now published its response to the consultation process.
Summary of the proposed relief
In summary, the Government proposed that an individual who is non-UK domiciled would be able to invest in “qualifying businesses” in the UK. It was intended that such an investment of overseas funds into the UK would not immediately attract a charge to UK tax. A qualifying individual investor may, therefore, use unremitted foreign income and / or foreign capital gains to fund an investment in the UK.
It was proposed that to qualify, the investment should be in shares or loans to a company that is a “qualifying business”. A qualifying businesses was proposed to be, either a “trading company” defined in accordance with the usual criteria for UK tax purposes, or businesses undertaking the development or letting of commercial property. Investment in businesses that build and develop residential property might also be permitted.
“Qualifying business” would be limited to unquoted trading companies.
Response to the Consultation
The Government’s response was published in early December.
The proposed tax relief will only apply to resident non-doms who claim the remittance basis. Where the non-dom is a long term UK resident he will currently be paying the remittance basis charge of £30,000, increasing to £50,000 from April 2012 for those UK resident in 12 of the last 14 years. As considered in an earlier Update.
The companies into which the investment is made, must be private companies or listed on the Alternative Investment Market or PLUS market. Furthermore, it is not necessary that the business is trading when the investment is made but it must be trading within two years, if the investment is to qualify. There is thus the opportunity to invest in new business start-ups.
The Government has also accepted that the proposed restriction to investments in UK companies and certain non-UK companies is unnecessary and will abandon such a restriction. Investments in partnerships will not be included in the scheme.
There will be no lower or upper limit to the level of the investment.
The Government has accepted that if the business in which a non-dom has invested, no longer qualifies under the scheme as a result of matters outside the control of the investor, then he should be allowed to withdraw his investment without a charge to tax within a 45 day period of grace. A similar period of grace is proposed to enable an investor to withdraw one investment, before re-investing in a further qualifying business or removing the proceeds from the UK, without a charge to UK tax.
There will be anti-avoidance provisions. Should an investor invest in a company from which he receives personal benefit, excluding commercial salary, interest or dividends, or the investment is part of a tax avoidance scheme then the funds invested must be invested in accordance with the rules or removed from the UK.
Overall we consider that the proposals should be welcomed by non-doms as providing an effective means of investing overseas income and gains in the UK as part of their tax and investment planning.
It is to be hoped that scheme is operated with the simplicity and clarity as the Government has stated is its wish.
Draft legislation has been published and a further consultation period is open until mid-February. The final legislation will be included in the Finance Bill 2012 following the Budget.
UK Tax Update -Statutory Residence Test & Non-Dom News