UK Non-Dom Remittance Basis - Update June 2012

Changes to the Remittance Basis for UK Resident Non-Doms

The UK’s tax authority HMRC has published an Information Note on the recently introduced changes to the remittance basis of taxation of individuals who are UK resident but non-UK domiciled (“non-doms”). The Information Note and this summary covers these changes and the introduction of Business Investment Relief, Exempt Property Relief on Sale and the simplification of some Remittance Basis Rules.

The majority of the reforms are included in Finance (No 4) Bill and will be effective for the 2012/13 tax year. Further additional simplification reforms will be enacted in Finance Act 2013.

Changes to the remittance basis
A higher level Remittance Basis Charge will apply from the tax year 2012/13 for those who have been resident for 12 or more of the last 14 tax years. The Remittance Basis Charge has been increased from £30,000 to £50,000 pa. The present annual Remittance Basis Charge of £30,000 remains unchanged for UK resident non-doms who have been UK resident for at least 7 of the last 9 years; but resident for less than 12 of the last 14 years.

Business investment relief
UK resident non-doms can invest foreign income and gains in a “qualifying businesses” in the UK without the remitted funds attracting a UK tax liability. To benefit from this relief a number of conditions must be met. The investment must be in a qualifying business, which broadly covers eligible trading companies, stakeholder companies or holding companies and excludes non-corporate entities, i.e. partnerships, and public companies. 

The investment must be completed within 45 days of the funds being remitted to the UK and should the investment not proceed the funds can be removed from the UK within the 45 day period without being considered as a remittance and taxable as such.

There is no lower or upper limit to the level of the investment. There are anti-avoidance provisions including rules on the extraction of value from the company and a two year start up rule that requires the company to be operational within two years of the qualifying investment being made.

Sales of Exempt Property
An individual, who is taxed under the remittance basis, was treated as remitting income and capital if he brought exempt property into the UK and then sold it. Exempt property being property bought outside the UK with foreign income or gains.

However, from the tax year 2012/2013 onwards if exempt property is brought into the UK and sold, the proceeds of the sale will not be treated as being a remittance of foreign income and gains, subject to certain conditions being met. The conditions provide among other matters, that the sale must be an arm’s length transaction, the purchaser must not be a relevant person and the sale proceeds must be either removed from the UK or placed in a qualifying investment (as described above) within 45 days of receipt.

Simplification of the Remittance Basis rules
The legislation is being amended for the tax year 2012/13 to allow individuals to remit the first £10 of nominated income or gains tax-free and without becoming subject to the identification rules.

Rules on foreign currency bank accounts have also been simplified. Until now withdrawals from a bank account denominated in a currency other than sterling were treated as part disposals and any foreign exchange fluctuations could give rise to a capital gain or loss that could require a number of detailed calculations during the course of the year. From the current tax year non-doms’ foreign currency bank accounts have been removed from the CGT charge so ending the need to make the detailed calculations previously required on each transaction. These changes also apply to all individuals, trustees and personal representatives regardless of their domicile.

Conclusion
While the increase to the annual charge for longer term resident non-doms is disappointing we consider that the Remittance Basis remains an attractive option for UK non-domiciled individuals who wish to be UK resident. The remaining changes should be welcomed by non-doms as they provide an effective means of investing overseas income and gains in the UK, remove exempt property from charge, subject to conditions being met, and the simplify certain Remittance basis rules.  It is comforting however that the Chancellor has also confirmed that there will be no further substantive changes to the rules for the remainder of this Parliament.