Need to Know — Non Domicile Changes

Proposed new rules for UK residents not domiciled in the UK. Flat rate charge

 

On Tuesday 9th October the Chancellor proposed new rules for UK resident persons who claim that they are not domiciled in the UK. This is a very important change for our many non domiciled clients and takes effect from 6 April 2008. These proposed new rules are not tax law yet and could be subject to change.

 

Non domiciled persons who have been resident in the UK up to and including 7 years, can still elect to be taxed on the remittance basis. i.e. only UK Source income/gains and income/gains remitted from abroad are subject to UK tax. However, if the remittance basis is elected the UK personal allowance, currently £5,225, will no longer be available. This could result in a tax increase of over £2,000. This restriction will also apply to individuals resident but not ordinarily resident in the UK.

 

Flat rate charge

 

From the 8th year of residence, there is a choice of either continuing to be taxed on the remittance basis, losing the personal allowance and paying a £30,000 flat rate charge or being taxed on the arising basis which results in tax being levied on worldwide income but there being no £30,000 flat rate charge. The qualifying period is retrospective so individuals who have been in the UK longer than 7 years at 6 April 2008 will be immediately affected.

 

The £30,000 is not an income tax and so may well not be creditable against other countries’ taxes, i.e. our US clients will not be able to claim the £30,000 as a foreign tax credit against their US tax liability.

 

In general terms, an individual would need annual non taxed offshore income in excess of £75,000 before it would ever make economic sense to suffer the £30,000 annual charge.

 

Other tax advantages which non domiciled individuals utilise, such as using ‘source ceasing’ to enable interest earned on foreign bank accounts to be remitted to the UK without a tax charge, will from 6 April 2008 no longer be effective. The legislation will also include provisions to ensure that offshore trusts and companies will no longer be able to alienate income and gains tax efficiently or convert taxable income and gains into non-taxable payments, as well as other measures aimed at plugging perceived remittance loopholes.

 

Residence status

 

The rules for determining residence are to be changed by requiring both the arrival and departure day to be taken into account when determining the length of time spent by an individual in the UK in any tax year.