REFORM OF THE TAXATION INDIVIDUALS CONSULTATION DOCUMENT OF NON DOMICILED OF 17 JUNE SPEAKER: GILES CLARKE 7 September 2011

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1 REFORM OF THE TAXATION OF NON DOMICILED INDIVIDUALS CONSULTATION DOCUMENT OF 17 JUNE 2011 SPEAKER: GILES CLARKE 7 September 2011!"#$%&%'%()&*+(%&"+,&-%%.&/+0%.&/1&%.,2(%&/"%&+**2(+*)&13&/"%,%&.1/%,&+.4&/"%&+**156+.)#.7&/+$08&.1&(%,61.,#-#$#/)&31(&$1,,&1**+,#1.%4& /1&+.)&6%(,1.&+*/#.7&1(&(%3(+#.#.7&3(15&+*/#1.&+,&+&(%,2$/&13&+.)&,/+/%5%./&#.&/"%5&*+.&-%&+**%6/%4&-)&/"%&,6%+0%(9&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& :&&;#$%,&<$+(0%&=/%$%6"1.%&>??&=@A&BCDE&BF@FFFA&

2 REFORM OF THE TAXATION OF NON DOMICILED INDIVIDUALS CONSULTATION DOCUMENT OF 17 JUNE 2011 A. THE PROPOSED INVESTMENT RELIEF 1. THE PRESENT POSITION i. Wide meaning of remittance - Property derived from income/gains (ITA 2007 s 809L, Condition B). - Remittance caught if effected by either the taxpayer or a relevant persons. - Relevant persons include:- (1) Spouse (2) Minor children and grandchildren (3) Trusts under which any individual relevant person is a beneficiary. (4) Companies in which any other category of relevant person is a participator. - Pre 2008 income / gains only taxed if remitted by the individual. Exclusions - Services: payment abroad for service provided in the UK is not a remittance provided the service relates wholly or mainly to foreign property (ITA 2007 s 809W). - Gains realised in trusts (and in companies owned by trusts) are not taxed if remitted by the trust/company (or if realised on UK assets). This is so even if the trust is settlor-interested (unless the settlor is UK resident and domiciled: TCOA 1992 s86 (1) (c)). Instead TCGA 1992 s 87 applies, meaning there is no charge save insofar as the gains are matched with a capital payment. This means trusts can invest in the UK without risk of remitting trust gains. - Partnerships: these are not relevant persons and in HMRC s view a remittance by a foreign partnership is not taxed as a remittance by the partners (RDRM para 33530). i Problems in investing in the UK - Investment by the individual results in any income/gains from which the funds invested are derived being taxed as remitted. An exception applies to pre 2008 investment income which has been invested in non fixed-interest assets (FA 2008 Sch 7 para 86). But otherwise what can be treated as remitted includes both pre and post 2008 income/gains. - Investment by a non resident company in which the individual is a participator is likely to be a remittance of: 3

3 (a) Any post 5 April 2008 income/gains of the individual from which the company s assets are derived. (b) Post 5 April 2008 income of the company (normally taxable as that of the individual under ITA 2007 s 720). (c) Post 5 April 2008 gains of the company (taxable as that of the individual under TCGA 1992 s 13). - Investment by a settlor-interested offshore trust (or company owned by such a trust) is likely to be a remittance of: (a) Any post 5 April 2008 income/gains of the individual from which the funds settled derived (including gains realised on gifts into trust: s 809T). (b) Any post 5 April 2008 income of the trust or underlying company (which is taxable as the settlor s under ITTO1A 2005 s 624 or ITA 2007 s 720). - In practice often difficult to be certain funds are untainted by income/gains. 2. THE PROPOSAL i. What will it apply to? - Shares in or loan stock issued by either: (a) UK companies; or (b) Foreign companies trading in the UK through a permanent establishment. - Investment can be of any size. What companies will qualify? - Companies carrying on qualifying business, i.e.: (a) Trading activity; or (b) Development or letting of commercial property. - Holding companies whose subsidiaries all: (a) Carry on qualifying business, and (b) Are UK companies or foreign companies trading in the UK through a permanent establishment. - Excluded businesses: (a) Holding or letting residential property. (b) Leasing. (c) Certain personal services. i Quoted companies all - Unquoted companies carrying on qualifying business will attract the relief. - Position with quoted companies yet to be decided: may be restricted to AIM. i Who will the relief apply to? - Relief will be available to investment by trusts and companies as well as by individuals. 4

4 - Relief will be available even if the investor works for or is otherwise connected with the company. Anti Avoidance - Amount invested taxed as remitted if: (a) The investment disposed of, and (b) Funds not removed from the UK or reinvested within 2 weeks. - Provisions will counter: (a) Leakage of value to the individual. (b) Excessive remuneration. v. Arising and remittance basis - A suggestion the relief will only be available in years in which the individual is a remittance basis user. - No relief from the remittance basis charge. B. REMITTANCE BASIS CHARGE 1. THE PRESENT POSITION i. When is the charge made? - Resident in 7 out of the preceding 9 tax years (ITA 2007 s 809C). What is the amount? - 30,000 no matter how long the period of residence. i What is the form of the charge? - Tax on nominated income/gains. - Claim for the remittance basis must contain the nomination (s 809C (2)). - Nomination need not be sufficient to generate the full 30,000 tax. In cases of insufficiency, deemed top-up nomination (s 809H (4)). The remittance trap - Remittance of any nominated income/gains triggers artificial ordering rules (s 809I). - Avoided by opening special bank account to generate the nominated income (which can be just 1). 2. INCREASE IN CHARGE i. When will it apply? - Resident in 12 of the 14 prior tax years. 5

5 What will the amount be? - 50, CHARGE IN NOMINATION RULES i. The proposal - Remittance of the first 10 of nominated income is not taxed and so does not engage the ordering rules. Effect - Nomination of 1 of income/gains will ensure the ordering rules are not engaged. C. FOREIGN CURRENCY 1. THE PRESENT POSITION i. Segregation - Can segregate income from principal. - No remittance charge if principal remitted. - Separate capital and income accounts achieve this. Mixed funds - Money or other property derived from both income and capital or from two or more types of income (s 809Q (4)). - Rules determine what is remitted, namely: LIFO as between years. Within each year income and capital gain before capital and income before capital gain (s 809Q). - Rules also apply on transfer between foreign bank accounts, namely: Pro rata transfer of all items in the transferor account (s 809R(4)). Subject to an anti avoidance rule (s 809S). - These rules only apply if the transfer is an offshore transfer, i.e. funds transferred not remitted in the tax year and not expected to be remitted (s 809R (6)). i Currency gains - Foreign currency bank accounts are an asset for CGT purposes (TCGA 1992 s 21(1)). - Gains or loss accrue whenever funds are withdrawn. - An issue for all non corporate taxpayers, not just non domiciliaries. 6

6 Impact of AEA - For most taxpayers, currency gains are absorbed by the AEA. - AEA does not apply to those claiming the remittance basis (TCGA 1992 s 3(1A)). 2. THE PROPOSAL i. Exempt bank accounts - All bank accounts of individuals will be exempt from CGT. - May need to be anti avoidance rules to prevent bank account gains being matched by losses on other assets. Trusts - Document expressed in terms of individuals. - Currency gains a real issue in s 86 and s 87 computations. i Non resident companies - Currency gains not apportionable under TCGA 1992 s 13 under current law. The reason for this is:- (1) s 13 gains are computed as if the company was in charge to CT (s 13 (11A)). (2) For CT purposes, currency gains on bank accounts and loan stock are within the loan relationship rules and not charged to CGT. - Accepted by HMRC in relation to bank accounts (HMRC Notice 10 December 2009). Other assets - No proposal to exempt fixed-interest investments generally, where currency gains can be significant. 7