DOMICILE, REMITTANCE BASIS AND RESIDENCE: GUIDANCE ON THE FINANCE ACT 2008 LEGISLATION

Transcription

1 1. Tax Guide DOMICILE, REMITTANCE BASIS AND RESIDENCE: GUIDANCE ON THE FINANCE ACT 2008 LEGISLATION A further guidance note issued on 9 January 2009 by the ICAEW Tax Faculty on the changes to the rules on domicile, the remittance basis and residence which apply from 6 April This guidance note contains a number of revisions and further updates to TAXGUIDE 8/08 (published on 6 November 2008) which is now superseded. Contents Paragraph(s) The purpose of this TAXGUIDE 1 7 A summary of the new rules 8 Changes affecting individuals 9 59 Changes affecting offshore trusts and companies Summary 77 ICAEW and the Tax Faculty: who we are Annex 1 Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) E tdtf@icaew.com DX DX 877 London/City 1 of 17

2 DOMICILE, REMITTANCE BASIS AND RESIDENCE: GUIDANCE ON THE FINANCE ACT 2008 LEGISLATION THE PURPOSE OF THIS TAXGUIDE 1. This ICAEW TAXGUIDE provides guidance on the new rules on domicile and the remittance basis and on residence which apply from 6 April It clarifies the rules and suggests what members should consider when advising their clients. 2. The proposals for changing the way the remittance basis applies and how residence is determined were announced in the Pre-Budget Report on 9 October Following the publication of the Finance Bill and the many amendments to it, Finance Act 2008 (FA 2008) received Royal Assent in July and the law is in force. Many parts of the law remain unclear as to their impact and implementation. There were numerous consultations and FAQs issued during the Finance Bill process and members should ensure they are considering the final version of the legislation as enacted. 3. The changes are effective from 6 April The change to the residence rules is set out in s 24, FA The changes to the domicile rules are set out in s 25 and Sch 7, FA Schedule 7 makes extensive changes to the existing provisions and inserts an entirely new Chapter 1A into Income Tax Act 2007 (ITA 2007), with the new provisions being numbered ss 809A to 809Z7. 4. One of the most fundamental points is that the rules can apply to any individual who is not UK-domiciled not just the super-rich. Central to the new rules is the 30,000 charge which will be levied on those who: (i) are both eligible to use the remittance basis (ie those not domiciled or not ordinarily resident in the UK and wish to claim it (ii) are over 18 at some point during the tax year, and (iii) have been resident in the UK for seven or more of the preceding nine tax years. 5. We discuss below some of the key issues that members may encounter. However, this relatively brief guidance note cannot be comprehensive. The onus is very much on the taxpayer to ensure that the right amounts are recorded and returned. We recommend that members ensure they ask sufficient questions of their clients to ascertain the correct position, and seek specialist advice if they are in doubt. 6. The Tax Faculty issued TAXGUIDE 1/08 in February Following subsequent amendments to the rules, the Faculty published a further TAXGUIDE (TAXGUIDE 8/08) which expanded and replaced TAXGUIDE 1/08. There have been a number of further developments and the opportunity has been taken to produce this further updated TAXGUIDE which also clarifies and corrects some of the text in TAXGUIDE 8/08. This latest guidance note supersedes TAXGUIDE 8/08 which is now withdrawn. 7. The Tax Faculty will also be producing a TAXline Tax Practice (available exclusively to Tax Faculty members) to set out the rules and practical guidance in greater detail. 2 of 17

3 A SUMMARY OF THE NEW RULES 8. The key points in the new rules, which will apply from 6 April 2008, are: A UK-resident non-domiciled individual may still be able to access the remittance basis of taxation with respect to their foreign income and foreign chargeable gains. However, from 6 April 2008 the general rule is that the arising basis is the default basis of taxation for all UK residents. Accessing the remittance basis will normally require a remittance basis claim to be made and there will be a financial penalty. The extent of the financial penalty will depend on the number of years the individual has been resident in the UK. Apart from where specific exemptions apply or the individual s entitlement to allowances is enshrined in a double tax agreement: a. UK-resident non-domiciled individuals who claim the remittance basis, regardless of their length of residence, will lose their entitlement to personal tax allowances on income and their annual exemption on gains; and b. a UK-resident non-domiciled individual who has been resident in the UK for seven of the nine tax years immediately preceding the tax year in question and who chooses to pay tax on a remittance basis will, in addition to losing their personal allowance and capital gains tax annual exemption, have to pay an annual charge of 30,000 in order to be able to claim the remittance basis. The charge is called the remittance basis charge (RBC). The need to make a remittance basis claim, and all the negative financial consequences, will be avoided if in the tax year the aggregate unremitted foreign income and foreign chargeable gains are below a de minimis limit of 2,000. In determining whether one has been resident for a tax year, the rules which apply are UK domestic laws. It is possible therefore to be regarded as resident in another country under a double taxation agreement but for that period to count towards the seven out of nine total. In determining whether an individual is resident in the UK in any year, days where one is present in the UK at midnight will be counted. There is a specific transit exemption. Previously days of arrival and departure were both ignored. There are measures addressing what are described as flaws and anomalies in the previous system whereby income or gains were effectively brought into the UK using the remittance basis but not taxed. These are discussed in more detail below. 3 of 17

4 CHANGES AFFECTING INDIVIDUALS Who has to make a claim for the remittance basis to apply and how is the claim made? 9. All UK resident non-domiciled taxpayers (and UK domiciliaries who are not ordinarily resident in the UK) who wish to have their overseas income and gains taxed on the remittance basis have to make a claim for this basis to apply unless they are within one of the exceptions. If they do not do so they will automatically be taxed on the arising basis. 10. The claim (under s 809B, ITA 2007) will generally be made on the self assessment tax return on an annual basis. It is possible for a claim to be made for the remittance basis for one year and the arising basis the next. It should be noted that under the new rules, even where a claim has not been made for a tax year (the arising basis therefore applying), as well as foreign income and gains for that year being taxable there will be a tax charge where there is an initial remittance consisting of or derived from foreign income and gains for earlier tax years for which the remittance basis applied. 11. A claim does not have to be made if the individual comes within either of the two exceptions in ss 809D and 809E. These are: Unremitted foreign income and gains from overseas are less than 2,000 (s 809D). There is no UK income and gains in a year and no remittances of foreign income or gains (s 809E(c) and either the individual: has not been resident for more than six of the preceding nine years (s 809E(e)(i); or is under 18 throughout the year (s 809E(e)(ii)). 12. The test of 2,000 relates to the gross sums which would be taxable in the UK if they were remitted. We are asking HMRC to update its classifications of foreign entities so that taxpayers and their advisers will be able to determine the levels of income or gains that would have been taxable in the UK. The most up to date information with respect to HMRC s views on the classification of foreign entities for UK tax purposes can be found at The second of the two tests is very restrictive. Whilst the provision was brought in to avoid trailing spouses and children having to submit tax returns just to claim the remittance basis, many such individuals will breach the conditions through the receipt of minimal amounts of UK bank interest - there is no de minimis so as little as 1 of bank interest would breach the requirements. Accordingly, when preparing returns for clients it is important that the reporting requirements with respect to their spouses and children are not overlooked. Who will be liable to the 30,000 remittance basis charge (RBC)? 14. The 30,000 RBC is payable by an adult taxpayer who wishes to use the remittance basis and who has unremitted overseas income and gains of 2,000 or above in the relevant tax year (the de minimis limit). 4 of 17

5 15. The charge will apply in a year if the individual has been resident in the UK for seven tax years out of the previous nine and is aged 18 or over at some point in the relevant tax year. In establishing whether for tax year 2008/09, an individual who is over 18 in the tax year has to pay the RBC, one looks at the tax years from 1999/2000 to 2007/08 (inclusive) and determines whether the individual has been UK resident in at least seven of those nine tax years. For example, a taxpayer will be liable in 2008/09 if he or she was resident from 2001/02 onwards. 16. The RBC applies in any particular year to an individual who is aged 18 or over in that year. For example, if a person is 18 on 4 April 2009 and has been UK resident for seven of the nine preceding tax years, in order to access the remittance basis for 2008/09 they will have to pay the RBC. 17. As with the existing test for deemed domicile for inheritance tax, the years of residence include any year in which the taxpayer is resident, even if only for a part of that year. In a similar way, being treaty non-resident will not mean that a tax year will be ignored for the purposes of the test: the test is whether one has been resident under UK domestic law. 18. The charge is applied on an individual basis, therefore a non-domiciled couple who both have overseas income could each pay the charge, and their children (if they are over 18 during the tax year) may also be liable. There may be additional tax returns to prepare and hence 5 October reporting requirements apply and an additional burden on members to assist clients in meeting their compliance obligations. 19. There is a useful flowchart which can be found at summarising the position. How will the charge be treated when it is paid? 20. The legislation provides that the charge will always equate to 30,000 and that it will be collected via self assessment. It will form part of the payments on account system if it relates to nominated income (see below for an explanation of this term) but not if it relates to nominated capital gains. To increase the likelihood of the payment being creditable overseas, HMRC has introduced a mechanism of nomination, the full details are set down at s 809C and s 809H, ITA Essentially the taxpayer paying the RBC must nominate a source of foreign income or chargeable gains to which the charge attaches. The actual nominated income or gains is deemed to be taxable on the arising basis and the additional tax due (referred to as the relevant tax increase) as a result of the nomination computed. The relevant tax increase can either: equate to 30,000, in which case nothing further need be done as the nomination has given rise to the appropriate amount of additional tax due; equate to a figure in excess of 30,000, in which case the Financial Secretary to the Treasury (at the time Jane Kennedy) 5 of 17

6 gave assurances that the remittance basis claim would not be invalid and that HMRC would assist the taxpayer in repairing the claim so that the nomination only gives rise to an additional tax liability of 30,000; or equate to a figure that is less than 30,000 in which case the deeming provisions come in and the taxpayer is deemed to have nominated relevant foreign income such that a charge of 30,000 would arise (the fact that the taxpayer might not have received such income in the tax year is irrelevant). 22. It is hoped that categorising the RBC as income tax or capital gains tax in this way will enable foreign jurisdictions to give credit for it. The US position is of particular concern. It will be remembered that HMRC obtained a legal opinion that it released at the time of the Budget which opined that the US tax authority (the IRS) should allow credit for the RBC. The actual position the IRS will take is unknown currently. 23. In UK tax terms it is important to realise what the 30,000 does not do. It does not give carte blanche to make tax-free remittances. It is a charge levied in addition to the normal level of income tax or capital gains tax. This means that remittances consisting or derived from foreign income and/or foreign chargeable gains continue to be part of the taxable foreign income the individual is subject to tax on with respect to the tax year the remittance is made to the UK. 24. Credit in the UK for the RBC can only occur when the actual nominated foreign income or gains are remitted. However, there are complex provisions which mean that it is unlikely in practice that an individual will be able to obtain credit in the UK for the RBC. Broadly, the legislation means that for tax purposes nominated foreign income and gains will only be accepted as having been remitted where there has been a remittance of ALL the remittance basis foreign income and gains of the individual for ALL the tax years from 2008/09 up to and including the year the remittance is made (some foreign income or gains will inevitably be spent abroad so it is hard to envisage a situation where this condition could be met in reality). 25. There is an even nastier sting in the tail as s 809I and s 809J provide for penal matching rules (as set down in s 809J) if the taxpayer remits actual nominated income or gains. The rules are complex and will be explained in our Taxline Tax Practice. Once triggered these penal rules apply to all tax years going forward. Accordingly, one must think carefully about what foreign income or gains to nominate and how to ring-fence nominated funds so as to avoid remittances. 26. The remittance of monies to pay the 30,000 charge would not of itself constitute a taxable remittance if paid directly to HMRC from overseas. It must not be paid into a UK bank account of the taxpayer and then paid over to HMRC as this would constitute a remittance. 27. Paying the charge does not guarantee that an individual s domicile status will not be questioned or that the individual will not be the subject of a future HMRC enquiry. 6 of 17

7 What will happen if the 30,000 is not paid? 28. The charge effectively permits a claim for the remittance basis. If it is not paid the individual is taxable on the arising basis on their worldwide income and gains. If it is paid the remittance basis can be claimed tax on remittances is then calculated and paid in the normal way. 29. It is possible to elect to pay the charge in one year and be taxed on the arising basis in a subsequent year or vice versa. However, if income or gains, which arose in a year when the remittance basis was used, are subsequently remitted in a year in which one is being taxed on the arising basis, then those remittances will be taxed as well. The record-keeping and understanding of this rule will be paramount. Are personal allowances and capital gains tax exemptions affected? 30. The withdrawal of allowances applies if the remittance basis is claimed. Therefore if the individual is automatically entitled to the remittance basis for the tax year as they come within one of the exceptions to the claim set out in paragraph 11 above (explained in greater detail in paragraphs 12 and 13) then he or she will not lose the personal allowance or capital gains tax annual exemption. In all other cases if the non UK domiciliary decides to be taxed on the remittance basis a claim must be made for the tax year. In such circumstances the general rule is that for a tax year in which a remittance basis claim is made a non UK domiciliary will no longer be entitled to personal allowances or the annual exempt amount for capital gains tax (this applies regardless of how long they have been resident in the UK). This can potentially affect notices of coding etc and needs to be considered when calculating any sums due. 31. As stated in paragraph 8 there is one exception to the general rule that a remittance basis claim results in the loss of allowances in the relevant tax year. The exception arises because certain double tax agreements (DTAs) the UK has entered into have specific provisions which, if the individual meets the conditions, establish that the individual has a right to the same allowances and reliefs as a UK citizen who is not UK resident. The countries with whom the text of the DTA with the UK is such that this can happen are Austria, Belgium, Fiji, France (though not when the new agreement comes into force), Germany, Ireland, Kenya, Luxembourg, Mauritius, Namibia, Netherlands (though when the new agreement comes into force the qualifying conditions are further restricted), Portugal, Swaziland, Sweden, Switzerland and Zambia. The OECD model convention does not contain such a provision. 32. Where an individual qualifies for entitlement to UK personal allowances under a double tax treaty this right overrides the current ITA 2007 provisions such that the remittance basis claim will not result in a qualifying individual losing their personal allowances. For the exact conditions that need to be met one should refer to the appropriate treaty and should bear in mind that it is possible that the current clauses will be removed (as have occurred with the UK/France Double Taxation Convention signed in London on 19 June 2008 which will come into force when the necessary Parliamentary procedures and exchange 7 of 17

8 of diplomatic notes has been completed) or further restricted (such as with the UK/Netherlands agreement, also due to come into force when the formalities have been completed, where an individual resident in the Netherlands will not be entitled to UK personal allowance if their UK income consists solely of dividends, interest or royalties or solely of any combination thereof). 33. Very broadly, under the terms of the agreements currently in force, to be entitled to UK personal allowances the individual must be treaty resident in the other territory. Given these conditions, for a UK resident foreign domiciliary to qualify the individual would have to be dual resident. In such circumstances it may not be of practical significance as making the remittance basis claim may result in a UK tax liability in excess of the liability if the individual were subject to UK tax on the default arising basis. 34. The removal of the capital gains tax annual exempt amount means that all capital gains transactions will need to be reported on tax returns however small. Is capital loss relief affected? 35. Yes. The legislation as originally drafted denied all relief for foreign losses. In response to our comments this was amended so that there can now be an element of relief. The rules are set out in new ss 16ZA D, Taxation of Chargeable Gains Act 1992 (TCGA 1992). 36. The most important feature of the new rules is that an election must be made for the first year in which the remittance basis is claimed regardless of whether there are any losses at that point. If the election is not made for this first year (2008/09 onwards) then the power to claim foreign losses is removed unless and until a tax year in which the individual is domiciled in the United Kingdom (in other words for foreign losses to be allowable again the foreign domiciled individual must acquire a UK domicile of choice). 37. If the election is made and the arising basis of taxation applies then neither the annual exemption nor current year losses can be set off against foreign gains remitted to the UK which accrued in an earlier year. If the election is made and the remittance basis claimed in a year then ALL losses are set off in the following order (s 16ZC, TCGA 1992): first against remitted foreign chargeable gains which accrued to the individual in the tax year; next against unremitted foreign chargeable gains which accrued to the individual in the tax year; and lastly against UK chargeable gains which accrued to the individual in the tax year. 38. Accordingly, where UK losses and UK chargeable gains are likely to be higher than anticipated foreign losses making the election may not be advisable. It will require a certain amount of crystal ball gazing to determine whether or not the election should be made. The time limit is the normal self assessment limit one of five years and 10 months (Finance Act 2008 gives the Treasury power to pass a statutory instrument to the effect that from a specified date all the 8 of 17

9 standard five year ten month time limits are reduced to four years after the end of the tax year). Where making the election will be beneficial for the client members should ensure that the deadline is not missed. 39. Current year losses cannot be offset against foreign gains remitted to the UK which accrued in earlier tax years. There can be no offset of losses against gains attributed under s 87, TCGA 1992 (note than s 86 TCGA 1992 does not apply to foreign domiciliaries). Does bringing an asset into the UK constitute a remittance? 40. Yes. There are some far-reaching changes to the definition of remittance. In particular the individual can be taxed on the amount of foreign income or foreign chargeable gains used to acquire property purchased overseas, if the property is brought into the UK. After some extensive lobbying these measures were relaxed during the progress of the Finance Bill and we now have transitional provisions and some exemptions. Brief details are given below with further detail in a forthcoming Taxline Tax Practice. 41. The transitional provisions can be found at para 86 of Sch 7 to the FA The provisions only apply to property acquired before 6 April 2008 consisting of or derived from relevant foreign income (defined at s 830, ITTOIA 2005). Where they apply the relevant foreign income is treated as not having been remitted if it would otherwise have been so regarded. 42. The exemption provisions are set down in s 809X to s 809Z6. Where they apply the property is deemed to be exempt property and so treated as not remitted to the UK. The public access rule applies whether the property is purchased or derived from foreign employment income, relevant foreign income or foreign gains. The detailed conditions can be found at s 809Z and s 809Z1. The other rules only apply where the property is derived from relevant foreign income and are for: Personal property Property brought to the UK for a temporary purpose Property brought to the UK for repair Property where the derived from relevant foreign income of less than 1, Section 809L defines remitted to the United Kingdom it is important to realise that the remittance definition goes beyond the individual and extends to actions by relevant persons and benefits received by relevant persons. The section sets down four conditions and there is a remittance where conditions A and B are met (these conditions are in point where the property belongs to a relevant person), condition C (pertinent where the property belongs to gift recipient) is met or condition D (relevant where the property belongs to a third party who is neither a relevant person nor a gift recipient - and there is a connected operation) met. The conditions will be discussed in greater detail in our Taxline Tax Practice. Broadly, relevant persons include spouses/civil partners, minor children and grandchildren and unmarried co-habitees, certain companies and certain trustees (see s 809M for the meaning of relevant person ). There are 9 of 17

10 important transitional rules at para 86(4) of Sch 7 to the FA 2008 which limit the definition of relevant person where the foreign income or gains arose or accrued prior to 6 April 2008; further details will be provided in our forthcoming Taxline Tax Practice. 44. The rules on these so-called constructive remittances extend to payment for the provision of services (including UK professional fees). There is an important exemption at s 809W. The exemption only applies if payment is made to a non- UK bank account for services relating wholly or mainly to property outside the UK. Where the exemption applies there will not be a remittance by the individual. We are discussing with HMRC the precise scope of the exemption and further details will be provided in our forthcoming Taxline Tax Practice. 45. Great care is needed when advising clients in this area and there is no alternative other than undertaking a line by line analysis of each client s position to establish whether this is or could be a tax charge. What if my non-domiciled client makes a gift offshore? 46. A further change to the remittance rules is that if A makes a gift to B and B is a relevant person (as defined above), then if B remits the gift to the UK at a time when A is UK-resident then there could be a tax charge on A. This overturns the long standing rule in Carter v Sharon (20 TC 229) which permitted an unconditional gift to be made offshore so that the donee was treated as receiving clean capital which could then be brought to the UK. It is also important to realise that B could, for example, be the trustees of a settlement or a close company. 47. As explained at paragraph 43 there are important transitional provisions set down in para 86(4) of Sch 7 to the FA Accordingly, for gifts consisting of or derived from foreign income or foreign chargeable gains for the tax year 2007/08 and any earlier tax years, one is only concerned with a remittance being made or benefit being received in the UK by the individual to whom the foreign income or gains originally arose or accrued. Where the foreign income or gains gifted are for tax year 2008/09 or later tax years, there will be a remittance where a relevant person (defined in paragraph 43) remits the property to the UK or receives a UK benefit. My client has previously used the source ceasing rules to remit capital to the UK with no tax payable, is this still possible? 48. No from 6 April 2008, if sums are brought into the UK for the first time any income item is taxable as income even if the source no longer exists and regardless of when it ceased. This is a far-reaching and retrospective provision, as such income may have long been assumed to be capital. There is no cut-off date for previously closed accounts, so again record-keeping and tracing may be an issue for advisers and their clients. 10 of 17

11 If the funds remitted to the UK come from a mixed account how do I calculate what is taxable? 49. For tax years from 2008/09 onwards there is now a statutory rule applicable to mixed funds with foreign income or foreign gains. For tax years up to and including 2007/08, the pre 6 April 2008 prevailing practice continues to apply in relation to determining whether an individual s income and chargeable gains have been remitted. 50. The legislation can be found at ss 809Q 809S. Broadly the sequence is: employment income (not within (b), (c) or (f)); relevant foreign earnings (not within (f); foreign specific employment income (other than within (f)); relevant foreign income (other than within (g); foreign chargeable gains (other than within (h)); employment income subject to a foreign tax; relevant foreign income subject to a foreign tax; foreign chargeable gains subject to a foreign tax; and other income or capital. 51. There is a step by step guide set out in the legislation at s 809Q to quantify what has been treated as remitted from the mixed fund and identify the source of the remittance for the purposes of a remittance under s 809L where conditions A and B are met. The result of all this is that the importance of segregation of income and gains etc will be crucial, if only to minimise accountancy fees! 52. As set down above the new statutory rules are only stated to apply where after 5 April 2008 conditions A and B of s 809L, ITA 2007 are met. Accordingly, there is uncertainty over the application of the rules where condition C or D of s 809L are met. It is possible that the pre 5 April 2008 prevailing practice may continue to apply in these circumstances. 53. The legislation provides for different matching rules where there are payments from the mixed fund which do not result in a remittance to the UK and there is also an anti-avoidance rule. The legislation is complex and further details will be provided in our forthcoming Taxline Tax Practice. 54. The record-keeping in all but the simplest situation will be challenging. A guide of this type cannot set out all the points in detail. If in doubt members would be wise to seek advice. Does the legislation include the changes to day counting for establishing residence? 55. The answer is sort of. Section 24, FA 2008 has inserted a statutory definition of a day of UK presence into: s 831, ITA 2007 which deals with the taxation of the foreign income of individuals in the UK for a temporary purpose; 11 of 17

12 s 832, ITA which is a very specific section dealing with the employment income of individuals in the UK for a temporary purpose; and s 9, TCGA 1992 which deals with residence and temporary residence for the purpose of the capital gains tax legislation. HMRC has amended booklet IR20 its guide to residence and taxation but the position remains unsatisfactory. What about the situation where my client leaves the UK for a period? 56. The rules on temporary non-residence for capital gains tax are familiar. There will now be a similar rule for income tax for remittance basis users (para 53 of Sch 7 to the FA 2008, inserting a new s 832A into ITTOIA 2005). If an individual becomes not UK-resident but resumes UK residence within five fiscal years, any remittances to the UK in the period of absence, consisting of or derived from relevant foreign income which arose in the prior tax years during which the individual was UK resident, will be taxed on his return. The rule will apply where the individual was resident in four out of the seven years prior to the year of departure. As with the capital gains tax rules this will necessitate careful record-keeping and there are detailed rules setting out when the section applies. 57. As can be seen all taxpayers will need to keep careful records of the time spent in and outside the UK. Are there any other changes for individuals income? 58. Yes the accrued income scheme will now apply for non-uk domiciliaries but income from the Republic of Ireland can now be taxed on the remittance basis where it is applicable. 59. A specific provision (s 809T) has also been introduced such that the deemed gain on either an offshore gift or a sale at an undervalue of a foreign situs asset can now be treated as remitted to the UK if the asset, or property derived from the asset, is later remitted to the UK. HMRC appear to accept that the provision only applies where the gift or sale at undervalue was effected on or after 6 April Further details will be provided in our forthcoming Taxline Tax Practice. CHANGES AFFECTING OFFSHORE TRUSTS AND COMPANIES What capital gains tax changes apply to offshore companies? 60. Prior to 6 April 2008 the rules attributing gains of offshore companies to shareholders with a 10% or more shareholding only applied to those shareholders who were UK-domiciled. The rule applies to non-uk domiciliaries with effect from 6 April This means that where a company realises a gain on a UK asset the resident but non-domiciled shareholder will be taxed on his proportionate share in the year the gain arises. Where the individual is a remittance basis user and the company realises non-uk gains, these will be taxed on a remittance basis. The legislation includes detailed rules to 12 of 17

13 determine whether there has been a remittance of a foreign gain but it is important to realise that acts by the company can result in a tax charge for the participator. These are separate from the rules on gifts described above, which could cause a double tax charge to arise in certain cases. 61. Clients will thus need to tell their advisers about any offshore companies in which they hold a stake of 10% or more (when assessing if the 10% interest test is met one includes the holdings of any connected persons). 62. One of the major impacts of this change will be where UK real property is held in an offshore company, a far from uncommon situation. The individual shareholder will be taxed on the gain when the property is sold but there will be no principal private residence relief available because this relief is not available to companies. And offshore trusts? 63. Since TAXGUIDE 1/08 the changes to the capital gains tax offshore trust antiavoidance rules have been relaxed considerably. HMRC has responded to earlier fears and changed the whole approach on offshore trusts. The key features are as set down below. Settlor-interested trusts 64. Under the final provisions s 86, TCGA 1992 cannot apply to a UK-resident but not UK-domiciled settlor. There are no special capital gains tax provisions with respect to foreign domiciliaries who are settlors of non UK resident settlements. 65. Settlors will only be potentially subject to capital gains tax if they are also beneficiaries of the settlement and after 5 April 2008 receive a capital payment. They will be taxed in exactly the same way as any other beneficiary. This means that the potential tax charge is under s 87, TCGA Where the individual is a remittance basis user there will only be a potential tax liability if the payment is remitted to the UK. 66. Where the foreign domiciliary is taxed on the arising basis in the tax year or is a remittance basis user who makes a remittance in the tax year the transitional provisions (described in paragraphs 70 to 74 below) will potentially reduce or eliminate any tax charge. And offshore income gains within a trust structure? 67. The offshore income gains provisions are highly complicated and a detailed analysis is outside the scope of this Tax Guide. There were issues with the original wording of the draft legislation meaning that offshore income gains may not have attracted the remittance basis where the investments were held within a trust structure. These issues were addressed. 68. Where the modified s 87, TCGA 1992 offshore income gain (OIG) charge applies the transitional provisions (discussed at paragraphs 70 to 74 below) are in point. Where the income tax anti-avoidance provisions apply to attribute the gain to the UK resident settlor/beneficiary there are no transitional provisions. 13 of 17

14 Accordingly, it is more beneficial if the modified s 87 provisions apply as will generally be the case (as they have priority where both charges are triggered in the same tax year). There will be an issue where the modified s 87 charge is not triggered but the income tax anti-avoidance provisions are (care must be taken where there is a settlor interested trust and there will be an issue if the s 87 matching rules mean an OIG has been matched to a payment to a nonresident). Beneficiaries of offshore trusts 69. From 6 April 2008 any capital payments made to a beneficiary of an offshore trust will be taxable in the UK under s 87, TCGA A remittance basis user is only subject to tax if a capital payment is remitted to the UK. There is a big advantage for beneficiaries who are remittance basis users in that even if the gain arises on the sale of a UK asset, the tax charge arises only if the capital payment is remitted to the UK. There are several pages of detailed matching rules to establish what is taxable. Trust transitional provisions 70. The other major change from the original proposals is that the final legislation contains automatic and elective transitional provisions. The automatic transitional provisions mean that a foreign domiciliary is not subject to capital gains tax with respect to chargeable gains treated as accruing as the result of (i) a capital payment received (or treated as received) before 6 April 2008; or (ii) the matching of any capital payment made after 5 April 2008 with capital gains for the tax year 2007/08 or earlier years. 71. The elective transitional provisions are popularly referred to as the rebasing election. The provisions are found at para 126 of Sch 7 to the FA The legislation states that the individual is not charged to capital gains tax on so much of the chargeable gains as exceeds the relevant proportion of those gains. Where the capital payment triggers a UK tax liability, either because the individual is taxed on the arising basis or because the individual remits the funds, the capital gains attributed to the individual may be reduced as a result of the provisions. 72. An election can only be made by the trustees and is an irrevocable all or nothing election (which extends to the assets within an underlying company where s 13, TCGA 1992 would apply to attribute company gains to the offshore trust). The time limit is 31 January after the end of the year in which either the first capital payment is received by a UK-resident beneficiary or there is a transfer of assets to a new settlement. 73. If an election is not made, and the foreign domiciliary receives capital payments post 5 April 2008 which are matched to capital gains with respect to disposals effected after 5 April 2008 then: a. if the individual is taxed on the arising basis the individual will be taxed, in the tax year that the payment is made, on the entire gain matched to the capital payment; and 14 of 17

15 b. if the individual is a remittance basis user and the payment is remitted to the UK they will be taxed, in the tax year that the remittance is made, on the entire gain matched to the capital payment. 74. HMRC were given the power to specify the way the election should be made and the form the election should take. This was done on 5 January 2009 through the mechanism of making a form available on the HMRC website. The form can be accessed at The election declaration has to be signed by all the trustees. Completion of the form requires disclosure of: the name of the trust; the date the trust was set up; its tax reference if it has one; the trustees names and addresses; an answer to the question has a UK resident beneficiary received a capital payment (includes a benefit) since 5 April 2008 and if yes the date of the first such capital payment; and an answer to the question has section 90 TCGA 1992 applied to the transfer of property to another settlement since 5 April 2008 and if yes the date of the first such transfer. If an early election was needed prior to the from becoming available, perhaps because a trust had been or was in the process of being wound up, elections could be made by writing to: Non Resident Trusts, St John s House, Merton Road, Bootle, L69 9BB. It is thought that where the trustees had to make the election before the form was available there will be no requirement for the form to also be completed. Are there any new notification requirements for trusts? 75. No. The original TAXGUIDE 1/08 noted that: The existence of any offshore trusts created by UK residents will need to be notified to HMRC under new information powers. This applies even if the settlor was not UK-resident at the time the trust was formed. Existing UK residents have until 5 April 2009 to make the necessary reports. New trusts or existing trusts created by individuals arriving in the UK will have to be notified within 12 months. However, HMRC appears to have backtracked on this requirement in informal meetings and again we have to wait and see if this provision is in the final legislation. 76. We are pleased to confirm it is not in the legislation hence there are no new notification requirements. 15 of 17

16 SUMMARY 77. There is a complete sea change in the way in which non-domiciliaries, offshore trusts and companies are taxed. Members are urged to take great care in advising on these matters and to seek specialist advice if necessary. The ICAEW Tax Faculty 9 January of 17

17 ANNEX 1 ICAEW AND THE TAX FACULTY: WHO WE ARE 1. The Institute of Chartered Accountants in England and Wales (ICAEW) is the largest accountancy body in Europe, with more than 132,000 members in 160 countries. Three thousand new members qualify each year. The prestigious qualifications offered by the Institute are recognised around the world and allow members to call themselves Chartered Accountants and to use the designatory letters ACA or FCA. 2. The Institute operates under a Royal Charter, working in the public interest. It is regulated by the Department for Business, Enterprise and Regulatory Reform through the Financial Reporting Council. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy, including taxation. 3. The Tax Faculty is the focus for tax within the Institute. It is responsible for tax representations on behalf of the Institute as a whole and it also provides various tax services including the monthly newsletter TAXline to more than 10,000 members of the ICAEW who pay an additional subscription. 4. To find our more about the Tax Faculty and ICAEW including how to become a member, please call us on or us at taxfac@icaew.com or write to us at Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ. 17 of 17