Taxation of non-domiciled individuals: Important changes

It is well known that in his Pre-Budget Report, the Chancellor announced changes to the tax rules relating to non-UK domiciled UK resident individuals. These changes include more than the highly publicised £30,000 levy likely to apply to non-domiciles. The detail includes a significant tightening of the entire non-domicile tax regime, which is likely to affect most offshore structures and could significantly increase the amount of UK tax payable. 

The £30,000 levy

The remittance basis for non-UK investment income and gains (i.e. broadly that they are taxable only when the money is brought into the UK) is expected to continue, but in order to take advantage of it after April 2008, those who have been resident in the UK for at least seven out of the last 10 tax years will need to pay an annual levy of £30,000. The alternative is to pay UK tax on worldwide income and gains instead of the levy.

Residence

Changes are proposed that will mean that days of UK arrival and departure are included when calculating days spent in the UK for the purpose of establishing residence.

Trust changes

These changes will have a significant impact on individuals with global ownership structures, who, through these structures don’t currently pay UK tax on worldwide income and gains.

Anomalies

There will be many changes to deal with what HMRC terms, anomalies, in the detailed remittance rules. These will have significant impact for many non-domiciled individuals as they will close a number of the planning techniques that were permitted and regularly used to bring overseas funds into the country with no UK tax. Anomalies addressed include; ceased source planning (whereby income could be brought into the UK tax-free, provided that the source of the income had been closed in the previous tax year); planning using offshore trust and company structures, which allowed offshore capital gains to be brought into the UK tax-free; and extending the meaning of the term ‘remittance’.

What happens if this issue remains unaddressed?

The draft legislation appears to be worse than was expected. The core is that the non-domiciled individuals will be treated as realising a UK taxable gain if a sum is remitted to them from an overseas trust which has made a capital gain. This is a parallel position to the UK resident and domiciled individual who has such a trust. Undoubtedly, for many non-domiciled individuals, all these changes will have a huge impact on how they arrange their worldwide affairs.

The consultation document and the draft legislation relating to these extensive changes was expected in November and December 2007, giving non-domiciles some time to reorganise their global affairs before 5 April 2008. However, the consultation document was not issued until December 2007 with draft legislation arriving mid-January and a further clarification issued on 12 February. The intention is still to effect the changes from April 2008, leaving non-domiciles with little degree of certainty or time to organise their worldwide affairs.

How can we help solve this issue?

You have a short window of opportunity between now and 5 April 2008 to reorganise matters. Your first step is to contact your usual PricewaterhouseCoopers LLP advisor or one of PwC's specialised private client advisors, listed above, to discuss how the changes are likely to affect you.

For further information here are some of the articles available in PwCPlus (registered users). To register click here.

• More on HM Treasury's consultation on residence/ domicile, remittances, days in UK
• HM Treasury consultation on residence/ domicile, remittances and days in the UK surprises many
• Paying a fairer share - a consultation on residence and domicile