 Have you gotten to grips with what the latest budget has in store for you? Well as the 6th April is fast approaching, this budget report issued by RBC International Wealth Planning and RBC Regent Tax Consultants Limited looks at what it means for non dom individuals.
Widely billed in advance as a green Budget, Alastair Darling’s first March Budget speech was as unexciting as his predecessor’s and contained little of the real detail. It did contain the expected increase in taxes on cigarettes, alcohol and high CO2 emitting cars, but was surprisingly brief, lasting for only 50 minutes! However, as soon as the Chancellor sat down, the Treasury published 107 press releases and various other supplementary documents.
There is a lot of information to digest! We will certainly find ourselves subject to a large number of tax changes from April 6 this year, but most had already been pre-announced – either by Gordon Brown in 2006 and 2007, or in the pre- Budget Report in October. Previous Budgets have outlined the reduction of basic rate tax to 20%, the increase in NI bands, and the changes to the inheritance tax treatment of trusts, whilst the pre-Budget Report heralded the ability to transfer the nil-rate band between spouses, together with sweeping changes to the taxation of capital gains and non-UK domiciliaries. There has been significant lobbying from many sides, and although the Chancellor announced no further changes to the new capital gains tax regime, a supplemental document has revealed a major change of heart on the way in which settlors and beneficiaries of offshore trusts will be taxed from April 6.
Offshore trusts were particularly hard hit by the draft legislation published by HMRC in January but, under the proposed new rules, they will still enjoy major benefits from both a tax and an estate planning perspective.
Changes To The Taxation Of Non-UK Domiciliaries (Non Non-Doms) Individuals The much publicised £30,000 annual charge payable by non-doms who have been resident in the UK for 7 out of the last 10 tax years, will come into effect from April 6 2008. This will apply to those aged 18 and above who have offshore income and gains over £2,000 (increased from £1,000). However, this will now be a charge on specific unremitted income and gains and not a stand alone charge. This will be good news for US citizens, who will be able to claim credit against their US tax. If taxpayers wish to remain taxable on the remittance basis in a particular year, they will have to identify specific foreign income and gains, and effectively pay tax of £30,000 (either income tax or capital gains tax, as appropriate), in respect of them. The income and gains which have been identified in this way can then subsequently be remitted to the UK tax free, but only after all other offshore income and gains arising in the same year have been remitted and tax paid in respect of them. As anticipated, source ceasing will no longer be effective, and where income has already been source ceased it will be taxable when remitted, if it is not remitted before April 6, 2008. Currently, non-doms are only taxed on foreign investment income where that money is brought into the UK as cash. From March 12, this has been widened to include property acquired and services derived from foreign income (although, in a sensible change, personal effects, such as watches, jewellery, clothes and shoes, have been excluded). Non-doms have frequently taken out offshore loans to buy UK property and paid the interest out of offshore income without it being remitted to the UK. The draft legislation indicated that this would change, and the interest on new or amended loans will still be caught. However, the interest on existing unaltered loans secured on UK residential property can continue to be financed out of offshore income without a remittance for the period of the loan or until April 5, 2028. Offshore Trusts Non dom settlors of offshore trusts can breathe easier tonight; the proposals for all trust gains to be treated as arising to them personally have been reversed. However, non-dom beneficiaries (whether or not the settlor) who receive capital payments in the UK from offshore trusts will be charged to capital gains tax where those capital payments are (effectively) matched to gains realised after April 6, 2008. It has been confirmed that trustees of offshore trusts can make a rebasing election as at April 6, 2008 in respect of both directly and indirectly held assets, ie including assets held in underlying structures. This is a welcome clarification and effectively means that only gains realised or accruing post April 6 can ever be within the tax charge for non dom beneficiaries. HMRC have confirmed that there will be no requirement to disclose information about trust assets, provided the taxpayer has declared any taxable income or gains from the trust. However, HMRC may seek information if an election to rebase the trust assets has been made or they enquire into a beneficiary’s tax return. UK Residence: Day Count Rules Residence: Another good piece of news has been a relaxation of the originally draconian rules on how days are to be counted for the purpose of determining residence. At present, HMRC ignore days of arrival and departure when deciding how many days an individual has spent in the UK in any one year. An individual will be resident in the UK if he spends 183 days or more in any one year or an average of 91 days or more over a 4 year period. In January, the draft legislation provided that both days would count as from April 6. However, HMRC have now announced that the individual must be present in the UK at midnight for that day to count for residence purposes.
Days spent in the UK whilst in transit between two non-UK destinations will also be ignored, even if the passenger moves between airports or between terminals for two different modes of transport, and even if he spends the night in the UK, provided he does not engage in other activities whilst in transit, eg attend a business meeting. Capital Gains Tax As previously announced, taper relief and indexation relief will be abolished and all capital gains will be taxed at 18%. The much publicised entrepreneurs’ relief will have effect for disposals of business assets after April 6, 2008. The first £1 million of qualifying gains realised over the lifetime of the individual will be taxed at 10%. Enterprise Investment Scheme (EIS) Relief The maximum amount that can be invested in EIS shares in a tax year and qualify for a 20% income tax credit and capital gains tax exemption on subsequent sale is being increased from April 2008 to £500,000. Income Tax There was little reference in the Chancellor’s speech to the reduction of the basic rate of income tax from 22% to 20% which was announced in last year’s Budget, but comes into effect from April 6, 2008. For dividend income, the 10% starting rate still applies up to the higher rate and, for savings income, the 10% rate only applies where non-savings income is less than £2,320, so these changes are not as detrimental to lower-earners as was anticipated. HMRC have now rectified an anomaly to ensure that trust income from settlor-interested trusts forms the top slice of income and non-trust income no longer suffers a higher tax liability than intended. Anomalies in the taxation of dividends from foreign companies have also been corrected. UK resident doms are currently taxed on foreign dividends at 32.5%. They will now be given a notional 10% tax credit, so that only higher rate taxpayers will pay tax on these dividends, at an effective rate of 25%. UK resident non-doms remitting foreign dividends will pay tax at 40%. Corporation Tax The main rate of corporation tax will be reduced from 30% to 28%. However, the rate for small companies will increase from 20% to 21% from April 1, 2008. The Chancellor talks widely about supporting small businesses, but he has introduced a number of measures in recent years which suggest otherwise. Anti Anti-Avoidance Provisions No Budget is complete without a number of anti- avoidance rules, and this one is no exception: Over the last 10 years or so, taxpayers have mitigated their liability to income tax by investing in trading partnerships, which have generated initial losses which can be offset against their other income. HMRC have clamped down on these investments in successive Budgets, with the result that, more recently, individuals have been trading on their own account. As from March 12, however, losses generated in any trade will only be capable of being offset against other income of the trader if he spends an average of at least 10 hours a week in conducting his trade. There will be transitional provisions for such arrangements entered into before March 12; although we have no specific information on these, we anticipate that arrangements entered into unconditionally before this date should escape the tax changes. The wording of certain double tax treaties, most notably those with the Isle of Man and the Channel Islands, has apparently enabled taxpayers to avoid paying UK tax on the profits arising in a foreign partnership from the sale of business assets, particularly UK land subject to planning permission, but which has not yet been developed. Ominously, the press release announces that, notwithstanding the wording of the relevant double tax treaty, UK residents have always been liable to pay UK tax on their profits from foreign partnerships. It seems likely that this provision will result in tax being payable retrospectively. Inheritance Tax: Transfer Of Nil eritance Nil-Rate Band Between Spouses The Press Releases confirm the announcement in the pre-Budget Report that, on the death of a surviving spouse after October 9, 2007, their estate will benefit from any unused portion of their deceased spouse’s nil rate band in addition to their own. Alternative Investment Funds To make way for a new FSA regime, certain funds will be able to elect to move taxation on offshore income gains from the fund to its investors. Qualifying Offshore Funds HMRC have now removed the distribution requirement for funds to qualify; instead income is ‘reported’ to investors, and they are subject to tax on this reported income. We will be watching to see how this is implemented as it may give rise to double taxation; income tax on deemed income, and capital gains tax on the increase in value of the fund due to the income being kept within the fund! Notes: This publication has been issued by RBC International Wealth Planning* and RBC Regent Tax Consultants Limited. The summary contained herein has been carefully prepared based upon information that is believed to be accurate at the time of writing and is intended for general guidance only. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors. On any specific matter you are advised to take professional advice. Telephone calls to RBC may be recorded for training and evaluation purposes. *RBC International Wealth Planning is a trading name of RBC Wealth Planning International Limited. RBC International Wealth Planning and RBC Regent Tax Consultants Limited are both members of RBC which consists of a number of separate companies. A full list of these is available at www.rbcprivatebanking.com ® Trademark of Royal Bank of Canada. ™ Trademark of Royal Bank of Canada. Used under licence. Taxo8 Taxo8-06b |
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