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Non Domicile
Changes may still be made to the new remittance basis regime, but most of the outstanding questions for employers and expatriate employees have now been answered. Expatriates need to take special care in structuring their offshore banking arrangements, to avoid an unplanned remittance of funds leading to unforeseen tax charges. Areas for consideration include share options and other share plans, remittances from mixed funds, the £30,000 payment, termination payments and restriction of PAYE withholding.
Various announcements made at the Budget have been confirmed:
- Day counting for residence rule purposes will be dependent on whether the taxpayer is in the UK at the end of the day;
- A day on which a taxpayer is a passenger in transit through the UK at midnight will not count, provided that no activities unrelated to the travel are undertaken;
- Taxpayers who have been resident in the UK in at least seven of the previous nine tax years have to pay £30,000 in order to access the remittance basis;
- Transitional relief for interest paid on offshore mortgages that were already in place on 12 March 2008 has been confirmed, provided that the terms of the loan are not altered subsequently. However, the relief is restricted to payments made using offshore investment income. Interest payments met out of offshore employment income, for example, will be taxed as remittances as the law is currently drafted;
- A flat rate of 18% will apply to capital gains post April 6, 2008;
- Foreign domiciliaries can elect into a regime that will allow some relief for offshore capital losses, but will have to declare unremitted gains if they do so.
Share options and other share plans
As expected, awards of share options and securities acquired otherwise than under a securities option after 6 April 2008 will be subject to the same tax regime for all UK residents, whether or not they are not ordinarily resident. Those who are not ordinarily resident and have claimed the remittance basis of taxation for their foreign earnings will be able to claim relief so that they are only subject to tax on the UK proportion of their share award, unless the overseas proportion of the award is remitted to the UK.
The apportionment between UK and foreign will be on a "just and reasonable" basis (presumably workdays) treating any overseas workdays in any relevant year in which the remittance basis was claimed as the foreign component.
Remittances from mixed funds
Statutory rules will determine what is deemed to be remitted to the UK any time a remittance is made from a mixed fund. What is included in any mixed fund prior to a remittance is to be determined on a "just and reasonable" basis.
Any remittance made is then matched against the component parts of the fund in the following sequence:
- UK employment income;
- Foreign general employment income on which no foreign tax has been paid;
- Foreign specific employment income (such as income from share incentives) on which no foreign income has been paid;
- Foreign investment income not subject to foreign tax;
- Foreign chargeable gains (other than foreign chargeable gains subject to a foreign tax);
- Employment income subject to a foreign tax;
- Foreign investment income subject to a foreign tax;
- Foreign chargeable gains subject to a foreign tax; and?
- Any income or capital (including income or capital already taxed in the UK) not included in the previous eight categories,
This analysis has to be applied first to the income and gains of the tax year in which the remittance was made, and then to income or gains of all previous tax years included in the mixed fund.
The law, as drafted, effectively requires taxpayers to consider precisely what is remitted from a mixed fund every time a transfer from it is made to the UK. So, a taxpayer needs to look at what has gone in and out of an account before every single transfer made to work out what it comprises. Although HMRC had promised to consider a pragmatic solution more in keeping with their stated practice for expatriates, no announcement has yet been made. Therefore, individuals with mixed accounts may need to think about restructuring their existing offshore banking arrangements.
The £30,000 payment
The law on this has been rewritten to give the taxpayer the choice of nominating gains or income or some combination of the two, on which the £30,000 is deemed to have been paid. If so nominated, then amounts remitted will not be taxed again.
Particular rules apply to any income or gains nominated by the taxpayer in this way, such that all other income and gains of that tax year will be deemed to be remitted to the UK before the nominated income or gains. It is, therefore, unlikely that a taxpayer will effectively get relief for this £30,000 payment against his UK tax bill unless all overseas income and gains are remitted to the UK.
The treatment of the £30,000 as tax makes it more likely that it will be recognized by the UK's treaty partners, but this has yet to be specifically confirmed, including the Internal Revenue Service.
Termination payments
Because of the way in which the law was redrafted, it was not clear whether tax years during which a taxpayer was resident but not ordinarily resident would qualify for foreign-service relief. New sections have been drafted to ensure that this remains the case.
Restriction of PAYE withholding
The draft law also includes a section which allows PAYE to be restricted (under s690 ITEPA 2003) on the assumption that a claim for the remittance basis will be made subsequently.
The Bottom Line
Although changes may still be made to the new remittance basis regime, most of the outstanding questions have now been answered. This is, accordingly, the time to consider what action is needed in relation to expatriates both at the employer and employee level.
Specific care must be taken by expatriates in respect of how they structure their offshore banking arrangements to ensure that unforeseen tax charges do not arise by an unplanned remittance of funds.