The changes announced in the Coalition Government's First Budget, alongside recent amendments to immigration rules, signal positive news for UK resident and non-UK domiciled individuals ("Res Non Doms"). In this article, we focus on the implications that the Budget announcements will have for Res Non Doms.

Residence

Existing Position

There is currently no statutory test for determining UK residence for UK tax purposes. Instead, limited statutory rules are supplemented by case law and HMRC guidance. At present, taxpayers have to ensure that they comply with the rules as determined and interpreted by the courts, and have to rely upon the latest version of HMRC guidance (which appears to be deliberately vague, and can be withdrawn or changed at any time). This has long been considered an unsatisfactory state of affairs.

Proposed change

It has been announced that a statutory residence test will be introduced in 2012, following Government consultation.

Comment

In the wake of several recent cases in which the taxpayer has lost against HMRC on the issue of determining UK residence (including the continuing Gaines-Cooper case (R (on the application of Gaines-Cooper) v Revenue and Customs Commissioners [2010] EWCA Civ 85)), the announcement of the introduction of a statutory residence test is welcome. If drafted clearly, taxpayers would enjoy greater certainty as to how they will be assessed by HMRC when coming to and/or leaving the UK. It is important that the final legislation will be both relatively simple to understand and apply, and it is hoped that the consultation process will enable tax advisors to provide helpful input for the Government's draftsmen to consider and adopt in its drafting of the new legislation.

Remittance Basis

Existing Position

Broadly, UK residents pay UK tax on their worldwide income and gains. However, a Res Non Dom can elect to be taxed using the remittance basis. Res Non Doms who claim the remittance basis are only subject to UK tax automatically on UK source income, with foreign income and gains only becoming taxable to the extent that such income and gains are remitted (brought into or enjoyed in) the UK.

Under current law, Res Non Doms have to pay an annual charge of £30,000 to claim the remittance basis of taxation once they have been resident in the UK for 7 or more years (out of the preceding 9 tax years). Res Non Doms who have been resident in the UK for less than 7 years can still elect for the remittance basis of tax, but there is no annual charge.

Proposed change

The annual charge to claim the remittance basis will increase from £30,000 to £50,000 from April 2012 for Res Non Doms who have been resident in the UK for 12 or more years. The £30,000 charge will be retained for those who have been resident for at least 7 years but less than 12 years and there will still be no change for Res Non Doms who claim the remittance basis but have been resident in the UK for less than 7 years.

A further change announced is that Res Non Doms will no longer be taxed on remittances to the UK where such remittances are for the purpose of "commercial investment in UK businesses".

Comment

The increased annual rate for the remittance basis charge to £50,000 for Res Non Doms who have been in the UK for 12 or more years will result in some of the individuals affected needing to consider carefully whether it is still worthwhile for them to claim the remittance basis. In very broad terms, a Res Non Dom who has been in the UK for between 7 and 12 years would need at least approximately £83,000 of offshore income or £108,000 of offshore capital gains (in either case, that they intend to keep offshore) to make paying the £30,000 annual remittance basis charge worthwhile financially. For Res Non Doms who have resided in the UK for more than 12 years, at least approximately £100,000 of offshore income or £190,000 of offshore gains (in either case, that they intend to keep offshore) would be required to make paying the £50,000 annual remittance basis charge worthwhile financially (This is intended to provide very general guidance only, and a proper analysis of the individual's worldwide income and gains (including those received from offshore companies and trusts) would need to be considered)).

For Res Non Doms who are High Net Worth Individuals, the increased charge for long term residents is not as dramatic or draconian as was widely feared before the Budget announcements. Moreover, Res Non Doms can still claim the remittance basis for the first 7 years of residence in the UK without paying any annual charge for doing so. Furthermore, Res Non Doms have the choice to elect for either the remittance basis or the arising basis of tax to apply on a year-by-year basis, giving them greater flexibility in deciding how they are taxed each year, depending upon their particular circumstances.

Allowing Res Non Doms to make commercial investments in UK businesses without triggering a taxable remittance is a welcome change, which should encourage greater investment in the UK. Res Non Doms will no longer have to use up "clean capital" for UK tax purposes to make these types of UK investments without suffering UK tax, freeing up such clean capital for investments elsewhere or for personal use in the UK. Much will again turn upon the precise drafting and it will be interesting to see how UK business is defined in the Finance Bill 2012. It is hoped that the exemption will be available to all relevant persons, such as non-resident trustees, and that there will be a similar relaxation in the rules for individuals bringing funds into the UK for the purposes of the investor visa.

It is expected that this proposed relief for inward investments will be accompanied by anti-avoidance rules and it is hoped that such rules will not unduly add to the complexity of the existing remittance basis rules.

Conclusion

Following rumours of whole-scale changes to the non-domicile tax regime, the changes proposed in the 2011 Budget are relatively limited in scope, and it is positive news that there will be consultation before any changes are introduced in 2012. Moreover, the Government's announced commitment not to make further changes to the rules in this area (for the remainder of this Parliament) will provide some certainty and stability regarding the position of Res Non Doms. This Government appears to have recognised the considerable contribution that Res Non Doms make to the UK economy and is keen to ensure that the UK remains an attractive jurisdiction for these individuals.

Author: Dhana Sabanathan, Solicitor in the Tax Group.

27 April 2011