Reform of the taxation of non-domiciled individuals

HM Treasury have issued a consultation on changes to the UK taxation of non-UK domiciliaries.  The consultation, which can be downloaded here, closes on 9 September.

The proposals extend to the introduction of an exemption for remitted overseas income/gains that are used for investment in the UK, an increase in the remittance basis charge and a simplification of the existing remittance basis rules.

The introduction of the exemption, being broadly drawn, is to be welcomed. It might help to recover some of the international credibility which was lost with the FA 2008 changes even though there will remain a sense of distrust in the UK tax code that will resonate for many years, with many non-UK investors not now even considering the UK for inward investment.    

The exemption, in its proposed form, will allow for non-UK domiciliaries to remit foreign income/gains to the UK without incurring the remittance basis charge where the remitted funds are invested, whether directly by the individual or by a trust or foreign company, into a qualifying company.

A qualifying company is one which conducts a trade, including property development but not the leasing of personal chattels or the provision of certain personal services. Surprisingly, commercial property letting is included.

The investee company need not, itself, be UK tax resident. Whilst privately owned companies are favoured, it is possible that listed and AIM companies will also be qualifying companies for the exemption.

There will be no constraints over the size of investment, nor whether it is in equity or loan form. Upon realisation, the investment can be rolled-over or removed from the UK in order that the proceeds are not then treated as a remittance. The investment exemption will be claimed on the individual’s SA tax return.

Elsewhere, it is proposed that the annual charge of £30,000 will be increased to £50,000 from 6 April 2012 for those non-UK domiciliaries who wish to avoid the remittance basis charge and who have been UK resident for at least 12 out of the past 14 years.

It is proposed that the existing remittance basis rules will be simplified in relation to: nominated income; foreign currency bank accounts; the taxation of assets (such as works of art) remitted to and sold in the UK; and employees working in and outside of the UK under a single contract of employment.

Simplification will only be entertained if it comes with no cost, delivers clear and material benefits and is simple to legislate.