01 February 2009 Issue 2 Malcolm Finney

Non-dom Q&A

15 questions you were afraid to ask, post FA 2008.

The Finance Act 2008 has, inter alia, materially changed the taxation of non-UK domiciled but UK resident individuals from 6 April 2008 (albeit with some retrospectivity). Wide-ranging changes have been introduced.

It is likely to take some time before the full ramifications and the precise applicability of some of the new provisions is likely to be known.

Below are a small number of questions (and hopefully correct answers), which seek to highlight the impact of some of these changes for the non-UK domiciled individual.

Assumption

‘X’, in the Questions below, is a non-UK domiciled but UK resident and ordinarily resident individual and where necessary has claimed remittance basis treatment. Unless otherwise stated, assume X is over age 18.

Q1: X has been resident in the UK for six tax years out of the previous nine tax years immediately prior to 2008/09. X has UK source income. If remittance basis treatment is required for 2008/09, is a formal claim necessary and is the GBP30,000 remittance basis charge payable in this case?

A: Yes, a formal claim for remittance basis treatment will be required assuming that X’s unremitted foreign income and gains for 2008/09 are not less than GBP2,000. Assuming unremitted foreign income and gains for 2008/09 are not less than GBP2,000 (and thus a formal claim is required) the GBP30,000 charge is not payable as X has not resided in the UK for at least seven of the preceding nine tax years prior to 2008/09. If unremitted foreign income and gains for 2008/09 are less than GBP2,000 then remittance basis treatment will apply automatically without the need for a formal claim (or the need to pay the GBP30,000).

Q2: X has been resident in the UK for seven tax years out of the previous nine tax years immediately prior to 2008/09. X has UK source income. If remittance basis treatment is required for 2008/09, is a formal claim necessary and is the GBP30,000 payable in this case?

A: Yes, a formal claim for remittance basis treatment will be required assuming that X’s unremitted foreign income and gains for 2008/09 are not less than GBP2,000. Assuming unremitted foreign income and gains for 2008/09 are not less than GBP2,000 (and thus assuming a formal claim is required) the GBP30,000 charge is payable as X has resided in the UK for at least seven of the preceding nine tax years prior to 2008/09. If unremitted foreign income and gains for 2008/09 are less than GBP2,000 then remittance basis treatment will apply automatically without the need for a formal claim (or the need to pay the GBP30,000).

Q3: X will be aged 18 on 5 April 2009. X has been resident in the UK for seven tax years out of the previous nine tax years immediately prior to 2008/09. X has UK source income. If remittance basis treatment is required for 2008/09, is a formal claim necessary and is the GBP30,000 payable in this case?

A: Although X only attains age 18 on the last day of the 2008/09 tax year, X is ‘aged 18 or over in [the tax] year’ and, assuming unremitted foreign income and gains for 2008/09 are not less than GBP2,000, a formal claim for remittance basis treatment will be required. In addition, the GBP30,000 is also payable. Had X not been 18 until, for example, 6 April 2009, a formal claim for remittance basis treatment will still be required (assuming unremitted foreign income and gains for 2008/09 are not less than GBP2,000) although the GBP30,000 charge would not be payable.

Q4: X is non-UK domiciled under common law but deemed UK domiciled for inheritance tax purposes. Can X claim remittance basis treatment?

A: Yes, X can claim remittance basis treatment as a non-UK domiciled individual for income/capital gains tax purposes. Deemed UK domiciled status is applicable for inheritance tax purposes only.

Q5: X utilised pre 6 April 2008 relevant foreign income (RFI) of GBP5,000 post 5 April 2008 to purchase jewellery for his 21 year old daughter. The purchase was effected outside the UK by X. X then gifted the jewellery to his daughter who brought the jewellery into the UK. Does X or his daughter have a tax liability and, if so, at what point? How, if at all, would the answer be different if X’s purchase had been effected post 5 April 2008 out of post 5 April 2008 RFI and X had gifted the jewellery to his spouse prior to the remittance by the spouse?

A: Neither X nor X’s daughter has a tax liability. Under the transitional provisions applicable to pre 6 April 2008 RFI, X would have a tax liability thereon only if X enjoyed the jewellery once received in the UK. The purchase of the jewellery out of post 5 April 2008 RFI is not protected by any transitional provisions. X’s spouse is a relevant person and thus the remittance of the jewellery by the spouse to the UK in principle precipitates a taxable remittance on the part of X of the RFI. However, jewellery is specifically categorised as ‘exempt property’ and, as in this case, the ‘personal use rule’ conditions are satisfied, no taxable remittance arises.

Q6: X wants to gift to his 19 year old son, post 5 April 2008, GBP10,000 out of his RFI, which was generated pre 6 April 2008. The gift would be effected outside the UK and X’s son then proposes to bring the monies into the UK. Does X or his son have a tax liability and, if so, at what point? Would the answer be different if X’s son at the date of the gift was under age 18?

A: Neither X nor X’s son has a tax liability. Under the transitional provisions applicable to pre 6 April 2008 RFI, X would have a tax liability thereon only if X enjoyed the RFI once received in the UK. The age of X’s son is irrelevant as the transitional provisions protect X from a taxable remittance arising. The age of X’s son would, in principle, be relevant, however, if the RFI had arisen post 5 April 2008.

Q7: X used pre 6 April 2008 generated RFI to purchase a BMW car in Germany, post 5 April 2008, which he then brought into the UK. Has X made a taxable remittance?

A: Yes, X has made a taxable remittance of the pre 6 April 2008 RFI at the date the car enters the UK. However, had, for example, X purchased the car on or before 11 March 2008, no taxable remittance of the RFI would arise when the car is brought to the UK (whether pre or post 6 April 2008) under the transitional provisions.

Q8: X has unused non-UK situs asset capital losses generated pre 6 April 2008. Can X carry them forward post 5 April 2008 for offset against post 5 April 2008 capital gains?

A: No. Pre 6 April 2008 non-UK situs capital losses were, and continue to be, unusable against any capital gains whether arising on UK or non-UK situs capital assets pre or post 6 April 2008.

Q9: X closed his Bahamas bank (BA1) account in July 2006. The interest that had been generated on the capital in BA1 had been credited to bank account BA2. X remitted part of the interest to his UK bank account in January 2008 and the balance in July 2008. Has either/neither/both of the remittances precipitated a tax liability?

A: The bank account (i.e. source of the interest) ceased in the tax year 2006/07. The remittance in January 2008 (i.e. tax year 2007/08) precipitates no tax liability. However, the remittance in July 2008 precipitates a tax liability on the part of X (even though the source of the interest had ceased pre 2008/09). No transitional provisions are in point.

Q10: X closed his Bahamas bank (BA1) account in July 2006. The interest that had been generated on the capital in BA1 had been credited to bank account BA2. X transferred the whole of the interest in BA2 to his non-UK domiciled spouse’s (Y) Bahamian bank account (BA3) in December 2007. Y remitted this interest from BA3 to her UK bank account in two tranches in January and July 2008. Has either/neither/both of the remittances precipitated a tax liability?

A: Neither remittance in January nor July 2008 by Y (although a relevant person) precipitates a tax liability on the part of X (under the transitional provisions) or Y. This assumes X cannot enjoy any part of the remitted interest.

Q11: X opened a Bahamian bank account (BA1) account in July 2008. The interest that has been generated on the capital in BA1 has been credited to bank account BA2. X intends to transfer the whole of the interest in BA2 to his non-UK domiciled spouse’s (Y) Bahamian bank account (BA3) in May 2009. Y then intends to remit this interest from BA3 to her UK bank account in May 2010. Will the remittance precipitate a tax liability? Would your answer be different if Y was X’s 21 year old son?

A: Yes. A taxable remittance will arise on the part of X in May 2010 when Y (a relevant person) remits the interest to the UK. The transitional provisions are not in point. If Y is X’s 21-year-old son, no taxable remittance on X’s part will arise (Y is not, in this case, a relevant person).

Q12: X made the following capital gains/losses in 2008/09:

  • UK situs gains: GBP19,600
  • Non-UK situs losses: GBP35,000
  • UK situs losses: GBP7,000
  • Non-UK situs gains (unremitted): GBP21,000
  • Non-UK situs gains (remitted): GBP11,000

X is aged 35 and believes his net capital gains after the annual exemption of GBP9,600 is nil. Is X correct?

A: No, X is not correct. The aggregate capital losses available for relief are GBP42,000 (i.e. GBP35,000 plus GBP7,000). The GBP42,000 is off-settable against the GBP11,000 (remitted non-UK situs capital gains); the GBP21,000 (unremitted non-UK situs capital gains); leaving GBP10,000 of capital losses for offset against the GBP19,600 of UK situs capital gains leaving GBP9,600. This is, in fact, the net capital gains for X, as X is not entitled to the annual exemption because X has claimed remittance basis treatment.

Q13: In 2008/09, X settled a non-UK situs asset in an offshore resident discretionary trust. The asset cost GBP50,000 and at the time of settlement was worth GBP200,000.The beneficiaries of the trust included X, his non-UK domiciled spouse and his two adult children (A and B) who are each UK domiciled and resident. Towards the end of 2008/09 the trustees appointed the asset out to B whilst it remained outside the UK when its value had not changed from the GBP200,000. No income arose to the trustees. What is the tax position of the various persons?

A: The trust is ‘settlor interested’ for capital gains tax purposes but the settlor is non-UK domiciled and thus section 86 TCGA 1992 is inapplicable (i.e. any capital gains of the trustees cannot be imputed to the settlor). In any event, the trustees make no capital gain during their period of ownership of the asset as its value during this period remained at GBP200,000. Section 87 TCGA 1992 is, however, in principle applicable, but as the trustees made no capital gains in 2008/09 there are no such gains that can thus be attributed to beneficiary ‘B’ on the appointment of the asset to ‘B’. Nevertheless, the capital gain made by X on settling the asset (i.e. GBP150,000) is potentially taxable on X should the asset, inter alia, be brought to/used in the UK by a relevant person. However, ‘B’ is not a relevant person and thus X is not subject to any tax on the gain made on settling the shares even if B brings the asset to the UK. However, if the trustees had brought the asset to the UK and then appointed it to B, a remittance of the GBP150,000 gain on the part of X would occur (as the trustees are a relevant person vis a vis X).

Q14: X left the UK on 4 April 2008 becoming non-UK resident on 5 April 2008. X remained non-UK resident until X returned to the UK acquiring UK residency on 6 April 2012. In 2009/10 X remitted GBP100,000 of RFI to the UK; the RFI remitted had been generated pre 6 April 2008. Has a tax liability arisen on the RFI remittance?

A: Yes, the pre 6 April 2008 RFI is subject to tax on the part of X in the tax year of his return to the UK, i.e. 2012/13 (even though the remittance of the RFI to the UK occurred in a tax year 2009/10 of non-UK residency). This tax liability arises due to the new anti-avoidance provision introduced in FA 2008 (section 832A), applicable to non-UK domiciled individuals, assuming that prior to losing UK residency X (in this example) had been UK resident for at least four out of the immediately preceding seven tax years and remained non-UK resident for less than five tax years. Had X returned on 6 April 2013, no tax liability on the remittance would have arisen.

Q15: X opened a USD bank account in the Cayman Islands (FC1) into which he deposited USD100,000 in January 2007, which was a gift from his father. At the same time he deposited EUR75,000 (also a gift from his father) in his Swiss account SA1. In July 2007 X transferred USD60,000 from FC1 to FC2, another USD account maintained in the Cayman Islands. In July 2007, EUR24,000 was transferred from SA1 to SA2 another account maintained in Switzerland. In July 2008, USD60,000 was transferred to X’s UK bank account from FC2 and EUR24,000 was also transferred from SA2 to the UK. The exchange rates were:

  • January 2007 USD2/GBP1 EUR1.5/GBP1
  • July 2007 USD1.5/GBP1 EUR2/GBP1
  • July 2008 USD1.25/GBP1 EUR1.5/GBP1
  • What is X’s capital gains tax position for the tax year 2008/09?

A: Foreign currency and foreign currency bank accounts are chargeable assets for capital gains tax purposes. All calculations regarding liability are carried out in sterling. Each transfer of foreign currency from one account to another constitutes a chargeable disposal. The sterling equivalents are as follows:

  • USD60,000 equivalent GBP cost in January 2007 GBP30,000
  • EUR24,000 equivalent GBP cost in January 2007 GBP16,000
  • USD60,000 equivalent GBP cost in July 2007 GBP40,000
  • EUR24,000 equivalent GBP cost in July 2007 GBP12,000
  • USD60,000 equivalent GBP cost in July 2008 GBP48,000
  • EUR24,000 equivalent GBP cost in July 2008 GBP16,000
  • USD transfer in July 2007 precipitates GBP10,000 gain
  • EUR transfer in July 2007 precipitates GBP4,000 loss
  • USD transfer in July 2008 precipitates GBP8,000 gain
  • EUR transfer in July 2008 precipitates GBP4,000 gain

Pre 6 April 2008 non-UK situs capital losses could not be utilised (see Answer 8 above) to offset against any capital gains for the non-UK domiciled individual. Thus, the GBP4,000 loss is not usable. On remittance of the USD60,000 in July 2008 the aggregate capital gain is GBP18,000 (i.e. GBP10,000 plus GBP8,000) and on the remittance of EUR24,000 the gain is GBP4,000. Thus, X is chargeable to GBP22,000 of chargeable gains. No annual exemption is available to X.

The answers given are based on my understanding of the new FA 2008 provisions.

I would be interested to hear from anyone who has a different view from those expressed in the above answers, email [email protected]

This article is based on the author’s forthcoming book Wealth Management Planning: The UK Tax Principles published by Wiley & Sons.

Authors

Malcolm Finney