HN3 - Changes in the way that individuals will be taxed in the United Kingdom

Yesterday the government announced significant changes in the way that it will tax individuals in the United Kingdom with effect from 6 April 2008.

There are three basic concepts to taxing individuals in the UK:

• Residence
• Ordinary residence
• Domicile.

An individual is resident in the UK if he is present for 183 days in a tax year or for an average of 91 or more days in the tax year in question and the three preceding years.

Up until now days of arrival and days of departure have been excluded from the count. From 6 April 2008, days of arrival and departure will count as a day present in the UK. This will have a significant effect on the “international commuter”.

UK residents are taxable on their worldwide income and capital gains. However, individuals who are resident but not domiciled or ordinarily resident can elect to only pay tax in the UK on the amount of income or capital gains which they remit to the UK.

From 6 April 2008, anyone claiming this remittance basis who has been resident in the UK for seven years will have to pay an additional tax charge of £30,000.

Anyone claiming the remittance basis will not be allowed the usual income tax personal tax free allowances.

The alternative for individuals who are resident in the UK, but not domiciled or ordinarily resident there, will be to be taxed on their worldwide income and capital gains with the usual reliefs for foreign taxes paid.

The current rules mean that individuals using the remittance basis of taxation can, by planning the way that their assets outside the UK are held, avoid paying UK tax on monies that are brought into the UK. A number of changes will be made to the rules so that tax is charged on those remittances.

The changes include:

• Changes to the current claims mechanism which allows income arising in one year to be remitted tax free the following year by claiming the remittance basis in the first year but not in the second.
  
• Reducing the scope for the alienation of income and gains through the use of offshore structures, such as companies and trusts, with a view to making only non-taxable payments.
  
• Extending those existing anti-avoidance measures which currently do not apply to remittance basis users so that in future they do.
  
• Removing the 'ceased source' rule.
  
• Extending the definition of remittance in relevant foreign income.

The draft new legislation has not yet been published and is stated to be subject to consultation. However, publication is promised “towards the end of the year” which clearly means a very short “consultation” period.

Those individuals who are resident or who are thinking of becoming resident in the UK and are not domiciled or ordinarily resident in the UK need to review their arrangements in the light of these changes.

Additional Information

If you require any additional information, please contact us.