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HMRC Consults On Changes To Residence And Domicile Regime

by Amanda Banks, Tax-News.com, London

22 January 2008

HM Revenue and Customs (HMRC) on Friday gave further details of proposed changes to the UK's residence and domicile regime which will "force a fire sale of UK assets", according to The Society of Trust and Estate Practitioners (STEP).

The UK tax authority published for consultation draft legislation covering day counting and the remittance basis of taxation (including the GBP30,000 charge and personal allowances for those claiming the remittance basis).

According to HMRC, the new provisions will make a series of changes to the current rules, namely:

  • The residence rules will be amended, so that days of arrival in and departure from the UK will count towards establishing residence;
  • Individuals who are resident but not domiciled, or not ordinarily resident, in the UK will be required to make a claim in order to access the remittance basis of taxation for income and chargeable gains unless their unremitted foreign income and gains are less than GBP1000 . Individuals who opt for the remittance basis will lose their entitlement to personal allowances and the capital gains tax annual exempt amount;
  • Individuals who are resident but not domiciled, or not ordinarily resident, in the UK for longer than seven out of the past 10 years will only be able to access the remittance basis of taxation on payment of an annual charge of GBP30,000, unless their unremitted foreign income and/or gains are less than GBP1,000;
  • The current rules will be amended to remove "flaws and anomalies" that allow individuals using the remittance basis to avoid paying tax on foreign income and gains where it is properly due.

John Riches, Deputy Chairman of STEP Worldwide commented on the proposed changes:

"One direct consequence of the legislation announced today is that UK resident non-domiciles will be liable to an immediate charge to tax in relation to UK investments held by their offshore trusts, which is not the case currently."

"This move will only serve force a fire sale of UK assets and to drive these funds offshore depriving UK plc of much needed investment at a time when the credit crunch is starting to bite and recession looming."

"Sadly the ongoing consultation is undermined as many important decisions, particularly on CGT, have in practice already been taken. It is astonishing that, after five years of review, HMRC has not undertaken a proper analysis of the impact of these changes on the UK economy. The government should review these changes before investments and expertise depart the UK."

STEP revealed that according to a Chartered Institute of Taxation (CIOT) estimate, between GBP75 and GBP125 billion of UK assets are held through UK offshore structures, including investments in commercial property and private equity.

The Society went on to observe that:

"While much of the legislation published today was expected on the basis of the announcements made in the Pre-Budget Report in October last year, the Government has chosen to single out offshore dynastic trusts for particularly harsh treatment, in some cases applying a retrospective tax charge on benefits received at any point in the last 27 years."

"Beneficiaries who receive or have received capital payments from offshore trusts, set up by their parents or grandparents, will be subject to capital gains tax whether they bring that money into the UK or not."

"This will apply in relation if capital gains are made by the trust from 6 April, even if the distribution was received before 6 April 2008, but after 6 April 1998 and in some cases going back to 6 April 1981. Major concerns have been expressed about the retrospective nature of the proposals as drafted."

It concluded:

"Despite considerable lobbying, the Government has chosen not to structure the GBP30,000 levy on resident non-domiciles to make it clear that it is automatically allowed as a credit against their foreign taxes. Instead they have chosen to rely on every other nation changing their tax rules, to align them with the UK and to prevent their citizens being subject to double tax charges."

The deadline for responses to the consultation document is 28 February 2008. The amendments in the draft legislation are to be put before Parliament in the 2008 Finance Bill. Subject to the Bill becoming law they are expected to (broadly) take effect from 6th April 2008.

The full text of the HMRC draft legislation on residence and domicile can be found in the Tax News Resources section.

 

 






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