Changes to the Remittance Basis of taxation

Substantive changes have been proposed to the UK taxation of international individuals. This briefing note is designed to highlight the recent changes made and proposals afoot.

Changes to the Remittance Basis of taxation

On the 28th May 2012 HMRC issued an Information Note on the proposed changes to the taxation of resident, non-domiciled and not ordinarily resident individuals who choose to be taxed on the remittance basis for the purpose of UK taxation.

The changes are included in the Finance Bill and, subject to Parliamentary approval, will come into effect for the 2012-13 tax year.

The Government is proposing the following changes:

  • A higher Remittance Basis Charge of £50,000 for some non-domiciled individuals who have been UK resident for a long time and who choose to be taxed on the remittance basis;
  • The introduction of a business investment relief for remittance basis users;
  • A relief for sales of exempt property in the UK;
  • Simplification of the remittance basis rules.

Higher Remittance Basis Charge

From tax year 2012-13 a higher level annual Remittance Basis Charge of £50,000 is to be introduced if you:

  • Are not domiciled in the UK or not ordinarily resident in the UK;
  • Are UK resident in a tax year;
  • Make a claim to use the remittance basis in 2012-13 or in a later tax year; and
  • Have been resident in the UK in at least 12 of the 14 years before the year in which you make the claim.


Business investment relief

A new relief for business investments by remittance basis users will allow you to use your foreign income or gains to make an investment without being treated as having made a remittance to the UK.

To qualify for the relief a number of conditions must be met. The main conditions are:

  • You must make your investment (which may be in the form of shares or a loan) in a qualifying company that meets the eligibility conditions for the relief;
  • Your investment must be made within 45 days of your foreign income and gains being brought to the UK;
  • No relevant person is able to obtain benefits, either directly or indirectly, that are attributable to the investment;
  • You must make a claim for the relief from UK tax under this provision on your Self Assessment tax return for the year in which you make the investment;
  • When you dispose of the investment you must take the disposal proceeds (up to the amount of the investment) offshore or re-invest the proceeds in another qualifying investment within 45 days of the disposal.

The investment must not be made as part of a scheme or arrangement, the main purpose of which, or one of the main purposes of which, is tax avoidance.

If any of the conditions for this relief are breached, or certain other events occur you will be treated as having remitted the amount of your investment to the UK and your remittance will be chargeable to UK tax, unless you take appropriate mitigation steps.

Sales of exempt property

Exempt property is property that has been purchased overseas using foreign income and gains and brought to the UK, where certain conditions are met.

If you bring exempt property to the UK and sell it (or otherwise convert it to money), for tax years up to and including 2011-12 the foreign income and gains are treated as having been remitted. For tax years 2012-13 onwards the original foreign income and gains will not be considered as remitted to the UK and the gain arising on the sale will not be treated as a UK gain, provided certain conditions are met.

The conditions are that:

  • You must sell the exempt property to a person who is not a relevant person;
  • The sale must be by way of a bargain made at arm’s length;
  • The proceeds of the sale must be received within 21 months of the end of the tax year in which the sale takes place;
  • Once the sale is complete no relevant person:
  • Has any interest in the property;
  • Is able to benefit in any way from the property or from anything derived from the property;
  • Is able to acquire any right (conditional or unconditional) to the property or to benefit from the property.
  • You need to take the entire sale proceeds offshore or invest them in a qualifying business investment within 45 days of receipt;
  • You must claim UK tax relief under this provision as part of your Self Assessment tax return, on or before 31 January following the end of the tax year in which the property was sold.

The sale must not be made as part of a scheme or arrangement, the main purpose of which, or one of the main purposes of which, is tax avoidance.

You must meet certain prescribed timescales in relation to:

  • Receipt of the sale proceeds,
  • Taking the proceeds of the sale offshore, or
  • Investing them (under the business investment relief provisions).


Simplification of the remittance basis rules

There are two other changes that will simplify the remittance basis rules in the following areas:

  • Nominated income
  • Foreign currency bank accounts

Enveloping high-value residential property: consultation on annual charge and extending CGT to non-residents

On 31st May 2012, the government published a consultation document setting out its proposals for the introduction of an annual charge on high-value residential properties owned by certain “non-natural persons” and the extension of CGT to disposals of high-value residential properties by non-UK residents. These measures are designed to discourage ownership through corporate envelopes to avoid SDLT on future sales. Comments on the consultation document are invited by 23rd August 2012.

Annual charge

The annual charge will apply if a non-natural person owns (alone or jointly with a natural person) a freehold or leasehold estate in a dwelling with a value exceeding £2 million.

The charge will only apply if the dwelling is:

  • Owned by a body corporate;
  • Owned by a partnership where at least one of the partners is a company;
  • Purchased for the purposes of a collective investment vehicle.

The following persons or types of property will be excluded from the charge:

  • Communal residential accommodation such as student halls of residence or care homes;
  • Property developers where a property is acquired for a development business that has been operating for at least 2 years and the property is purchased with a view to re-development or re-sale;
  • Corporate trustees (unless they are holding the residential property on bare trust);
  • Charities.

The rates of the annual charge will be as follows:

Value of property Annual charge for 2013-14
£2 million – £5 million £15,000
£5 million – £10 million £35,000
£10 million – £20 million £70,000
Over £20 million £140,000

The annual charge (but not the property value bands) will be increased in line with the Consumer Prices Index.

The due date for annual returns and the payment of the annual charge will be 15th April each year, subject to transitional rules for the first period. Repayments, on a pro-rata basis, will be available if the property becomes, or ceases to be, owned by a non-natural person during the period of account. All beneficial owners of the property will be jointly and severally liable for the annual charge and making returns.

The annual charge will be based on the market value of the relevant estate in the property. The valuation date will be:

  • 1st April 2012 (the base date), if the property was owned on that date;
  • The date of acquisition, if acquired after 1st April 2012;
  • The date of the creation, or the cessation, of a subordinate estate in the property, if this occurs after 1st April 2012.

The base date for valuation will alter every five years. Therefore, the annual charge for 1st April 2018 will be based on the value of the relevant estate in the property on 1st April 2017 if the property is owned on that date. As the valuation bands are not indexed, if property values appreciate over time more properties will come within the scope of the charge.

If separate estates in the property are owned by unconnected non-natural persons, each person’s liability to the annual charge will be determined by reference to the stand-alone value of that estate.

Taxpayers will be able to submit proposed valuations to the Valuation Office Agency (VOA) before submitting returns in order to agree the correct banding with the VOA. Valuation disputes will be within the jurisdiction of the Upper Tribunal (Lands Chamber). Valuations provided by professional valuers are recommended to avoid penalties.

Extending the scope of CGT

From April 2013, disposals of UK residential property by specified persons (CGT non-natural persons) who are non-UK resident will be within the scope of CGT if the amount or value of the disposal consideration exceeds £2 million.

CGT non-natural persons is a wider term than non-natural persons for SDLT enveloping and annual charge purposes. The term will include:

  • Companies and other bodies corporate;
  • Trustees (excluding bare trustees, but including trustees who are individuals);
  • Collective investment vehicles;
  • Personal representatives;
  • Clubs and associations;
  • Entities that exist in other jurisdictions that allow property to be held indirectly.

Charities will be exempt from the extension to CGT on the same basis that UK-resident charities are entitled to an exemption from CGT.

Partnerships retain transparency so that any gains would be apportioned between the partners, including non-UK resident non-natural partners. Individual partners who are non-UK resident will not be subject to the charge.

Not only will the extension of CGT apply to disposals of UK dwellings but also to the disposal of assets that represent such property, directly or indirectly. This includes shares, interests or securities in property-owning companies where more than 50% of the value of the asset is derived from UK residential property. The grant of an option over such property is also included in the extended charge to CGT. Gains will be computed in accordance with current rules. Losses will only be available to set against gains on disposals of high-value UK residential property in the same or future tax years.

There will be rules for apportioning gains and losses on the disposal of a property if, during the period of ownership, it was, at different times, residential and non-residential, or it was of mixed use or character (that is, both residential and non-residential).

Gains will not be apportioned between any period of ownership before April 2013 and the period of ownership after. In effect, the extension of CGT will be retrospective in nature.

If a CGT non-natural person would be, if UK resident, currently eligible for private residence relief, relief will also be available for its non-resident equivalent, but only if this is practically possible and would not create an avoidance opportunity. Therefore, it seems that the relief will be available for non-UK resident trustees owning property directly where one of the beneficiaries occupies it.

Non-UK resident companies that are currently liable to corporation tax will be subject to corporation tax on gains arising from UK residential property disposals and non-UK resident companies without a UK permanent establishment will be subject to CGT.

It is likely that there will be specific anti-avoidance rules to counter arrangements that artificially depress or delay gains, or exaggerate or accelerate losses.

The rates of CGT that will apply to the extended charge are not part of the consultation. A flat rate could be adopted (perhaps the existing rate of 28%) or a range of rates.

Statutory residence test and abolition of ordinary residence

On the 21st June 2012, the government published draft legislation to implement a statutory test for tax residence and abolishing the concept of ordinary residence for tax purposes. The draft legislation is contained in a document setting out the government’s response to the formal consultation on these measures that took place during the summer of 2011. As well as seeking views generally on the draft legislation, the government has posed a number of additional consultation questions aimed at helping it to refine its policy.

The closing date for comments on both the draft legislation and the additional consultation questions is the 13th September 2012. A revised draft of the legislation will be published alongside other draft Finance Bill 2013 clauses in the autumn of 2012 for a further 12-week period of consultation. A final version will be published shortly after the 2013 Budget.

The draft legislation does not make substantive changes to the original consultation document. A summary of the proposed changes are as follows (in bold):

Part A (conclusive non-residence)

Under the original consultation, an individual would be non-resident if they were not resident in one or more of the previous three tax years and they were present in the UK for fewer than 10 days in the current tax year.

It is proposed that the 10 day period be increased to 15 days.

Part A of the proposed test also includes a condition that would make an individual automatically non-resident if they worked full-time abroad.

Under the original consultation, an individual was able to satisfy the Full Time Work Abroad condition (“FTWA”) if they spent no more than 20 working days in the UK (and no more than 90 days of presence) in any one tax year. The original consultation also proposed that a working day be defined as any day on which three hours or more of work is carried out.

The Government recognized that the proposals on FTWA have the potential to cause a change in residence status for some employees and that the new approach will create a new record keeping requirement for individuals. It is willing to consider ways to mitigate this impact and proposes two alternative options.

Option 1: increase the limit of working days permitted in the UK from 20 to 25 working days

Option 2: increase the number of hours that constitute a working day from 3 hours to 5 hours

The Government accepted that specific rules should apply to international transportation workers. The Government proposes the following amendments for international transportation workers:

  • an individual who performs any work as an international transportation worker during a year should not be eligible for FTWA;
  • an individual who performs any work as an international transportation worker during a year will be excluded from access to the FTWUK condition;
  • a UK work day would be any day in which a journey starts from the UK irrespective of the number of hours spent in the UK and overseas. Conversely, an overseas work day would be any day in which a journey starts in another country.

Part B (conclusive residence)

The original consultation proposed that an individual should be classed as working fulltime in the UK if they were employed or self-employed in the UK over a continuous period of 9 months, and no more than 25 per cent of their duties were carried on outside the UK during the period of full-time work.

The Government will consider increasing the qualifying period from 9 months (276 days) to 12 months.

Part C (other connection factors and day counting)

The government does not propose to make substantive changes to the connecting factors outlined in the original consultation.

One of the connecting factors was the location of an individual’s family including children.

Following strong representations, a child will not be treated as creating a family connection factor for the individual if they spend fewer than 21 days in the UK not present at the educational establishment outside term time.

Other definitions used in the test

The Government is considering a targeted supplementary rule that would apply only to those who are present in the UK on a large number of days without ever being in the UK at midnight on those days.

Under current HMRC practice, days spent in the UK because of exceptional circumstances beyond an individual’s control may be disregarded for some purposes. The original consultation did not include a provision for exceptional circumstances in the statutory test.

The Government accepts that it is right to make provision for exceptional circumstances.

The Government has decided to make slight adjustments to the day count thresholds in Part C of the test to make it easier to understand and apply. These changes are set out below in the second column.

Individuals resident in one or more of the previous three tax years

Impact of connection factors on residence Days spent in UK Days spent in UK
NEW PROPOSAL Original Proposal
Always non-resident Fewer than 16 days Fewer than 10 days
Resident if individual has 4 factors or more 16 – 45 days 10 – 44 days
Resident if individual has 3 factors or more 46 – 90 days 45 – 89 days
Resident if individual has 2 factors or more 91 – 120 days 90 – 119 days
Resident if individual has 1 factor or more 121 – 182 days 120 – 182 days
Always resident 183 days or more 183 days or more

Individuals not resident in all of the previous three tax years

Impact of connection factors on residence Days spent in UK Days spent in UK
NEW PROPOSAL Original Proposal
Always non-resident Fewer than 46 days Fewer than 45 days
Resident if individual has 4 factors 46 – 90 days 45 – 89 days
Resident if individual has 3 factors or more 91 – 120 days 90 – 119 days
Resident if individual has 2 factors or more 121 – 182 days 120 – 182 days
Always resident 183 days or more 183 days or more

In addition the connection factor for “UK presence in previous year” will be amended so that it applies where the individual spends more than 90 days in the UK in either of the previous years. The original proposal was for at least 90 days.

The family connection factor will also be amended so that it applies where the individual spends more than 60 days with a child who is resident in the UK (rather than at least 60 days).

Other features of the test – Split year treatment

The Government is to amend the condition on return visits to the UK where an individual leaves the UK to live abroad and allow an individual to spend fewer than 16 days in the UK in the year of departure.

Transitional rules

The Government will include a transitional rule which will apply only for those parts of the test where the individual needs to know what their residence status was in one or more of the three years prior to the introduction of the test for the purpose of determining their residence in future years.

National Insurance Contributions

The Government confirms that the statutory residence test will not apply for NICs purposes when it is implemented in 2013.

Ordinary residence

The original consultation document set out two options for the reform of ordinary residence:

Option 1 – abolish ordinary residence for all tax purposes except overseas workday relief (OWR); and
Option 2 – retain ordinary residence for all tax purposes and create a statutory definition.
The Government has decided to abolish the concept of ordinary residence for tax purposes but it will retain OWR and put it on a statutory footing (Option 1).

The Government will make changes throughout the tax code to remove references to ordinary residence and replace them with references to residence. The table that follows summarizes the most significant provisions affected.

Summary of main tax provisions affected by abolition of ordinary residence

Provision Current application Future application
General remittance basis Available if tax resident and non-domiciled or not ordinarily resident Available only if tax resident and non-domiciled
Overseas workday relief Available if tax resident and ordinarily resident Replaced with statutory relief. Relief will only be available if non-domiciled
Transfer of Assets Abroad Applies to individuals who are ordinarily resident Will apply to individuals who are tax resident
Seafarers Earnings Deduction Available if ordinarily resident in the UK or tax resident in an European Economic Area state (other than the UK) Available if tax resident in the UK (or resident in an EU or EEA state) or tax resident in an European Economic Area state (other than the UK)
Foreign service relief for termination payments Applies in respect of earnings related to UK duties for individuals who are not ordinarily resident Will apply only in respect of earnings for overseas duties
Capital gains tax Applies to UK gains if individual is tax resident or ordinarily resident Will apply to UK gains only if individual is tax resident
Capital gains tax and temporary non-residence rule Applies to individuals who are tax resident or ordinarily resident Will apply to individuals who are tax resident
Taxable lump sums from pension schemes (ESC A10) Applies in respect of earnings related to UK duties for individuals who are not ordinarily resident Will apply only in respect of earnings for overseas duties
Individual Savings Accounts (ISAs) Available to individuals who are tax resident and ordinarily resident Will apply to individuals who are tax resident

The Government will introduce transitional provisions to ensure that individuals who currently benefit from being not ordinarily resident do not lose out following abolition of ordinary residence.

The Government confirmed that it will restrict the new statutory definition of OWR to non-domiciles only.

The Government believes that OWR should only be available to individuals who have not been previously resident in the UK or, if previously UK resident, have been non- resident for a distinct period.

The look-back period is reduced to three years. This means that employees will be denied access to the new statutory definition of OWR if they have been UK resident in any of the three tax years prior to coming to the UK to work.

The original consultation also proposed that OWR would be denied to individuals who were resident in the current tax year on the basis that their only home was in the UK (“only home qualifying condition”).

The Government, in principle, thinks that OWR should not be denied to non-domiciled employees unless they are settled in the UK. The only home qualifying condition was intended to be a proxy for the concept of being “based” in the UK but the Government recognises that its original proposal could have unintentionally led to harsh outcomes for a significant number of employees. It will therefore change this condition.


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.