Over the past two weeks, I have been looking at the consultation on a full statutory definition of residence for UK tax law. Most agree that greater statutory clarity and certainty would be welcome.
Most often, UK financial advisers will advise UK-resident and domiciled clients. However, this will not always be the case and it is essential a financial planner is able to spot when there could be a question mark over the residence status of a client or potential client.
It can have a significant impact on pension, investment and tax-planning strategy. For example, even at the most mundane level, if an investor in an insurance bond is not UK-resident, then, in relation to an offshore bond, non-resident relief will effectively provide for a proportion of any realised gain to be tax-free. This will be determined on a time-apportionment basis, with days of non-tax residence ownership as the numerator and the total days of ownership the denominator.
The reduction in the amount of gain to be taxed is the gain multiplied by the fraction. Also, if the bond is held in trust, any chargeable-event gains would not be assessed on the creator (being non-UK resident) of the trust but on the trustees, provided they are UK-resident. In short, you would need to give the encashment strategy more thought.
Returning to the consultation, it is important to keep in mind that it only covers the issue of tax residence in the UK for individuals and will not cover the residence status of companies.
HM Revenue & Customs is considering the possibility of providing an interactive online tool to enable individuals to self-assess their residence status when the full statutory definition is introduced. A prototype of this tool has been made available through a link and interested parties are invited to make use of this to assess how a statutory test could operate in practice.
Given the number of cases that have been heard in relation to the definition of residence, this consultation will be welcomed by many. Residence and ordinary residence are concepts that are fundamentally important in relation to an individual’s liability to UK income tax and capital gains tax.
As stated above, for the majority of UK-based financial advisers, clients will be clearly UK-resident and ordinarily resident and, for that matter, UK-domiciled, too. However, where there is an element of doubt, such as in relation to the growing number of non-UK nationals working in the UK who may become clients of UK advisers and in relation to emigrating and immigrating individuals, establishing the correct resident/ordinarily resident status, as well as domicile status, is a fundamentally important place to start before embarking on the task of giving advice.
So much for the statutory residence test.
I am now going to turn to the taxation of non-UK domiciliaries.
In the 2011 Budget, the Government announced it would reform the taxation of non-UK domiciled individuals, or non-domiciles, by:
- increasing the existing £30,000 annual remittance basis charge to £50,000 for non-domiciles who claim the beneficial tax regime, or remittance basis, in a tax year and who have been UK-resident for 12 or more of
the last 14 tax years prior to the year of claim (the £30,000 remittance basis charge, slightly modified, will remain for shorter-term long-term residents);
- enabling non-domiciles to remit overseas income and capital gains tax-free to the UK for the purpose of commercial investment in UK businesses; and making technical simplifications to some aspects of the current remittance basis rules to remove undue administrative burdens.
The Government states that it recognises non-domiciles can make a valuable contribution to the UK economy and wants to encourage them to invest in the UK, contributing to its priority of generating growth.
These reforms include a significant new incentive for inward investment. The meaning of this is addressed in some detail in the consultation with the definition of a qualifying business incorporating trading businesses and businesses involved in the development or letting of commercial property. The latter is likely to raise some eyebrows but, possibly, in a good way.
Exclusions would include businesses focused on holding and letting residential property and leasing. The consultation makes it clear that the business structure must be a company and not, say, a partnership or LLP. It seems investors could be issued ordinary or preference shares and even make loan capital available. It seems there will be a strong set of anti-avoidance provisions.
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