Plus ca change

For those of us advising international private clients, November’s Autumn Statement was as much about what will not change (yet), as about what will, bringing to mind Lady Astor’s observation: “The main dangers in this life are the people who want to change everything... or nothing.”

The big story was the delay in the introduction of a statutory residence test. But, as a consequence, what will change has not received as much prominence as it deserves. For once, there is a development in the taxation of non-doms that, as well as being good news for them, should be good news for all of us. The new relief allowing remittance basis users to invest foreign income and gains in UK businesses without being liable to tax on those funds is a change that should have real positive implications for the economy (and we’re not hearing much of that at the moment). Also, I am not sure the current law on residence needs to provoke quite so much wailing and gnashing of teeth.

Standing start

Let’s begin with what is not going ?to change.

In an increasingly mobile world, how one determines whether someone is resident in the UK or not for tax purposes affects more of us. Residence determines whether an individual is potentially subject to UK tax on all their income and capital gains or only certain types of UK source income. Currently the law of residence is based on limited statutory provisions and a venerable body of case law, much of it from another age. As a consequence, practitioners are heavily reliant on HM Revenue & Customs guidance, and, although there is now good authority that it is reasonable for a taxpayer to rely on this guidance, great care needs to be taken in doing this, and the guidance itself has become more equivocal.

The campaign for a statutory test is based on the premise that the current state of the law is therefore unsatisfactory. For the majority of clients, even those who decide to move to the UK or leave the UK, it is in fact fairly satisfactory. Sometimes vast amounts hinge on the question of whether someone is resident or not and it is nerve-racking not to be able to know with absolute certainty, but that affects a very special category of taxpayer who will often be knowingly pushing matters to the limit to avoid tax altogether.

In most cases it is quite clear whether or not someone lives in the UK, and the case law and guidance broadly reflect this common-sense view. Even where it is not clear where someone lives, if neither of the two jurisdictions that are contesting for residence are low-taxing jurisdictions then, even if the taxpayer is arguably resident in both of them, there will be a double tax treaty to divide up the taxing rights. It is possible to take a reasonable view on the tax liabilities which is unlikely to be questioned, still less criticised.

It is not perfect, but equally the proposed new test had, or has, its faults (including that it incorporated the current uncertain law for determining certain issues). The reason for the delay is because it has not been possible to iron out these faults and, perhaps, as is often the case, seeking to spell out everything in statute only introduced further ambiguities and lacunae. Delay is therefore no bad thing.

Tidying up one or two other aspects of the law of residence which were to be dealt with at the same time has also been put back, including enshrining the ‘split-year concession’ in statute and deciding the future meaning and significance of ‘ordinary residence’. The current meaning of ‘ordinarily residence’ and when one begins being ordinarily resident really is unclear. It will be interesting to see how this is dealt with.

Ups and downs

The bad news for non-doms is that from 2012/13, those who have been in the UK for at least 12 of the last 14 tax years (not including the tax year for which tax is being reported) will have to pay an annual fee of £50,000 to qualify for the remittance basis of taxation, rather than the current £30,000. However, there should not need to be any new ‘nominated income’ accounts in future years. Due to the way in which the remittance basis charge works, it is necessary to nominate some foreign income or gains on which the charge is deemed to relate to, and subsequently remitting these nominated funds was to be avoided. Now it will not matter if taxpayers remit nominated funds of up to £10 and they don’t need to nominate any more than £10.

However, there is some good news. Currently UK resident non-doms face an upfront tax charge of up to 50 per cent for using income or gains, which arose outside the UK, to invest in the UK. This is simply because investing foreign income and gains in UK assets amounts to a remittance. A similar tax charge will currently arise if they invest through a non-UK holding company. Where a trust is in place, the trustees’ gains can currently be invested in the UK without triggering a tax charge, but any income which the trustees invest in the UK will be taxed.

From 6 April 2012, provided certain conditions are met, then such remittances will be relieved from taxation. The relief will apply to funds used within 45 days of being remitted to make equity or debt investments in private limited companies which carry out a commercial trade or have a business of generating income from land. Companies intending to carry out this activity within two years also qualify.
Companies must not be listed on a recognised stock exchange, which means it is fine if they are listed on AIM. The relief must be claimed by the second 31 January following the end of the tax year in which the remittance occurs. Investments in holding companies and non-UK companies (to the extent this would be a remittance in the first place) will fall within the relief.
The acquisition of existing shares is not an investment. It will not matter if the taxpayer or their family is employed by the business (on a commercial basis). But it is important that no relevant person receives a benefit related to the investment. The relief will also apply to investments made by offshore companies and trusts that are ‘relevant persons’ in relation to the taxpayer.

Room for manoeuvre

The existing treatment of profits made on UK investments will continue to apply, so tax will be payable on dividends and, unless a trust is involved, there will be an immediate tax on capital gains. At the point when an investment is sold, as well as any new profit, the proceeds will also contain the income or gains that were originally used to make the investment (i.e. the investment process will not ‘clean up’ the original funds). If the original foreign income and gains are not to be taxed at that point, the funds will need to be taken out of the UK within 45 days but they can be re-invested in the UK again in the future in a qualifying business. There will also be a tax charge on the original income or gains in certain other circumstances, including if the company ceases to qualify and the investment is then not disposed of and the proceeds removed from the UK or re-invested within 45 days.

There are two other changes worth noting. If an asset which was purchased with income or gains is brought to the UK, this may result in a remittance. There are some exemptions to this, such as temporary imports, but currently, even where an exemption applies, if the asset is sold then this will result in a remittance of the proceeds of sale. A new exemption will make clear certain assets can be brought to the UK for a genuine third-party sale in the UK without there being a remittance, provided the proceeds are removed from the UK immediately afterwards or invested in accordance with the new relief for investments.

Clients have long been surprised that a bank account can give rise to a capital gain, where the cash is in a foreign currency. This has also made life difficult for accountants and it is why clients are advised to hold their ‘clean capital’ in sterling. Now, withdrawing or transferring foreign currency in a bank account will not give rise to a gain for individuals, trustees and personal representatives.

All in all, despite the disappointment over what the Finance Bill does not contain, the changes that are included in the Finance Bill represent good news for international clients and their advisers, with the regime for those who decide to move to the UK made more straightforward, more attractive and more beneficial to the country.

James Badcock is a partner in the Geneva office of Collyer Bristow