Common tax planning Q&A's for non dom traders
31/07/2009
There have been a number of changes to the tax treatment of non doms after April 2008. Any non doms living in the UK who are trading or investing in the overseas markets will be directly impacted by many of the changes. In this article we look at some of the common tax planning Q&A's that may arise for many traders and investors. Will I have to pay the £30,000 tax charge if I'm a non dom? Not necessarily. This is not a charge on non doms but rather a charge on the right to use the remittance basis of tax. You'll only have to pay the £30,000 tax charge if you're: - a non UK domiciliary
- who has lived in the UK for at least 8 of the last 10 years
- and who claims the remittance basis
If you don't claim the remittance basis or haven't lived here for the 8 year period you won't have to pay the £30,000 tax charge. If I want to use the remittance basis for overseas gains on my trades will I always have to claim it? Usually yes. It is only if you have unremitted overseas income or gains of less than £2,000 that no claim will be necessary. In this case the remittance basis will apply automatically and the income/gains of up to £2,000 could be retained overseas free of UK tax without suffering the £30,000 annual charge.
How will I claim the remittance basis? If you do want to claim the remittance basis of tax you will need to complete the non dom section of the tax return (in the residence & remittance basis supplementary pages). Will I always lose my personal allowance/annual exemption? If you claim the remittance basis you will lose the personal allowance (including the blind persons allowance) and the CGT annual exemption. There is an exception to this where the unremitted overseas income or gains is less than £2,000. In this case the allowances won't be lost. Does the loss of the annual exemption only apply to overseas gains? If you do claim the remittance basis and lose the annual exemption it will not be available for offset against UK or overseas gains. I have overseas income -- should I claim the remittance basis or not? Generally speaking if you are subject to the new £30,000 tax charge and the overseas unremitted income is more than £81,000 it is worthwhile claiming the remittance basis. If have unremitted gains they would need to be more than £176,000 to make it worthwhile. Can I still avoid remitting income by gifting cash to family overseas? The legislation has clamped down on this practice. In the past it used to be possible to gift cash to family members overseas who would then bring the cash into the UK. The new legislation looks to class this as a remittance if the transfer into the UK was by or for the benefit of the non dom or a connected party. A connected party includes a spouse or civil partner, someone you are living with as a spouse or civil partner and a variety of family members (including children, parents siblings etc). If you wanted to use this technique now you would need to either transfer to friends, family that you weren't connected to (eg an uncle) or possibly a company. Is it still worth having capital and income accounts? Yes it is if you are or may opt for the remittance basis in the future (and pay the £30,000 annual charge). If you're opting for the arising basis all income or gains in that year would be taxed and the capital/income accounts would have no impact on this. Any income credited to the income account would be taxed as would any capital gains in the capital account. If you were taxed on the arising basis and could use the remittance basis in the future it would be advisable to keep UK taxed income or gains out of the overseas capital and income accounts to avoid mixing up taxed overseas income or gains with unremitted and untaxed overseas income or gains. Can pre existing capital still be brought into the UK free of tax? Yes it can and this should be kept in a separate account. Can I avoid the £30,000 tax charge by losing UK residence? Yes. You can use the remittance basis without paying the £30,000 annual tax charge until you have been UK resident for at least 8 in the past 10 tax years. Once you exceed this you'll need to either stop using the remittance basis or pay the £30,000 in addition to tax on anything remitted. If you live in the UK for 5 tax years you could move out of the UK for a further 5 tax years before returning and not have to pay the £30,000 tax charge for a further 8 years or so. The requirement to look back at the last 10 years effectively means that an absence after 5 years for a further 5 years 'resets the clock'. Is non dom status still beneficial for tax purposes? Yes. It has numerous inheritance tax advantages as well as allowing the option of the remittance basis. There is also the option of retaining income or gains up to £2,000 per tax year free of UK tax. Can I raise debt overseas and settle interest out of overseas income without there being a remittance? You used to be able to obtain an overseas loan, spend the funds in the UK and use overseas income to repay the interest without there being a remittance.
The new legislation has altered this so that any settlement of the 'debt' will be classed as a remittance. As the debt includes the interest element this should make the settlement of interest from overseas a remittance.
Can I use reinvested or deferred overseas income to avoid paying UK tax? Yes you can. If you invest in overseas investments with a low income yield (eg zero type securities) there would be no income to tax and the arising basis could be used saving the £30,000 tax charge. Providing the income was below £2,000 the remittance basis could even be used to retain the income overseas without it being taxed. The investments could then be sold free of CGT after departure from the UK.
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