Tax Update for Non-UK Residents & Non-UK
Withdrawal of Personal Allowances for UK Non-Residents
The Government has announced a consultation on a proposal to restrict the availability of the personal income tax allowance (currently £10,000 and due to rise to £10,500 on 6 April 2015) where the individual is non-UK resident but has UK source income. Individuals earning annual income over £120,000 are unaffected because UK residents lose entitlement to any personal allowance at that level. There are several categories of people potentially affected if the personal allowance (“PA”) is eliminated for non-UK residents.
People working in the UK only for a few months (over 110,000 people)
These individuals currently pay UK tax on their earnings and receive the benefit of a PA. In most cases they will also pay tax on their UK income in their country of residence but receive credit for the UK tax paid (under a double tax treaty). Provided that the country of residence has an income tax rate at or above the UK tax rate, the individual will pay the same level of tax overall. There is a potential problem if the income tax rate in the country of residence is lower than in the UK or if there is no double tax treaty between the UK and the country of residence.
Non-residents receiving UK rental income (about 175,000 people)
These individuals are in the same position as people working temporarily in the UK and may be unaffected provided that there is a double tax treaty that will provide relief.
UK Pensioners retired overseas (about 1.2m people)
Many such individuals remain technically UK resident and will therefore continue to be able to claim the allowance. Others may be in a situation where a double tax treaty means that their UK State pension and personal/private pensions are not taxed by the UK – they would only be affected to the extent that they have other UK source income such as rents or interest. Pensions earned on Government service such as NHS and local authority staff are taxable only in the UK and could be badly affected by the withdrawal of the PA. Accordingly, the Government does not propose to remove the allowance used to cover such income. Where, for example, the individual receives a Government pension of £7,000 and rents of £3,000 only £7,000 of pa would be given leaving the £3,000 taxable. The consultation ends on 9 October and so it is a reasonable assumption that any changes to the PA are likely to be included in the 2015 Budget Statement. Due to the difficulties of processing such changes it is possible that implementation may not take place until 6 April 2016.
Update Re Consultation on Capital Gains Tax on Non-UK Residents
You will recall that we advised earlier in the year the UK Treasury plans to implement a capital gains tax (CGT) charge on the disposal of UK residential property by non-residents. The proposed charge will be effective from April 2015 and applies only to gains arising from that date. The consultation closed at the end of June and the first details following the closure have been announced, the full response on the consultation will be published in the autumn. HMRC have announced that the new CGT charge on non-residents disposing of UK residential property, will not extend to institutional investors and companies with diverse ownership.
In the Autumn Statement last year, the Chancellor announced the new CGT charge for non-resident investors in UK residential property, click here to see our full article. Under current law and unlike other countries that collect tax on gains relating to the disposals of residential property located within their jurisdiction, the UK does not generally charge CGT on disposals by non-UK residents. UK resident individuals are subject to CGT on disposals of any residential property that is not their primary residence, including gains on any residential property they own abroad. Residential property owned through trusts, companies and funds outside the UK is not usually subject to CGT or corporation tax in the UK. The new CGT charge is being introduced to align the position of UK residents and non-UK residents. Initially, HMRC intended that the new charge would apply to any non-residents disposing of UK residential property, except for charities and pension funds equivalent to those that are tax exempt in the UK. Respondents to the consultation urged that such a blanket charge would limit overseas institutional investment in the UK, particularly in the private rented sector which would adversely affect housing supply. The Treasury has now announced that ‘widely held’ investors or companies will not be subject to the proposed extension of CGT to non-UK residents. Instead they intend to set the scope of the tax on corporate investors and other collectives by reference to a form of “close company” test drawing on existing legislative definitions. The full response on the consultation will be published in the autumn, however this recent announcement will allay the fears of institutional investors.
HMRC launch further attack on non-domiciled individuals who are UK resident for tax purposes.
Non-UK domiciled Individuals who are resident in the UK and receive substantial income and capital gains on assets held abroad can elect to be taxed on the “remittance basis” so that no UK tax is paid on income and gains left offshore. Where a claim is made for the remittance basis to apply, the taxpayer will have to pay a fixed annual charge if they are long-term UK resident as follows: a) £30,000 if the claimant has been UK resident in at least seven of the previous nine tax years; b) £50,000 if the claimant has been UK resident in at least 12 of the previous 14 tax years.
In addition, they are not entitled to the personal allowance (currently £10,000) or annual capital gains exemption (currently £11,000) for that year. The decision to claim the remittance basis can be made annually. There is clearly a remittance of foreign income or chargeable gains if money or other property is brought to, or received or used in the UK by or for the benefit of the taxpayer (or close relative, partner or connected company). The servicing of loans in the UK out of foreign income and gains is one such example.
In relation to commercial loans raised in the UK and repaid out of overseas income and gains the previous position was that the repayments were treated as remittances. However, HMRC announced on 4 August the withdrawal of its existing treatment of commercial loans under which only payments to service such loans are taxed as remittances and not the underlying collateral. In particular, HMRC will now regard a remittance as having arisen where an “non-dom” has obtained a loan in the UK or overseas, secured using foreign income or gains that remains overseas, and remits part or whole of that loan to the UK – the individual will be considered to have remitted foreign income or gains to the extent of the loan amount remitted. For example, if you have a £1 million loan facility secured by foreign income or gains of £1 million, and £100,000 is borrowed and brought to the UK, then you are making a taxable remittance of £100,000 at that point. The change also means non-domiciled individuals would now be taxed on unremitted foreign income or gains used to secure the full amount of a loan in the UK. HMRC has made its decision without consultation and slipped out this particular piece of bad news during the holiday period. This change is particularly galling because HMRC are now referring to its former treatment to prevent a double tax charge arising as a 'concession', when this was understood to be an interpretation of the law. There are now concerns about what would happen where a bank has a right of set-off against all assets of the borrower, so that although the primary collateral is in the UK, the bank has offshore assets as secondary security. This attempt to prevent avoidance will probably catch many commercial situations. HMRC's position on arrangements set up before today's date is that taxpayers should notify full details to HMRC if they have used foreign income or gains as collateral for a loan and have not declared a remittance. HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the previous “concession”, provided:
a) the taxpayer gives a written undertaking (which is subsequently honoured) by 31 December 2015 that the foreign income or gains security either has been, or will be replaced by non foreign income or gains security before 5 April 2016, or b) the loan or part of the loan that was remitted to the UK either has been, or will be repaid before 5 April 2016. The notification should be sent to HMRC at Bootle and should include the amount of foreign income or gains used as collateral and the amount of the loan remitted to the UK (if not the full amount).
We will post further updates regarding the above matters as announcements are made, in the meantime should you need to discuss any of the above, please do not hesitate to contact us.
Harbour Key Limited
+44 (0) 1242 244115
+44 (0) 1242 241747
28 August 2014