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Non-Domicile Status- Residence, Domicile and the Remittance Basis: Operational changes

The Finance Act 2008 made a number of changes to the remittance basis tax rules and some changes to the residence rules. These changes followed the ending of the review of residence and domicile which started in 2002. The changes can be found in sections 24 and 25 and Schedule 7 of the Finance Act 2008 but can be summarised broadly as:

  • Most individuals now need to make an annual claim to the remittance basis.
  • Individuals claiming the remittance basis of taxation, where they have unremitted foreign income or gains of £2,000 or more arising in the tax year, lose their entitlement to personal allowances and the annual exempt amount for Capital Gains Tax.
  • The introduction of an annual £30,000 tax charge for adult remittance basis users resident in the UK in the current year and for seven or more of the previous nine years where they have unremitted foreign income or gains of £2,000 or more in the current year.
  • Changing the day counting rules that determine when someone becomes resident in the UK under the 183-day rule to count as a day any day upon which an individual is in the UK at the end of that day (ie at midnight), subject to a new rule for transit passengers.
  • Closure of a number of loopholes and flaws in the remittance basis that allowed people to bring untaxed income or gains into the UK tax-free.

In the light of these changes HM Revenue & Customs (HMRC) is making some changes to the way we deal with residence, domicile and the remittance basis of taxation.

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Guidance

The main HMRC guidance for residence, domicile and remittance basis issues has for many years been the IR20. This was updated last year to incorporate some changes introduced by Finance Act 2008 but, as already announced; we recognise that IR20 needs significant revision. So guidance to replace the IR20 will be published soon and at the same time the IR20 will be withdrawn. We will also be withdrawing any other HMRC guidance on residence and ordinary residence contained in other HMRC manuals, Statements of Practice and publications (for example R&CB 01/07, TB52, SP/A10, SP3/81, SP2/91, SP17/91). In the light of this any practices associated with the old guidance, whether in IR20 or elsewhere, will not apply from 6 April 2009, unless provided for in the new guidance. That new guidance will be in the form of a new set of internet based guidance supported by HMRC guidance manuals for our staff which are also published on the Internet.

The new guidance reflects the 2008 Finance Act changes, other changes from other Finance Acts and recent court decisions in this area. Some wholly new guidance is being issued in some areas, such as domicile, to help people correctly self-assess their tax liability. Some interim guidance had been made available already, mostly in the form of Frequently Asked Questions (FAQs) and the explanatory notes for Schedule 7 Finance Act 2008. This interim guidance will be incorporated into the new permanent guidance as appropriate. The following guidance has already been released:

The remaining guidance will be published shortly and will include:

  • A simple guide to residence, ordinary residence and domicile.
  • The ‘Residence, Domicile & the Remittance Basis’ guidance (HMRC6).
  • This replaces the old IR20. New guidance on the remittance basis rules.
  • (This will form part of the new ‘Residence, Domicile and Remittances’ manual for HMRC staff.) Some new guidance on domicile. (This will move to the Residence, Domicile and Remittances manual in due course.)
  • Some new guidance on non-resident trusts.
  • Some guidance on the application of the remittance basis to the Transfer of Assets legislation. (This will form part of the new ‘Transfer of Assets’ manual for HMRC staff.) Updates to the Capital Gains Tax manual to reflect the changes to the remittance basis.
  • A new short guide for international students.
  • Revised guidance on letting property abroad.

Most of the guidance will initially be published on the ‘Residence and domicile : Guidance on the new tax rules‘ pages but over the coming months it will be incorporated into existing guidance manuals as appropriate and published as part of our general internet guidance. The same webpage will provide links to any guidance published in existing guidance manuals

Remittance basis users whose foreign income and gains is less than £2,000

Under section 809D ITA 2007 an individual who is entitled to claim the remittance basis of taxation but whose total unremitted foreign income and gains is less than £2,000 in any tax year, can use the remittance basis without having to make a formal claim each year by submitting a Self Assessment tax return. Also, such users will not lose any of their Personal Allowances or their Annual Exempt Amount. Individuals making use of section 809D are still taxable on any foreign income or gains remitted to the UK.

Remittances may be in the form of cash, assets or services enjoyed in the UK. Taxable remittances have to be included on a self assessment tax return. Also, some people who are able to use the remittance basis under section 809D will already be within self assessment and so have an annual Self Assessment tax return to make. There is a new box on the supplementary ‘Residence and Remittance Basis etc.’ pages (SA109) for such individuals to advise HMRC of their use of the remittance basis under section 809D.

This ensures they continue to get their Personal Allowances and the Annual Exempt Amount. It is recognised that some individuals, in particular those on low income, may make small cash remittances to the UK, out of foreign income or gains, and as a result have to complete a Self Assessment tax return possibly to pay only a small amount of tax. This is particularly the case where foreign tax has already been paid on the income or gains. Where an individual who is making use of section 809D remits less than a total of £500 in cash, which arises from foreign income or gains, into the UK during the tax year, then HMRC will accept that such an individual does not need to make a Self Assessment Tax return simply to pay the tax on those cash remittances. However where such an individual is required to complete a Self Assessment tax return for any other reason, or HMRC serves them with a notice to make a return, then they will need to include those remittances on the return and pay the tax due. This practice will apply for 2008-09 and subsequent years.

Individuals paying the £30,000 Remittance Basis Charge

The £30,000 charge is not a separate stand alone tax charge but rather a charge to income tax or Capital Gains Tax on unremitted foreign income or gains. The fact that the £30,000 constitutes income tax or Capital Gains Tax (or a combination of the two) ensures that individuals who remit all of their foreign income and gains to the UK can get credit for the £30,000 against their UK liabilities. In order to obtain that relief individuals have to make sure they make appropriate nominations of the income or gains upon which the £30,000 is paid.

The rules for nominating income and gains upon which the £30,000 is paid, and the rules for identifying what is taxed if those nominated income or gains are later remitted to the UK, can be complex. To help ensure individuals who pay the £30,000 get the right level of customer support from HMRC, we have decided that most individuals who pay the £30,000, or have paid it in the past, will have their tax affairs dealt with in one HMRC office from 2009-10. This will be the CAR Residency office in Castle Meadow, Nottingham. Customers who are sent a self assessment return by a different office should make the return to the office issuing that return. Once the return has been received by HMRC we will arrange for the individual’s tax records to be transferred to the CAR Residency office in Nottingham and advise the individual and any agent, accordingly. Until such time as individuals or their agents receive such a notification they should continue to deal with their current tax office.