Sarah: A non-dom can be taxed in one of two different ways really. They can either choose to be taxed on an arising basis, so their worldwide income and gains would be taxed in the UK, or they can make a claim to be taxed on a remittance basis and that means that they are only taxed on their UK source income and gains and taxed on their foreign income and gains if they remit them to the UK.
If you want to be taxed on the remittance basis, for the first 7 years you can do that just by making a claim, there is no charge. Once you get to the 8th year, then there is a £30,000 per year charge for claiming the remittance basis. When you have been resident for 12 of the last 14 years then there is a £60,000 charge for claiming the remittance basis.
Once you have been resident for 15 out of the last 20 tax years, then it is not possible to claim the remittance basis anymore.
There are advantages and disadvantages to both the arising basis and remittance basis of taxation, so really tax payers should take advice before they make a decision, so they can understand the long term implications of both.
Sarah: The definition of a taxable remittance is incredibly complex but in its most simple terms, if somebody brings foreign income or gains into the UK either themselves or a relevant person brings them into the UK. It could be something as simple as a transfer from a foreign bank account into a UK bank account, if there is untaxed income or gains in the account then that would be a remittance.
But it could be something slightly less obvious, so if you use a UK credit card in the UK or overseas, then you repay that with foreign income and gains, that would be a taxable remittance, or if you use a foreign credit card in the UK and you pay the balance of that card with foreign income and gains, again that would be a remittance. Things like buying furniture or artwork overseas and bringing them into the UK. If they were bought with foreign income and gains, it would be remittance. There’re also incredibly complex rules around loans.
So really, I think that if you have foreign income and gains that you want to use for a transaction and there’s any kind of connection with the UK, then it’s best to just seek advice before you start the transaction just to make sure there’s not going to be any remittance issues.
Sarah: For offshore accounts, I think it is really important that the structuring is done right so that there is flexibility to bring money into the UK free of tax or at lower tax rates where possible. The first thing that people need to understand which is really important, is that any money in accounts that was in the accounts before a person becomes resident in the UK will be clean money for UK tax purposes.
So it’s really important that when people come to the UK that they don’t add to accounts that were in existence before they came to the UK; and when I say don’t add to them I mean even down to if it’s a bank account and the bank account receives interest, then that interest should go into a separate income account rather than be added to that clean account. Otherwise you’ll taint your clean account and that will mean that there could be tax implications if you bring your money into the UK.
When you get to the UK in an ideal world, you would set up new bank accounts overseas and as a very minimum you would set up 3 bank accounts. You would set up an account to hold any clean monies-monies that could come to the UK tax free, you’d set up an account to hold capital gains so that when you sell investments you would put the proceeds in that account and then you would have an income account that would hold dividend income or bank interest or investment interest. That would kind of give you the maximum flexibility in terms of being in control of what you remit to the UK.
Sarah: A mixed fund is an overseas bank account which contains more than one kind of income, capital gains or capital and if you want to bring money to the UK from a mixed fund account, there is a strict ordering rule set out in the legislation and essentially you would look at the account and you would look at what’s in the account and you look at what’s in the account on a tax year by tax years basis starting with the most recent year. Then the rules broadly work so that you bring what’s in the account which is taxable at the highest rates first. So, you would normally bring in income taxable at the 45% rate first and then capital gains taxable at capital gains tax rate, and the last thing for each tax year you would bring in would be any clean capital which wouldn’t be taxable in the UK.
If you were going to make a transfer to another offshore account rather than to an account in the UK, those ordering rules are turned off and instead you will be deemed to transfer a proportion of everything in the account out of the account and into the offshore account, which means it’s not possible to clean up a mixed fund account by making transfers to another foreign account.
At the moment however HMRC have got a mixed fund cleansing opportunity running, which means that until the 5th April 2019, if you follow their guidelines you can identify within your account which elements are capital gains, income or clean capital and you can separate those out and transfer into their own individual foreign bank accounts so that you can isolate your clean capital which would allow you to then bring that into the UK.
There are some guidelines that you need to follow, so if that is something that would be of interest to you then I suggest that they take advice and get some help on doing that in the best way possible.
Sarah: When a tax payer has been resident in the UK for 15 of the last 20 tax years, they will be deemed domiciled for all taxes, and that means for income and capital gains tax purposes, they are taxable on their worldwide income and gains, and it’s not then possible to claim the remittance basis of taxation. And for inheritance tax purposes, on their death, their worldwide estate would be subject to inheritance tax.
It’s really important, therefore, that a deemed domiciled person seeks advice before they become deemed domiciled because it is possible to structure your affairs in a way in order to minimise your exposure to these taxes going forward.
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