Tax-Free Remittances for “Non-Doms”
By Sykes Anderson Perry Limited solicitors and chartered tax advisers in London, England
Please note that law is a complex subject and you should not rely on this article without professional advice on the facts of your case
It has been a long-standing principle of UK tax law that individuals who are resident here but not domiciled (i.e. they have an overseas background / heritage) are taxable here only on UK source income and gains and such overseas income and gains that they bring to or use in the UK (“remit”). Over time this has become less favourable for non-domiciled individuals so that, now, they must elect to be taxed on this basis and it results in loss of personal allowances. Once you have been resident in the UK for a long period, there is an annual remittance basis charge. This is £30,000 per annum after 7 years of residence and £50,000 per annum after 12 years of residence.
From 2012, the Government has sought to encourage wealthy non-doms to bring their overseas income to the UK in order to stimulate business and property investment here. This has been done through the introduction of an exemption from tax if certain conditions are met. This has not been widely publicised and, as a result, we have not seen many individuals take advantage of this exemption. It does though present some interesting opportunities for people which we consider below.
The relief has applied since 6 April 2012. So long as the monies which are brought to the UK are used to make a qualifying investment they are not treated as “remitted” to the UK and so they are not taxable. There is no restriction on the amount which can be remitted and benefit from this relief.
The investment has to be made within the period of 45 days beginning with the day on which the money is brought to or received in the UK. If funds are not invested within this time limit they will be treated as remitted and the income or gains from overseas will become taxable in the UK.
When the investment is repaid (i.e. via a loan repayment or the sale of shares), the amount of the original investment will either have to be re-invested or taken offshore within 45 days otherwise there will be a deemed remittance, which becomes taxable. If the company were to stop trading this would trigger a potentially chargeable event and funds would need to be re-invested or moved offshore to avoid becoming taxable.
At no stage can there be any benefit (e.g. availability of property as a dwelling) given to the individual or anyone connected to them. If such a benefit is provided then the remittance will become taxable. You are entitled to commercial interest and / or dividends though. Everything must be on a commercial / arm’s length basis.
In order to qualify for the relief, the investment must meet a number of criteria including:
- The investment must be into a private limited company (a limited liability body corporate (but not an LLP), none of whose shares are listed on a recognised stock exchange. There is no restriction on the level of shareholding which the individual can have in the company so funds can be invested in the individual’s personal trading company. The company does not have to be a UK company.
- This private limited company must be either a trading company; a stakeholder company (i.e. a company which itself will invest in trading companies – it must hold one or more such investments at the time you invest, or it must be preparing to make such investments within 2 years); or a holding company (i.e. a company which itself owns other trading companies). To be considered to be trading, a company must have an activity that is conducted on a commercial basis and with a view to generating profits. So long as the target company’s activity is substantially (more than 80%) made up of commercial trading this is an eligible company. Initially “trading” was stated to include commercial property investment. Helpfully the final legislation extended the relief to all property investment (including residential property acquired for development, trade or rental).
- An investment can qualify only if either shares in the company are issued to the person or a loan (secured or unsecured) is made by the person to the company. The funds cannot be used for a share purchase for example.
- The individual has to make a claim for this relief on their self-assessment return for the relevant year.
Income and gains made on the investment will be taxable in the UK in the ordinary way but the original funds remain outside the scope of UK tax provided the conditions above are satisfied.
Structuring the investment
It is also important to note that the investment can be made by the non-dom, or by a person (including a company) connected to them, so long as it would constitute a remittance were it not for this exemption.
This also helps to stop an exposure to UK inheritance tax for non-doms as, rather than holding UK assets directly (e.g. shares or a debt from a UK company) the investment can be made indirectly via a non-UK company.
This is a structure that has particular relevance for UK investment property. Buy-to-let residential properties are a popular investment for non-doms. These investments can now be made with offshore income and gains without triggering an income tax charge, which is extremely helpful. Of course the best structure for your purposes will depend on your exact circumstances and you should obtain advice in each case.
It is possible to obtain prior clearance from HMRC to confirm that the remittance is not taxable. As the remittance will have to be declared and the relief claimed in any case, this may be worth considering.
This relief provides significant investment opportunities for non-doms who previously had to leave their funds offshore to avoid any UK taxation. The legislation provides a fair amount of flexibility meaning that offshore funds can be contributed to the individual’s personal trading company by way of a loan or capital contribution.
Another attractive option would be for individuals to invest in the residential property market for rental purposes. Such an investment should still be possible via a non-UK company, which offers further advantages although advice will be required in all circumstances.
Solicitor Advocate, Barrister (Unregistered) and Chartered Tax Adviser