Residence and domicile: Frequently Asked Questions (FAQs)

Most of the FAQs have now been incorporated into the new guidance. Those that have not are reproduced below:

Disclosure

Q HM Revenue & Customs (HMRC) said it will not require disclosure of the source of funds remitted from offshore trusts to non-domiciled beneficiaries, using the remittance basis if the remittance is taxed in full. Does this mean that HMRC will not open any enquiries into the tax affairs of non-domiciled beneficiaries?

A No. Clearly HMRC will always have the right under the Self Assessment regime to enquire into a person’s tax return to ensure the right amounts have been declared and the right tax paid.

Q HMRC says it will not require disclosure of the source of funds remitted from offshore trusts to non-domiciled beneficiaries using the remittance basis if the remittance is taxed in full. Does this mean that HMRC will not open any enquiries if the remittance is returned as a capital gain rather than income?

A No. Clearly HMRC will always have the right under the Self Assessment regime to enquire into a person’s tax return to ensure the right amounts have been declared and the right tax paid.

Non resident Trusts

Q A non UK resident interest in possession trust with a UK resident non-UK domiciled beneficiary (prior to 6 April 2008) has been in existence for a number of years. The trust's only income has been foreign source and no income has been remitted to the UK, as such no UK tax has been paid on this income.

If the foreign source income accumulated in previous years and capital of the trust are distributed in the current tax year to the beneficiary who is UK resident and waived non domicile status from 6 April 2008 will there be any UK tax consequences in the following circumstances:

  1. The income and capital is distributed to the beneficiary outside the UK
  2. The income and capital is distributed to the beneficiary in the UK

A The changes to the remittance basis rules do not require an individual to change their domicile status. Non domiciled individuals may choose to use the remittance basis, otherwise they will be taxed on the arising basis. It would appear that the beneficiary is not the settlor of the settlement.

If a beneficiary is taxed on the arising basis from 6 April 2008 then any income distributed to the beneficiary or gains treated as accruing to the beneficiary from 2008-09 will be chargeable to tax on the arising basis whether or not the income or gains are provided within or outside the UK. Any income which arose prior to 6 April 2008 but is not remitted to the UK until after 5 April 2008 will be charged to tax when remitted - whether or not the individual is a remittance basis user at the time of the remittance.

Interaction of S624 ITTOIA and S 629 ITTOIA

Q 1. How do section 624 ITTOIA and section 629 ITTOIA interact where you have a non dom UK resident parent not electing to use the remittance basis and a non dom child electing to use the remittance basis for 2008-2009?

2. Does it apply where (the relevant capital and accumulated untaxed income) arose from an outright gift by the parent under a bare trust?

3. What is the position where both parent and child do not elect?

4. Please distinguish between pre 09 March 1999 and post 09 March 1999 gifts.

5. Can the trustees of the bare trust remit the accumulated income and capital to the UK in 2007 -2008 where the source ceasing rules have been used in prior years without a S660A or B tax charge on the settlor or a tax charge on the child?

6. What is the tax position of income left offshore arising in 2008-09 on the bare trusts?

A 1. Assuming that the parent is the settlor and settlor/spouse/civil partner can benefit from the trust then the income of the trustees is taxed on the settlor on an arising basis. If the settlor/spouse/civil partner are excluded from benefiting then the trust is taxed in the normal way but payments made to a minor child of the settlor are treated as the income of the settlor and not the income of the child (see section 629(1) so the child’s election is simply irrelevant.

2. Yes, income arising under a bare trust for a minor is treated as the income of the parent whether or not payment is made - section 629(1)(b)

3. See answer to 1 & 2 above

4. Before March 99 you couldn’t use what was section 660B to attribute the income of a bare trust for a minor to a settlor parent unless a payment had been made to a child. Where the parental gift, from which income arises, was made before that date that continues to be the case. There will be a small number of trusts set up before March 1999 which get around the change but this will cease to be relevant in March 2017 when the beneficiaries cease to be minors.

5. The normal rules apply for the particular source or charging provision, but will be subject to the remittance basis rules now contained in Schedule 7, Finance Act 2008. Where legislation deems income to be chargeable on an individual then the question of whether the remittance basis applies depends on whether or not the chargeable person has made a claim (where applicable) for it to apply. The question of whether there has been a remittance will depend on the actual facts.

6. See answer to 5 above

Interrelation between s727 or s731 ITA and s87

Q Could it be clarified that where a payment has been made - such as one under s731 which has attracted relevant income but has been protected from tax by non remittance - such a payment will not be regarded as a capital payment for s87 purposes?

A Where a payment (benefit) results in an amount becoming taxable by virtue of s731 ITA 2007, but the charge is deferred by a remittance basis claim because no relevant amount has at that time been remitted to the UK, the benefit will not also be taken into account for the purpose of s87 TCGA. Where the ‘capital receipt’ condition is met for the purpose of a charge under s727 ITA, even though the charge may be deferred by a remittance basis claim, nothing in that section alters the nature of any payment that triggered the charge.

US investment and retirement accounts

Q I am US domiciled and have been living in the UK for 10 years. I hold three types of investment accounts in the US: a brokerage account and two different retirement accounts. My first retirement account is called a Roth IRA, similar to an ISA in that it grows tax free forever and you are not taxed in the US when you withdraw from it during retirement. The other account is called a Traditional IRA which is similar to a UK personal pension in that growth is tax deferred, ie you only pay tax on the income that you take from it during retirement. The third type of account that I hold is a standard brokerage account, ie stocks, mutual funds (similar to unit trusts), etc. I will not be making withdrawals from these accounts until I am retired.
Can you confirm whether these US retirement vehicles will be subject to UK tax?

A The tax treatment is different for the IRAs and the brokerage account.

Brokerage account - any income and gains from this investment will be taxed on the arising basis, unless you make a claim for the remittance basis to apply, in which case you will only be taxed on sums remitted to the UK.

IRAs - the UK/US Double Tax convention was amended in 2003 which made significant changes to the treatment of pensions (Article 17 of the convention). These comments apply to the UK tax years from 2003-04.

Roth IRA - paragraph 1(b) of article 17 provides for a distribution to be exempt from tax in the UK to the extent that it would be exempt in the US. This means that withdrawals from this IRA should be exempt from UK tax.

Traditional IRA - the UK treatment follows the US treatment: sums are taxed on withdrawal. But, of course, if you make a claim for the remittance basis to apply you will only be taxed on sums remitted to the UK.

Cross-collateralisation of debts

Q Many banks are currently setting up dedicated accounts (with capital of say £100) which will earn just sufficient income (say £1) to be used as nominated income for the purposes of the £30k charge. However, under their standard terms and conditions, the bank will often have a floating charge over every account the individual has with them as support for any lending. If any of that lending is brought into the UK then there is a concern that the £1 income in the nominated account might be said to be 'used outside the UK in respect of a relevant debt' because it is, theoretically at least, capable of being taken in support of the borrowing under the cross-collateralisation. In practice, of course, the £1 in the nominated income account makes no difference one way or the other to the bank's security. One answer to this, of course, is for the banks to change their standard terms and conditions to exclude the nominated account. However, this is easier said than done and is unlikely in most cases to be done before 6 April 2009. The concern, as you will realise, is that if any nominated income is - as a result of this - deemed to be remitted then this results in re-characterisation under s809I and s809J, spoiling careful account segregation forever afterwards.

Is there any possibility that we could have some de minimis here so that, say, up to £100 of nominated income would not be treated as remitted in these circumstances?

A No. Whether or not this is an issue will depend on the terms and conditions attached to the accounts and loans held with the bank or other financial institution. If individuals are concerned about this issue then it would make sense to simply open a separate account with a different financial institution.

Offshore Life Insurance Policies

Q What is the tax treatment of payments deriving from a part-surrender of an overseas insurance policy under the remittance basis?

A Where an individual purchases an overseas life insurance, or other income-generating, policy and subsequently part of that policy is surrendered for a cash payment and that money is brought to the UK, such payments will be treated as taxable remittances to the extent that the purchase of the original premium was made with the individual’s untaxed foreign income and gains that would have been taxed on the remittance basis if remitted to the UK. Such remittances are regarded as derived from the untaxed foreign income and gains used to purchase the policy.

Nominated income and Discretionary Trusts

Q An individual may have no, or virtually no, overseas income of his own, but may be taxable, under the provisions of sections 720 ITA and 624 ITTOIA, on the income of a discretionary trust. As a result, he is treated as having sufficient income that it may be sensible for him to pay the £30,000 levy to claim the remittance basis. Assuming that he does so and wishes to nominate income, with a view to possibly later claiming a tax credit when the income is remitted (assuming that the client wants to cover all circumstances, including one in which eventually all his overseas income and gains are remitted to the UK) he would need to nominate income within the trust. Since the income is not his own in law, whatever the position for tax purposes, then in order for him to remit the funds and claim the tax credit the trust would need to make a distribution of this income to him. It is not clear whether, in making the transfer, the tax credit would still continue to attach to the income, in the hands of the individual.

We consider that, in these circumstances, section 743 of ITA would operate, such that the distribution of income from the discretionary trust would not be treated as a new source of income, and it is our understanding that HMRC take a similar view with regard to the provisions of section 624 ITTOIA. As a result the distribution would simply be a transfer of income, treated for tax purposes as already having arisen to the client, into the client’s hands. As such, assuming that all untaxed income and gains of the client had already been remitted to the UK, he should be able to remit this income and claim a credit for the £30,000 levy.

A If the income of trustees is deemed to be that of the settlor under section 624 ITTOIA, any actual payments made to the settlor are ignored for income tax purposes (see section 685A (5) ITTOIA). Of course, if the remittance basis applies, these two events are likely to occur in the same tax period, but the charge on the settlor becomes liable under section 624 ITTOIA, so there will be no charge on the annual payment made by the trustees, whilst section 623 ITTOIA will allow the settlor the deductions and reliefs to which they would have been entitled had they actually received the income.