I am a single, 77-year-old who has been a “non dom” resident since 1996 and dependent on a modest income from foreign savings remitted to the UK. The new £30,000 rule will soon wipe me out, while the alternative of paying tax on unremitted income would also be costly. Are there loopholes for purchasing assets abroad and remitting them to the UK without liability to tax? Would premium bonds fall into this category, for example?
Leonie Kerswill, tax partner at accountants PricewaterhouseCoopers, says that, under current “non dom” rules, income and capital gains from overseas investments and assets are only liable to UK tax if remitted or brought into the UK.
But under the proposed new legislation from April 6, unless overseas income is below £1,000, the “cost” of choosing to be taxed on the remittance basis will be £30,000 a year (for non doms resident in the UK for seven or more years) as well as the loss of the personal allowance and the annual capital gains tax exemption (currently £9,200).
It was initially also thought that bringing the £30,000 into the UK from overseas income or gains could itself create a tax charge but HMRC now says this will not be the case.
The alternative to this new annual levy is to pay UK tax on worldwide income and gains. This will mean additional costs in terms of collating information, calculating income and gains and filing returns.
The position will be further complicated if any of the non-UK income and gains has suffered overseas tax: those affected will need to ensure they get the proper credit against their UK tax so they don’t end up paying double tax.
Your query about purchasing assets abroad and bringing them to the UK without a tax charge refers to the fact that, under current rules, overseas investment income is only taxed in the UK if it is remitted as cash.
Overseas employment income and capital gains are taxed when remitted in any form. This means, for example, that you could use non-UK bank interest (but not overseas gains) to buy a painting in France and bring it into the UK with no tax charge. But if the painting were then sold in the UK, a tax charge would arise as there would be cash in the UK.
This “import” arrangement wouldn’t work in the case of premium bonds as these are UK assets.
This different treatment of overseas monies was seen by HM Revenue & Customs as somewhat anomalous and under the new draft legislation from April 6, all remittances of overseas investment income will be treated in the same way as other overseas income and gains.
As originally drafted, there were also concerns that the proposed new rules would catch such non-cash assets if they were still in the UK on April 6 2008 but HMRC has now confirmed that this is not the intention – unless the asset is subsequently removed from the UK and then later remitted.
One idea that you might consider is gifting offshore income or gains to someone, maybe a relative, outside the UK. If that person then brings the money to the UK before April 6, it won’t give rise to a taxable remittance.
There are, however, conditions that must be satisfied to ensure that the remittance of the gift isn’t simply taxed on you, so advice should be sought.
It should also be remembered that assets in the UK will fall into the UK inheritance tax net, whereas overseas assets will not, until individuals have been tax resident for 17 out of 20 years.
Furthermore, you might use the changes as an opportunity to review your investment strategy. If in the future you are unable to take advantage of the remittance basis of taxation you should take full advantage of tax-favoured investments such as individual savings accounts (Isas) and some National Savings products (including premium bonds), and use your annual capital gains tax exemption.
How is pension lump sum taxed?
Wealth Questions (February 2/3) said that most people in reasonable health are likely to benefit from deferring the state pension for up to five years – for either the enhanced pension or the lump sum on offer. How is the lump sum option taxed – all in one year or spread, and at what rate?
Tom McPhail, head of
pensions research at Hargreaves Lansdown financial advisers, says the taxation of the lump sum from a deferred state pension offers an interesting opportunity to exploit the tax system.
The government applies income tax to the lump sum at the same rate as the tax paid on your other income for that tax year – the idea being to avoid the lump sum pushing you into a higher tax bracket.
This means that if you are able to manipulate your income (perhaps by using a pension drawdown plan) to reduce your tax band in the year in which the deferred lump sum is paid, then you can also reduce the rate of tax applied to the lump sum.
With the planned scrapping of the 10 per cent band from April (at least for these purposes) there will be less scope to do this in future, but it might still make the difference between being taxed at 40 and 20 per cent.
The advice in this column is specific to the facts surrounding the questions posed. Neither the FT nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.