The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Residence and Domicile - Update Changes from 6 April 2008

Carolyn Steppler and Elizabeth Fothergill


Q1 2008


In the Spring 2008 issue of AIMA Journal, we wrote an article on the proposed changes to the UK tax rules on residence and domicile from 6 April 2008. That article was written prior to the Budget on 12 March and in fact there were significant changes between our first article and the regime coming into force. In particular, the proposed changes to the UK tax treatment of offshore trusts were almost entirely rewritten. This was partly, at least, as a result of extensive lobbying by the tax profession and non-domiciled community in response to the extremely wide reaching initial proposals which, it was agreed, would drive many non-domiciled taxpayers out of the UK.

In this article we summarise the changes that have been introduced, as well as highlight which rules remain. We then identify some practical implications of the new regime, of which non-domiciled taxpayers and their advisers, both financial and tax advisers, need to be aware.

Some things have not changed

The concepts of domicile and residence remain critical to UK taxation and are largely unchanged. The main difference in this area is in counting the number of days spent in the UK for the purpose of determining whether an individual is a UK resident under the 91 and 183 day tests. Whilst the original proposal was to include days of arrival and departure in the day count tests, the final position is that from 6 April 2008 days will now be counted if an individual is in the UK at midnight on that day. This is subject to a limited exemption where the individual is in transit through the UK. These day count tests remain only HMRC practice and a subjective approach to residence, including looking at the individual’s intention and overall lifestyle, still needs to be taken into account, particularly where an individual is seeking to lose their UK residence status. The government is under continued pressure to produce a clear statutory definition of residence based wholly on the counting of days. Whether this will be forthcoming remains to be seen.

Individuals who are UK resident but non-UK domiciled can still take advantage of the “remittance basis” of taxation. Where applicable, this means that they will not be subject to UK tax on their overseas income and gains, unless those monies are remitted to the UK.

Offshore trusts continue to be an extremely useful tax planning tool for non-domiciled individuals, but the way in which such trusts are subject to UK tax on distributions to non-domiciled beneficiaries has been significantly altered (see further below).

Changes to the remittance basis for individuals

For the tax year 2008/09 onwards, the remittance basis will only be available if a taxpayer claims it via his tax return (subject to a £2,000 de minimis). If the taxpayer claims the remittance basis in a particular tax year, he will lose his annual income tax allowance and capital gains tax exemption for that tax year. A decision will need to be taken annually as to whether or not to claim the remittance basis.

As initially proposed there will be a new annual charge of £30,000 where the remittance basis is claimed by a taxpayer who has been resident in the UK for seven or more of the last nine tax years. If the £30,000 charge applies, the taxpayer must nominate certain non-UK income/gains by reference to which the £30,000 will be paid. This decision is critical as if any of the nominated income/gains is/are brought to the UK before any other of the taxpayer’s overseas income/gains, complex remittance rules apply. This could potentially result in a significant tax bill being triggered merely by remitting just £1 of nominated income/gains. Advice should be taken as to the appropriate monies, in respect of which, to make the nomination and how to arrange the taxpayer’s overseas bank accounts accordingly.

Another consideration for the taxpayer in the first tax year in which they make a claim for the remittance basis, is whether to make an irrevocable, once and for all, election for capital losses made on non-UK assets to be allowable. This may appear to be a simple decision to which one would expect the answer to be “yes”, but the statutory ordering rules which set out the way in which elected losses will be set against gains in fact make the decision a complex one. The far reaching consequences of it need to be fully appreciated by the taxpayer.

Where taxpayers have offshore accounts containing a mixture of income and gains from different sources, there are now specific statutory ordering rules to determine the order in which monies will be treated as leaving those accounts when they are brought to the UK. This reduces the scope for bringing monies from such accounts to the UK without a tax liability. These rules are particularly relevant for taxpayers who have disposed of private equity or hedge fund investments. Offshore accounts containing only pre 6 April 2008 monies, i.e. those which were “frozen” on 5 April 2008, remain subject to the old rules with more potential planning opportunities.

As indicated in the Spring issue, a number of changes have been made to the way in which the remittance basis itself works including the removal of source ceasing rules. The definition of a “remittance” to the UK has been significantly broadened and now includes not only the bringing to the UK of overseas assets bought with overseas investment income but also where income or gains are brought to or used in the UK by or for the benefit of a “relevant person”. The new definition is potentially very onerous on the taxpayer, who may unwittingly and perhaps even unknowingly remit overseas income or gains, leading to interesting conundrums in the context of self assessment.

Changes to offshore trusts and offshore companies

Where a UK resident non-domiciled shareholder has a greater than 10 percent interest in the company (being a closely held company), from 6 April 2008 the company will be effectively transparent for both income tax (excepted in limited cases) and capital gains tax purposes, subject to the remittance basis (if claimed) for company owned non-UK assets.

This change will be of significance for those non-domiciled taxpayers who own UK property through offshore companies, perhaps for inheritance tax purposes. As and when the property is sold in the future, if the shareholder remains UK resident they will be subject to capital gains tax on any gain made, without the possibility of benefiting from Principal Private Residence Relief for one’s main home. Consideration should be given to restructuring such arrangements where this is possible without triggering a significant tax charge.

It was initially proposed that non-UK domiciled settlors of offshore trusts would be subject to tax on gains realised by the trustees on an arising/remittance basis. This was not followed through in the final form of the legislation. However, if the settlor is also a beneficiary of the trust they will be potentially subject to capital gains tax on distributions or the receipt of other benefits from the trust, as will all UK resident non-domiciled beneficiaries from 6 April 2008. The trustees of such trusts will need to take UK tax advice on the impact of the new rules and should also consider the option to make a rebasing election. The earliest time by which an election might need to be made is 31 January 2010 and it will require a market valuation of all trust and certain underlying company assets on 5 April 2008.

Practical implications

There are significant practical implications of the changes of which UK resident, non-domiciled taxpayers and their advisers, as well as the trustees of offshore trust need to be aware.

What were familiar rules on how offshore monies should be held in bank accounts by non-domiciled taxpayers have been affected. Advice should be taken on structuring offshore accounts, including the nomination of income and gains in respect of the £30,000 charge.

More onerous record keeping will be required. Taxpayers will need to be able to show where monies have come from, even where transfers have been made from one overseas bank account to another outside the UK.

The timing of receipt of non-UK income and realisation of overseas gains is more important than ever. Increased use of investment products to assist taxpayers with such issues, including investment wrappers and 13 month deposits, will no doubt grow in popularity.

Where non-domiciled clients make gifts to family members or offshore structures the wide extent of the remittance rules will need to be fully understood, to ensure that unanticipated UK tax liabilities do not arise for the client.

Married clients and those in civil partnerships may wish to consider transferring all non-UK assets to one spouse to avoid both taxpayers having to pay the £30,000 annual charge. However, non-tax implications of this should always be borne in mind.

Payment of UK professional fees out of offshore monies may trigger a UK tax liability. Careful consideration will need to be given to providing and invoicing advice from UK professionals, to mitigate the potential tax exposure.

Offshore structures should be reviewed and the impact of the new tax regime properly understood.

To conclude, the new regime is complex but tax planning opportunities remain. The number of potential pitfalls has, however, increased and those who act without appropriate professional advice should beware.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking - SFT reporting & transparency
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Securities Settlement
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
        3. REMIT
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites