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Expat Investor : January February 2008
expatinvestor.com 24 EXPAT INVESTOR January/February 2008 FIRST PERSON UK budget implications for expats Traditionally, the Chancellor of the Exchequer sets out the proposals for major changes to tax legislation in the March budget to be operative from the ensuing tax year starting 6th April. However, we are becoming accustomed to major announcements prior to the budget in what is known as the pre-budget report. Whilst most of the 28 issues covered in the latest report are of little consequence to expats, there are four points whose implications are more significant and these are summarised below. Capital gains tax reform It is true to say that over recent years the variety of reliefs that have been introduced have made this particular tax somewhat complicated and indeed in certain circumstances controversial. The Chancellor intends to apply a more simplistic approach and go for a flat rate of 18% effective from 6th April 2008 retaining as little as possible in respect of earlier reliefs although the existing rules will still remain for principal private residences, rollover relief for business assets, venture capital trust and enterprise investment schemes. The annual exempt amount will remain at the level for 2007/2008, £9,200 for individuals. No changes were announced in respect of the existing requirement to be non-resident for five tax years in relation to capital gains tax exemption. Domicile review For many years non-domiciled individuals (and those not ordinarily resident) have enjoyed an attractive tax advantage only being subject to UK tax on a remittance basis. Income or capital gain arising outside the UK avoids the charge to UK tax provided the amount in question remains outside the UK. The definition of domicile is somewhat complicated and is actually outside the scope of this article, but broadly speaking it relates to what can be described as ones 'mother' country. It could be that your father was born abroad or perhaps that you migrated to the UK but intend to eventually return to another country. In essence, the Chancellor has proposed that any individual who is non-domiciled that has been resident in the UK for seven years or more will only be able to continue to use the remittance basis of taxation if they pay an additional charge of £30,000 a year. It is open to the individual to decide whether or not to pay this amount or alternatively give up the right to be taxed on income and gains under the remittance basis, whereupon they will be taxed on their worldwide income and gains whether or not remitted to the UK. Residency A separate issue arose during the course of last year following a tax case concerning the historic procedure accepted by the tax authority of excluding days of arrival and departure when counting the number of days in the UK to determine residency. Interestingly, this has always been a matter of procedure as opposed to statute law. It is therefore proposed that from 6th April 2008 when looking at the number of days in a tax year that have been spent in the UK it will be necessary to include a day of arrival and the day of departure. This could potentially have a major impact on tax payers who regard their place of residence as being outside the UK but come to the UK during the week to conduct their work. For example, Mr Green lives in the South of France and arrives in the UK on Monday departing again on Thursday. Previously, Monday and Thursday would be ignored so that there would only be two days of relevance whereas now that effectively doubles to four. For those readers who go abroad to work for longer periods the impact will be much less significant and only relevant if they are near the limit. Inheritance tax changes Readers are reminded that the definition for domicile in so far as inheritance tax is concerned is different to that applicable for income tax and capital gains tax mentioned elsewhere in this article. Indeed, it is somewhat simpler and an individual who has been resident for 17 years out of the last 20 years is domiciled in the UK and subject to inheritance tax on their worldwide assets. The inheritance tax threshold is £300,000 for 2007/2008 and will be rising up to £350,000 by 2010/2011. The main change is that it is going to be possible to transfer any unused IHT nil rate band on a persons death to the estate of their surviving spouse or civil partner covering deaths from 9th October 2007 onwards. This will apply where the IHT nil rate band of the first deceased spouse or civil partner was not fully used in calculating the IHT liability for the estate. Although the operative date is from 9th October 2007, the effect of the legislation is actually retrospective although specific measures are still to be clarified in the next budget of March 2008 but it is worth looking at two separate examples. Firstly, a husband and wife or civil partners with assets of, say, £600,000 jointly will now effectively be able to enjoy an exemption to the inheritance tax by the time of the second death of £600,000 based on current rates. It should be noted that generally speaking transfers between husband and wife and civil partners are exempt from inheritance tax (note however, there is a significant difference with a non-domiciled partner). The second example relates to a situation where the partner has already died but did not utilise their nil rate band at the time of death. For example, their net assets were below the amount at which inheritance tax applied. That part will now become available to be carried forward to the survivor. Naturally many people will be in a situation of owning assets well above these values particularly as a result of rising house prices which still means that careful planning in such circumstances is recommended. For further infor mation from Wilder Coe, enquire through the fast facts number below. Howard Weintrob, Tax Partner at London-based chartered accountants, Wilder Coe, reviews the tax implications from the recent pre-budget statement British expats. Fast Facts 22470 MORE INFORMATION? Enter the Fast Facts number into the Reader Reply Service coupon on page20orgoto www.expatinvestor.com "It is therefore proposed that from 6th April 2008 when looking at the number of days in a tax year that have been spent in the UK it will be necessary to include a day of arrival and the day of departure. " "Naturally many people will be in a situation of owning assets well above these values, particularly as a result of rising house prices which still means that careful planning in such circumstances is recommended. "