Draft legislation in the United Kingdom will significantly change the method by which individuals resident but not domiciled in the United Kingdom will be taxed on income realized from outside the United Kingdom. Under current law individuals not domiciled in the United Kingdom are taxed more leniently than individuals domiciled in the United Kingdom.

 

 

As defined under United Kingdom law, domicile usually is based on a person’s nationality as well as the country in which the individual has their permanent home, regardless as to where they are living at the current time. So if you were born in the United Kingdom and have lived in the United Kingdom all you life, and you are now living in Bermuda while you are on a 6 year work related assignment, and you intend to return to the United Kingdom after the assignment ends, you are likely to be considered a United Kingdom domicile under United Kingdom law.

 

 

A United States citizen who goes to work in the United Kingdom for less than 3 years will be considered “not ordinarily resident” under current United Kingdom tax law.

 

 

If a United States citizen goes to work in the United Kingdom for at least 2 years, but less than 3 years, or is present in the United Kingdom for more than 183 days in the United Kingdom fiscal year that runs from April 6 to April 5, or visits the United Kingdom for more than 90 days a year over a 4 year period, the individual may be deemed to be resident in the United Kingdom.

 

 

Under current law, which of the above categories you fall into determine how income is taxed in the United Kingdom. For example, if you are resident in the United Kingdom but are not a United Kingdom domicile, investment income coming from sources outside the United Kingdom are not subject to income tax unless the investment income is “remitted” to the United Kingdom. United States citizens who temporarily reside in the United Kingdom while on assignment and whose work typically calls for travel to Europe, usually have a dual employment contract, one for services rendered in the United Kingdom and one for services rendered outside the United Kingdom. Compensation with respect to the latter contract is paid outside the United Kingdom and this compensation will not be subject to United Kingdom income tax unless the individual “remits” these funds into the United Kingdom.

 

The net result under current law is that if you are deemed to be both United Kingdom domiciled and resident, you are subject to United Kingdom income tax on your global income. If you are resident in the United Kingdom, but not domiciled in the United Kingdom, you are only subject to tax on income derived from the United Kingdom and on foreign source income “remitted” to the United Kingdom.

 

The current law is of significant benefit to U.S. citizens who live and work in the United Kingdom on short term assignments. For example, suppose the United Kingdom employment contract is for 140,000 pound sterling and the non United Kingdom employment contract is for $120,000. And also suppose that the individual realized interest income, dividends and capital gains from the sale of stock in the United States of $100,000. If the $120,000 salary and the $100,000 of investment income are not “remitted” to the United Kingdom, they are not subject to income tax in the United Kingdom. The tax savings is $88,000.

 

 

The primary change to the tax law, effective for the upcoming 6 April 2008 to 5 April 2009 tax year is a new concept called the “arising basis” of taxation. Under the “arising basis” an individual who is resident but not domiciled in the United Kingdom will pay United Kingdom income tax on their global income in the year in which the income is earned and/or the year in which dividends and interest are paid and capital gains realized.

 

 

The proposed legislation will allow an individual who is resident but not domiciled in the United Kingdom to “opt out” and continue to be taxed on the “remittance basis”, but to do so they must now pay a 30,000 pound sterling annual “charge”. The annual 30,000 pound sterling “charge” is applicable to an individual who is resident, but not domiciled in the United Kingdom, who makes a claim to continue to be taxed on the remittance basis, who has unremitted foreign income and gains of 1,000 pound sterling or more arising in the year of claim, and who has been resident in the United Kingdom for at least 7 of the 9 years immediately preceding the tax year.

 

An individual who chooses to use the remittance basis of taxation will not be allowed to claim the personal allowance that will be 5,435 pound sterling in 08/09 and the individual will also lose their annual capital gains exemption of about 9,600 pound sterling per year.

 

As the 30,000 pound sterling “charge” is not a tax on income, it is doubtful that it can be claimed as a foreign tax credit on a U.S. citizens U.S. tax return.