PERSONAL TAXATION

Income Tax Rates and Allowances

For 2008/09, the basic rate of income tax is reduced from 22% to 20%. The 20% savings rate is merged with the basic rate. The 10% starting rate is abolished and a new 10% starting rate for savings is introduced. There is no change to the 40% higher rate of tax. The 10% dividend ordinary rate and the 32.5% dividend upper rate also remain unchanged.

The basic rate limit is increased to £36,000. The new 10% starting rate limit for savings is £2,320. However, this rate is not applicable if an individual’s taxable non-savings income exceeds that limit; instead, the individual’s savings income is taxed at the 20% basic rate up to the basic rate limit and at the 40% higher rate thereafter.

The basic personal allowance is increased to £5,435. Agerelated personal allowances are £9,030 (for individuals aged 65 to 74) and £9,180 (for individuals aged 75 and over).

Income Shifting

Following the recent consultation on proposals to introduce legislation to prevent individuals shifting part of their income to another person who is subject to a lower rate of tax, the Government will not now enact legislation effective from 6 April 2008 but will conduct further consultation with the intention of including legislation in Finance Bill 2009.

Residence in the UK

For 2008/09 onwards, in deciding if an individual is resident in the UK for tax purposes, any day on which he is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes. Note that this is different from the earlier proposal that days of arrival and days of departure should each count as a day of presence. Days spent in transit will not count as days of presence, even if they involve being in the UK at midnight, so long as during transit the individual does not engage in activities inconsistent with his merely being in transit.

Residence and Domicile: Remittance Basis

The following changes are to be made to the remittance basis of taxation. The legislation will be in Finance Bill 2008 and will have effect for 2008/09 onwards.

• If he has been UK resident in more than seven out of the last ten tax years, an individual aged 18 or over who is non-domiciled or not ordinarily resident in the UK will be able to use the remittance basis for that tax year only if he pays an additional tax charge of £30,000 for that year. The charge will not, however, apply if the individual’s unremitted foreign income and capital gains for the tax year is less than £2,000. Anyone who opts not to pay the additional charge will be taxed on their worldwide income and gains. The £30,000 charge will be collected through the selfassessment system and normal payment dates will apply. It will be regarded as a tax charge on the individual’s unremitted income and gains. If the individual pays the £30,000 from an offshore source directly to HMRC it will not itself be treated as a taxable remittance.
• UK residents using the remittance basis for any tax year will not be entitled to UK personal reliefs or the capital gains annual exemption. This rule will operate independently of whether they are liable to, and have opted to pay, the £30,000 charge but will not apply to an individual whose unremitted foreign income and gains for the tax year is less than £2,000.
• Works of art will not be taxed under the remittance basis when brought into the UK for public display.
• An earlier legislative error is to be corrected. The error (in ITTOIA 2005) had the effect of charging income tax on foreign dividends at the rate of 32.5% for users of the remittance basis. The intention was always that foreign dividend income remitted to the UK should be taxed at 40%. The rate is duly increased to 40% for remittances made on or after 6 April 2008.

A number of loopholes in the remittance basis will be closed, for example:

• it will no longer be possible to remit income tax-free by claiming the remittance basis for the year the income arises but not for the year it is remitted;
• there will be measures to reduce the scope for converting taxable income and gains into non-taxable receipts through the use of offshore structures such as companies and trusts and the use of close relatives;
• certain pre-existing anti-avoidance legislation will be extended to apply to non-domiciled individuals;
• a pre-existing rule which does not permit income to be taxed in a year after the source has ceased will be abolished; and
• the definition of ‘remittance’ will be extended to cover in all cases items other than cash; certain assets owned on 11 March 2008 will be exempted.

Capital gains tax legislation will be amended so that nondomiciled individuals not being taxed on the remittance basis can obtain relief for foreign capital losses. Individuals who claim the remittance basis for any year from 2008/09 onwards will be able to obtain relief for such losses in any year for which they do not claim the remittance basis, but can do so only by making an irrevocable election that will require them to disclose details of unremitted gains.

Subject to grandfathering provisions for certain pre-existing mortgages, where a loan from a non-UK institution is advanced into the UK and is repaid out of untaxed foreign income, the repayments will count as remittances on and after 6 April 2008.