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WITH CRYPTO NOT going away anytime soon, HM REVENUE & CUSTOMS (HMRC) is writing to individuals who may need to pay tax on the disposal of cryptoassets such as Bitcoin.

These letters – known as “nudge letters” – which began circulating in August 2024, are part of a broader initiative to address underreported income related to digital assets, urging taxpayers to voluntarily disclose any outstanding liabilities before facing more serious repercussions.

In today’s Shipleys Tax brief overview, we take a look at HMRC’s latest crackdown on crypto investors through these targeted nudge letters aiming to reinforce the message that crypto investors must remain tax compliant and dispel the widespread misconception that using cryptocurrency is a loophole to hide wealth from the taxman. So, why might tax be due and what should you do if you receive a letter?

Understanding the Nudge Letters

The recent nudge letters specifically target individuals who may have disposed of cryptocurrency assets without fully declaring the resulting gains. These letters, which are based on data obtained from major crypto exchanges, warn that failure to disclose could lead to additional tax liabilities, including Capital Gains Tax (CGT) or Income Tax, as well as interest on late payments and significant penalties. A larger wave of these letters is expected to follow in September, as HMRC seeks to intensify its focus on this area.

Common Reasons for Underreporting Crypto Gains

One of the main reasons why many cryptocurrency gains go unreported is the complexity surrounding the tax treatment of digital assets. HMRC generally considers the profit or loss from buying and selling cryptocurrencies as subject to Capital Gains Tax. However, many investors are unaware that certain actions are considered taxable events. For example:

• using cryptocurrency to purchase goods or services
• exchanging one type of cryptoasset for another; or
• gifting cryptoassets.

In certain circumstances, income tax and NI may be payable.

Additionally, the constantly evolving nature of the cryptocurrency market, combined with the relative novelty of these assets, has left some investors unsure of their tax obligations. Misconceptions, such as the belief that holding assets in crypto without converting them to fiat currency exempts them from tax, further contribute to non-compliance.

Options for Voluntary Disclosure to HMRC

If you receive such a letter from HMRC, you must take action within 60 days even if no tax is due. If you submitted a tax return, the return should be amended where possible. If you did not submit a tax return, or the deadline has passed, you should use the dedicated Cryptoasset Disclosure Facility (CDF)to inform HMRC. 

While the CDF was specifically designed for cryptocurrency owners, there are other disclosure routes which might be more appropriate depending on individual circumstances:

1. Contractual Disclosure Facility (CDF) – This facility offers protection from prosecution for those making full disclosures of deliberate tax fraud, making it a critical option for those concerned about potential criminal liability.

2. Worldwide Disclosure Facility (WDF) – Suited for individuals with offshore holdings, the WDF allows for the disclosure of unpaid taxes on global assets.

3. Digital Disclosure Service (DDS) – Best for UK-based holdings or when multiple tax issues, such as inheritance or corporation tax, are involved.

These disclosure options allow taxpayers to notify HMRC of their intent to disclose and provide a 60-90 day window to make full disclosures and settle any outstanding liabilities. This flexibility is especially useful for addressing multiple tax issues at once, which is often the case with complex financial situations.

Take Prompt Action – Choose The Correct Disclosure Option

Receiving a nudge letter from HMRC should not be taken lightly. Whether you believe your tax filings are complete or suspect there may be discrepancies, it is crucial to act quickly. Consulting a tax adviser can help you choose the correct disclosure option and potentially reduce penalties.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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CONTINUING WITH OUR focus on people pondering a life overseas as the UK faces a period of socio-economic upheaval, combined with the increasing cost of living and increasing tax burdens, in today’s Shipleys Tax brief we have a quick look at the upcoming changes to much maligned non-Dom tax status.

What exactly is Non-Domicile (Non-Dom) Status in the UK?

Non-domicile, or non-Dom status, is broadly a rule that allows individuals who have their permanent home (domicile) outside the UK to benefit from favourable tax treatment. If you are a non-Dom, you can choose to be taxed on a “remittance basis”, meaning you only pay UK tax on the income and gains you bring into the UK, not on your worldwide income or assets.

Domicile of Origin and Tax Planning – Domicile of origin refers to a concept that a UK based person can have another country as their “domicile’, usually based on their father’s domicile if the parents are married or their mother’s if not. For tax purposes, having a non-UK domicile of origin was used to reduce Inheritance Tax (IHT) liabilities by excluding assets from UK tax. Accordingly, individuals with non-UK parents can utilise their “domicile of origin” to reduce their tax liabilities, especially regarding Inheritance Tax (IHT).

Budget Changes and Their Impact

The UK government announced, quite belatedly, significant changes in the Spring Budget 2024, set to take effect from April 2025. These changes will replace the domicile-based system with a residence-based tax system. Under the new rules:

• Abolition of Non-Dom Status – The concept of domicile will no longer determine tax liability. Instead, the tax regime will shift to a residence-based system. This means individuals will be taxed based on their UK residence rather than their domicile status​.

• Four-Year Relief for New Arrivals – New UK residents will benefit from a four-year period where foreign income and gains are exempt from UK tax. This applies only if they have been non-resident for the previous ten consecutive tax years.

• Inheritance Tax (IHT) Changes – IHT will be based on residence rather than domicile. From April 2025, individuals who have been UK residents for more than ten years will be subject to IHT on their worldwide assets, not just UK assets. This includes assets held in trusts​.

• Transitional Arrangements – Transitional reliefs include a 50% reduction in the taxable amount of foreign income for the 2025/26 tax year and a temporary 12% tax rate for repatriating previously unremitted foreign income and gains​.

• Trusts – Foreign assets in some property trusts established before 6 April 2025 will remain outside the scope of IHT, but post-2025 trusts will follow the new residence-based rules​.

Implications for IHT Planning

Given these reforms, the client’s potential IHT exposure and planning strategies need careful reconsideration:

1. Non-UK Assets and IHT:

Currently, non-Doms are only subject to IHT on UK assets. Post-reform, non-doms resident in the UK for over ten years will face IHT on their worldwide assets. This significantly broadens the IHT net and impacts estate planning strategies​.

2. Residence-Based IHT:

For clients who have been UK residents for less than ten years, it is critical to understand the timing of their residency and how it will affect their IHT liability under the new rules. Planning should consider the ten-year residence rule to mitigate worldwide IHT exposure​.

3. Use of Trusts:

Establishing certain trusts before April 2025 may still provide IHT protection for non-UK assets. However, post-2025 trusts will be subject to the new regime, making early planning crucial to enable taxpayers to organise their affairs.

4. Foreign Income and Gains:

Utilising the transitional reliefs, such as the 50% tax reduction and the temporary repatriation facility, can optimise tax efficiency during the transition period. This may include moving assets before the new rules fully apply​.

Conclusion

The abolition of the non-Dom regime and the shift to a residence-based IHT system from April 2025 represents a significant change in UK tax law. These reforms necessitate a thorough review of estate planning strategies to ensure tax efficiency and compliance with the new rules. Early planning and strategic use of transitional reliefs can help mitigate the impact of these changes.

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AS THE UK faces a period of socioeconomic upheaval, increasing tax burdens and the growing cost of living crisis, many are pondering a life beyond its borders. The allure of lower taxes, more affordable living or better opportunities can be compelling – but such decisions are, from a tax point of view, often more complex than they first appear.

In todays’ Shipleys Tax brief we look at why just becoming non-UK resident may not in itself be enough to escape the dreaded UK tax net. In some cases, the UK’s long of arm of the taxman can reach individuals who previously believed themselves as unaffected. This brief article aims to provide general guidance on the current and upcoming non-resident tax obligations that follow you abroad, the potential traps for the unwary, and some of the important tax considerations that need to be addressed when contemplating a move from the UK.

The Temporary Non-Residence Trap

The UK tax system is widely known for its anti-avoidance measures, including the ‘temporary non-residence rules.’ These rules target individuals who leave the UK temporarily to take advantage of tax benefits abroad but plan to return. If classified as temporarily non-resident, any income or gains earned during this period may still be taxed in the UK upon their return, just as if it had been earned while resident. There are suggestions that that staying non-resident for at least six consecutive tax years is advisable to avoid this trap, however this is needs to be approached with caution. Planning your departure date carefully and ensuring you remain non-resident for at least six tax years to avoid being classified as temporarily non-resident is one of the factors HMRC will look at. For the best solution, work with a tax adviser to structure your income or asset disposals during the non-residency period.

Double Tax Treaties and Split-Year Treatment

The complexities of double tax treaties often come into play when individuals find themselves potentially liable for taxes in multiple jurisdictions. In such cases, they might benefit from these treaties’ provisions, which can offer relief from double taxation. Split-year treatment can occasionally divide the tax year between periods of residency and non-residency, though this requires strict adherence to qualifying criteria. Review your eligibility for double tax treaties and split-year treatment. Conducting a residency analysis before departure to maximise treaty benefits and reduce double taxation will offer greater certainty.

Income Tax and Capital Gains Tax (CGT): How the UK Tax Net Reaches Beyond Borders

Non-residents are generally taxed on UK-sourced income. Certain types of investment income from UK companies can often be disregarded for tax purposes, but rental income from UK properties is still taxable in the UK even when non-resident.

In the ever-changing CGT landscape, non-residents who once enjoyed immunity from CGT on UK assets have faced new rules since 2015. From 2015, non-residents became taxable on UK residential property disposals. Further, since 2019, this tax extends to disposals of all UK land, including commercial property and indirect disposals through ‘property-rich’ entities. Before leaving the UK, assess all UK-sourced income streams and evaluate the tax implications of any property or business asset disposals. Consider restructuring assets to minimise future CGT exposure.

UK Property Ownership: Ties That Bind

Owning property in the UK makes you subject to various tax obligations. Renting out a UK property whilst abroad leads to income tax liabilities and filing of additional paperwork with HMRC. Although the main residence relief can help reduce CGT on your property, this is restricted by stringent residency and occupancy requirements and any non-qualifying tax years since 2015 could limit the available relief.

Furthermore, the basic 90-day occupancy test complicates matters, especially for individuals who spend significant time abroad. However, designating one property as your main residence and monitoring qualifying occupancy days will help secure main residence tax relief. Additionally, those abroad need to register with HMRC for the Non-Resident Landlord Scheme if renting out any UK property. Those owning UK properties via limited company have different set of obligations which is beyond the scope of this article.

Inheritance Tax (IHT): Domicile is (still) a Decisive Factor

Inheritance tax isn’t based on residency alone but on domicile, a deeper, often permanent connection to a location. Currently, non-domiciled (“non-dom”) individuals may only face IHT on UK assets unless they gain deemed domicile status after 15 years in the UK, subjecting their entire estate to IHT. Leaving the UK can reduce this exposure, but the deemed domicile rule extends the IHT net for three additional years after losing actual domicile status.

After the 2024 Spring Budget, significant changes were announced regarding the taxation of non-UK domiciled individuals. From April 2025, the existing non-dom regime will be replaced by a residence-based system. Under the new rules, inheritance tax (IHT) will apply to worldwide assets if a person has been UK resident for 10 years. Conversely, non-residents will remain liable for IHT on their non-UK assets for 10 years after leaving the UK. This significantly extends the scope of IHT compared to the current deemed domicile rules, which require 15 years of UK residency.

Evaluate your domicile status well in advance and plan a strategy that reduces or delays IHT liability. Consider creating trusts or transfer assets strategically to minimise exposure.

Meticulous Tax Planning is crucial to mitigate upcoming changes

Going forward, there will be a consultation on moving entirely to the aforementioned residence-based system, which will also determine how trusts will be taxed. Foreign assets in certain property trusts settled before April 2025 will continue to follow the old rules, but any trusts created after that date will be subject to the new residence-based regime. Trustees will be taxed on assets if the settlor has been a UK resident for 10 years, or if they have resided in the UK in the past 10 years​.

Given these changes, it’s crucial to stay informed as further details emerge during the consultation process, and seek advice if you think your estate may be affected. Keep in mind that the final implementation may be influenced by the results of the next general election​.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284

Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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