Section 116 Finance Act 1991

Section 116 of the Finance Act 1991: Taxation of Foreign Income

Section 116 of the Finance Act 1991 introduced significant changes to the taxation of foreign income for UK residents. It primarily focused on broadening the scope of taxation concerning income arising from assets located outside the United Kingdom, specifically targeting individuals who sought to avoid UK tax by holding assets offshore.

Prior to Section 116, the taxation of foreign income was primarily governed by the “arising basis.” This meant that only income actually received or remitted to the UK was subject to UK tax. Individuals could therefore avoid tax by accumulating income offshore and not bringing it into the UK. Section 116 sought to address this perceived loophole by introducing the concept of “deemed domicile” for long-term UK residents.

The key provision of Section 116 stipulated that individuals who had been resident in the UK for at least seven out of the preceding nine tax years would be treated as domiciled in the UK for income tax and capital gains tax purposes. This effectively shifted them from the “arising basis” to the “remittance basis” of taxation for foreign income and gains. The "remittance basis" meant that only income and gains remitted to the UK were taxed, provided they paid a specific annual charge.

The rationale behind this change was to prevent wealthy individuals from permanently residing in the UK while claiming non-domiciled status to avoid paying UK taxes on their offshore income and gains. By deeming them domiciled after a certain period of residency, the government aimed to ensure a fairer contribution to the UK tax system.

The introduction of Section 116 had a significant impact on individuals with substantial foreign income and assets. They faced a choice: either remit their foreign income to the UK and pay tax on it, or continue to keep it offshore and pay the remittance basis charge. The charge was tiered, increasing with the length of residency in the UK. This created an incentive for some individuals to restructure their financial affairs or even leave the UK altogether.

The legislation was complex and spawned numerous legal challenges. The definition of "domicile" itself is notoriously difficult to determine, and the concept of "deemed domicile" added another layer of complexity. Furthermore, the rules regarding what constituted a "remittance" were subject to interpretation and further clarification over time. Section 116 was later amended and superseded by subsequent legislation, most notably the Finance Act 2008, which introduced further reforms to the taxation of non-domiciled individuals. However, the underlying principle of targeting long-term UK residents claiming non-domicile status remained a key focus. Despite its eventual replacement, Section 116 represents a significant moment in the evolution of UK tax law and its attempts to address the challenges posed by globalization and the movement of capital.