What is the UK Remittance Basis of Taxation and How Can it be of Benefit?
The UK continues to offer significant tax advantages for individuals who are resident but not domiciled in the UK. This is due to the availability of the remittance basis of taxation. The availability of the remittance basis for longer term residents was restricted from April 2017 and additional details are available on request.
Non-UK domiciliaries who are resident in the UK (whether on a short-term basis or a long-term basis) should take specialist advice from a firm such as Dixcart, which has expertise in this area, ideally before they become UK resident.
Advantages Available Through the Use of the UK Remittance Basis Of Taxation
- The remittance basis of taxation allows UK resident non-UK domiciliaries, who retain funds outside of the UK, to avoid being taxed in the UK on the gains and income that arise from those funds. This is as long as the income and gains are not brought into or remitted to the UK.
In addition, clean capital (i.e. income and gains earned outside of the UK before the individual became resident, that have not been added to since the individual became resident in the UK) can be remitted to the UK with no further UK tax consequences.
What is the UK Remittance Basis of Taxation?
Generally, the remittance basis applies in the following circumstances:
- If unremitted foreign income is less than £2,000 at the end of the tax year (6 April to the following 5 April), the remittance basis applies. The remittance basis automatically applies without a formal claim and there is no tax cost to the individual in the UK. UK tax will be due only on foreign income or gains remitted to the UK.
- If unremitted foreign income is over £2,000 then the remittance basis can still be claimed, but at a cost:-
- In all cases the individual will lose the use of his or her UK annual tax free personal allowance and capital gains tax exemption.
- Individuals who have been resident in the UK for less than 7 out of the prior 9 tax years do not have to pay a Remittance Basis Charge in order to use the remittance basis.
- Individuals who have been resident in the UK for at least 7 out of the prior 9 tax years have to pay a Remittance Basis Charge of £30,000 per annum in order to use the remittance basis. This remains the annual charge until they have been in resident the UK as specified in point 4 below.
- Individuals who have been resident in the UK for at least 12 out of the prior 14 tax years must pay a Remittance Basis Charge of £60,000 per annum in order to use the remittance basis.
- Anyone who has been resident in the UK in more than 15 of the previous 20 tax years will not be able to enjoy the remittance basis, and will therefore be taxed in the UK on a worldwide basis for income, and capital gains tax purposes.
Identifying Income and Chargeable Gains
The starting point is to identify what type of income and/or chargeable gain is covered by the rules. In some cases this is relatively straightforward. For example, if an individual’s sole source of foreign income is interest arising on a foreign deposit account, then the interest is clearly the individual’s foreign income. However, in reality, matters are often more complex.
The concept of income and chargeable gains includes not only income from sources owned by the individual personally, or gains realised from personally held assets, but also income and gains treated as being received by the individual.
There are many scenarios that might be included in the latter category and some examples are detailed below:
- Income arising in non-UK structures (i.e. trusts and companies) of which the individual is the settlor/transferor (i.e. the person who created the structure or, in some circumstances, who added property to it) where the income is treated as theirs;
- Gains deemed to be those of the individual by being attributed to him through certain closely held foreign corporations – note that these provisions generally only apply where the individual’s ability to participate in the gains and income of the company (normally through a shareholding) amount to a participation of more than 25%; and
- Certain types of deemed income – including on the disposal of non-reporting status offshore funds (i.e. most hedge funds), or income deemed to arise under the “accrued income scheme”, or gains from the disposal of other securities, known as deeply discounted securities.
Having identified what constitutes the individual’s “income and chargeable gains”, it is necessary to track the income and chargeable gains in order to see if they have been remitted to the UK.
Definitions: Remittance, Relevant Persons and Relevant Debt
The legislation creates a broad meaning for remittance and a wide class of persons capable of triggering a remittance. It is important to fully understand the definitions that apply to: “remittance”, “relevant persons” and “relevant debt”. Please contact Dixcart for this detailed information.
The Remittance Rules in Practice
The remittance rules are designed to stop an individual and any “relevant person” using unremitted foreign income or gains to finance an item of UK expenditure without a remittance occurring.
As a result, and subject to the exceptions outlined briefly below, the purchase of any asset in the UK, the payment for any service in the UK, the importation of any asset into the UK by an individual or by a “relevant person” using the individual’s income or chargeable gains, will be deemed to be a remittance.
John purchases a work of art at an auction in Switzerland. John does not have sufficient clean capital to fund the purchase, so he uses overseas income in order to do so. He then brings the art to the UK and displays it in his house. “Property” has been “brought to” and “received in” the UK by John; therefore this is treated as a remittance of the income used to purchase the picture.
Brian and Claire are husband and wife. Their child David is at school in the UK. The school bills Claire for David’s school fees. Brian gives foreign investment income to Claire to finance the payment of the school fees. Claire is a “relevant person”. Claire has received income which she then spends in the UK by paying David’s school fees. A remittance by Brian is deemed to have occurred.
The facts are the same as in example 2 above, except the school has a foreign bank account into which it invites non-UK domiciled parents to pay the school fees. In this case, no money or other property is “brought to”, or “received” or “used in the UK”. However, a service (in other words the education of David) is provided in the UK to David, who is a relevant person (i.e. Brian’s minor child). Therefore the payment of the school fees by Claire is deemed to be a remittance by Brian.
Exceptions to the Remittance Rules
- Under an exception introduced from 6 April 2012, no tax charge arises on remittances to purchase certain UK investments (this includes the purchase of an interest in a commercial property business).
In addition, there are other exceptions to the remittance basis of taxation. One of these is exempt property, which includes:
- Clothing, footwear, jewellery and watches if they are for the personal use of a “relevant person”.
- Property where the amount of foreign income or gains (that would otherwise be deemed to be remitted) is less than £1,000. “Property” for these purposes does not include “money” or any negotiable instrument (e.g. travellers cheques).
The Mixed Funds Rules
Since 6 April 2008 new rules have applied which create an order of priority of distribution from “mixed funds” to determine the type of monies that have been remitted to the UK.
Effectively, each account that contains “mixed funds” has to be analysed to determine the type of funds held in that account. This exercise must be undertaken for each tax year in which amounts have been credited to the account. The account will therefore contain a number of layers, each of which will contain a different composition of income and gains as defined in the mixed funds rules. The purpose of the mixed funds rules is to identify the type of funds being remitted to the UK.
This can give rise to complex situations and, wherever possible, we advise individuals coming to the UK to structure their affairs in a suitable manner before becoming resident in the UK. Dixcart is experienced in providing this type of advice.
The simplest way would be to establish three accounts outside of the UK:
- Capital arising before the individual became resident in the UK, from which remittances can be made tax free;
- Capital with capital gains arising after the individual became resident in the UK – remittances from this account will attract tax at 20% on the proportion remitted to the UK (with gains being taxed in priority to capital at the same 20% rate); and
- Other – this would include income; such as interest paid on the first account, deemed income and capital that has become mixed with other sums, except gains.
The intention would be that the individual would keep the capital in account 1, free from any further additions. These amounts could then be remitted to the UK without any further UK tax charge.
If the capital in account 1 was subsequently exhausted, remittances should then be made from account 2, ensuring a lower tax rate than if amounts were taxed as income from account 3.
Temporary Non-Residence in the UK
Non-UK domiciliaries who have unremitted foreign income and gains, and who cease to be resident in the UK, will need to leave the UK and be non-resident for at least five complete years, if they wish to use the non-UK income and gains, that they held prior to becoming non-resident, to fund UK expenditure during their absence from the UK.
The most likely example of the funding of UK expenditure during an individual’s absence would be the repayment of a debt incurred during the individual’s period of residence in the UK. If the individual returns to the UK to become resident within the five year period, pre-departure non-UK income and gains which have been remitted to the UK will be taxed.
In addition, dividends or loans from closely held companies, certain employment income, pension income and chargeable event gains from certain insurance policies will be taxed on return to the UK after a period of temporary non-residence.
If you require any additional information on this topic, please speak to Paul Webb at the Dixcart office in the UK: firstname.lastname@example.org or to your usual Dixcart contact.