by John Westwood [email protected]
John Westwood is the Managing Director of Blacktower Financial Management Group.
On August 14, 2009, HM Revenue & Customs in the UK issued 302 pages of new technical guidance on residence, domicile and remittance, replacing the interim guidance notes.
Here we have summarised the key points for consideration when deciding whether to use the remittance basis of taxation.
UK residents are generally liable to UK tax on their worldwide income, as well as gains as they arise. This is known as the “arising basis”. However, where individuals are either:
Non-UK domiciled but UK-resident (ND) Or not ordinarily resident (NOR) in the UK (regardless of domicile, which includes UK domicile).
They can claim an alternative tax treatment known as the “remittance basis”.
The remittance basis is a way of deferring UK tax, as there is no actual tax charge when foreign income or gains arise. They will only be taxed when the capital (or any assets stemming from the capital) are remitted to the UK. So for example, if Tom has bought a boat with his foreign gains and brings it back to the UK, the boat represents these amounts so would be subject to tax. If, however, foreign income/gains remain offshore and are never remitted back to the UK, the tax charge is effectively deferred indefinitely.
Most clients should take advice to decide whether it is appropriate for you to use the remittance basis each year, as it depends on your individual circumstances and any plans for the coming year.
To what income or gains does the remittance basis apply?
For individuals who are not ordinarily resident in the UK, the remittance basis is only available on foreign income. Non-domiciled UK residents can apply the remittance basis to both foreign income and capital gains.
Those who elect to use the remittance basis automatically lose their entitlement to various personal tax allowances, for example personal income tax across all age bands and CGT allowance. These tax allowances are removed regardless of whether the individual is NOR or ND. So, even though an NOR individual cannot claim remittance on foreign capital gains, they still lose their CGT allowance.
What is a remittance?
A remittance occurs when an individual or a person linked to them (a “relevant person”) brings money or property to the UK that is (or that represents) foreign income or gains, or property that was acquired using those foreign income or gains.
Where a service is provided in the UK for the benefit of the individual or a relevant person, and is paid for with foreign income or gains, this will be regarded as a taxable remittance. Examples of services provided in the UK could be private school tuition or legal services.
What is the remittance basis charge?
The remittance basis charge (RBC) is payable by long-term UK residents who are aged 18 or over at the end of the tax year, and who claim the remittance basis of taxation. A long-term UK resident is defined as an individual who has been tax resident in at least seven out of the nine years preceding the current or relevant tax year.
From the 2008/09 tax year onwards, NOR or ND individuals who claim the remittance basis will have to pay an annual remittance basis charge of £30,000 in addition to any UK tax liability.
When someone elects to use the remittance basis, they will have to nominate un-remitted foreign income and gains, which will not be taxed again when they are remitted to the UK – ensuring that tax is not paid twice on the same amount.
Tom is ND, and subject to UK higher-rate tax at 40 per cent. In 2010/11, he receives £140,000 in interest paid into his Jersey bank account. In his 2010/11 claim, Tom is able to nominate a maximum of £75,000 (i.e. £75,000 x 40% = £30,000 RBC) of the total £140,000.
In 2011/12, Tom receives a further £60,000 of interest paid into his Jersey bank account. He can only nominate foreign income occurred in the same tax year as his remittance claim, i.e. in 2011/12. He cannot use his used 2010/11 non-nominated income of £65,000 (£140,000 minus £75,000 = £65,000).
Persons who are subject to the remittance basis charge may be able to claim relief for income tax or capital gains elements of the charge under the terms of a double taxation agreement.
A compromise for non-domiciled individuals
The remittance basis does not apply to offshore bonds (wrapper) but for ND individuals who would prefer not to pay the £30,000 “remittance basis charge”, an offshore bond might provide a suitable compromise.
ND individuals with offshore assets producing less than £75,000 gross income (which at 40% income tax would be charged £30,000) would not need to pay the £30,000 tax, but could still allow their assets to roll up on a gross basis by using an offshore bond. If the capital invested in the offshore bond was not “mixed” then the 5% tax-deferred withdrawal facility could also apply. Assuming a 2.5% gross return on an offshore deposit, investors with sums of £3 million or less are most likely to benefit. However, the actual cost of maintaining the remittance basis is greater than is first apparent, given the loss of the personal allowance for inheritance tax, annual allowance for CGT etc.
Those with assets substantially above £3 million in value and preferring not to pay the RBC could also benefit from an offshore bond if their eventual intent was to leave the UK, as returns would be tax-deferred beyond the point that they were UK-resident. This would also apply to “mixed” funds (see below) if no encashment were made before leaving the UK.
For some ND individuals, two bonds might be appropriate: one for “mixed” funds and the other for untainted capital. The latter could be used for providing 5% tax-deferred withdrawals in the UK, which the former could not.
ND individuals were encouraged to ensure they did not mix their offshore funds. So it was not uncommon for persons to have three offshore bank accounts, containing:
(i)clean capital; (ii) income and (iii) proceeds of capital investments.
The first could be remitted tax-free, the second would be subject to income tax on remittance, and the third would be subject to capital gains tax on remittance to the extent that the remitted funds represented capital gain. For those who continue to claim the remittance basis in future, this will still be a relevant strategy.
This can be a complex area and professional advice should always be sought.
Blacktower Financial Management Group – Telephone 289 355 685.