UK: Uk Resident Foreign Domiciliaries

Last Updated: 8 March 2012
Article by Smith & Williamson

The remittance basis charge

Please note the following:

As part of the 23 March 2011 Budget, the Chancellor announced plans to increase the existing £30,000 remittance basis charge referred to in this Briefing Note to £50,000 for longer term UK residents – being those who have been UK tax resident in at least twelve of the previous fourteen tax years. The £30,000 charge will remain for those UK tax resident in at least seven of the previous nine tax years who do not qualify for the higher £50,000 charge.

In addition foreign income and gains remitted to the UK for the purpose of a qualifying investment in specific types of unlisted companies or those listed on an exchange-regulated market (such as AIM or PLUS Quoted), will not be subject to tax The intention is to permit funds to be remitted for commercial investment in the UK.

These changes are expected to be effective from 6 April 2012. Draft legislation was published on 6 December 2011 and is covered in more detail in a separate Briefing Note.

Introduction

From 6 April 2008 the general rule is that the arising basis is the default basis of taxation for all UK residents, whatever their ordinary residence or domicile status. With limited exceptions those entitled to access the remittance basis have to make a specific claim for each tax year that they wish to be taxed on the remittance basis. Making a remittance basis claim comes with a cost attached. The basic cost is the loss of:

  • the income tax personal allowance including any additional age related element (though the individual may lose entitlement to all or part of their personal allowance anyway depending on the amount by which their adjusted income exceeds £100,000);
  • the blind person's allowance (if applicable);
  • the capital gains annual exempt amount; and
  • the married couples'/civil partners' allowance (only claimable where one of the individuals was 65 before 6 April 2000 and operating as a tax reduction relief rather than being a tax free allowance).

The first tax year from 2008/09 onwards that the remittance basis claim is made also impacts on the capital loss relief that the individual is entitled to as the making of the claim will result in the individual losing entitlement to standard capital loss relief. Either the individual makes an election and opts into a different capital loss relief regime (which impacts on UK and foreign losses) or they will lose entitlement to foreign capital losses although they can continue to benefit as normal from UK capital losses.

The additional issues for adult long term UK residents

In addition to the basic cost of accessing the remittance basis, the £30,000 remittance basis charge (RBC) is payable where the individual is over 18 at the end of the tax year and meets the definition of a long-term UK resident. An adult is an individual who reaches the age of eighteen at any point during the tax year. A long term UK resident is an individual who is resident in the UK in at least seven of the immediately preceding nine tax years. In deciding whether the individual meets the seven out of nine preceding tax years' test one counts residence in any part of the tax year. Residence is determined under UK law and years when the individual was treated as "treaty resident" outside the UK are counted for the purposes of this test.

To re-cap the general rule is that adult long term UK resident foreign domiciliaries who want to use the remittance basis:

  • will not be entitled to personal allowances (meaning PAYE codes giving entitlement to the personal allowance will have resulted in too little tax being deducted from employment income) or the CGT annual exemption; and
  • will have the following UK tax liabilities:
    • subject to tax on actual and deemed/attributed UK income and capital gains on the arising basis;
    • the £30,000 RBC; and
    • will be taxed on all remittances of actual or deemed/attributed foreign income and chargeable gains.

The individual is unlikely to ever receive credit in the UK for the £30,000 if they subsequently remit untaxed income and gains for the year for which it was paid as, to do so it is necessary for them to have first remitted all foreign income and gains subject to tax on the remittance basis since 6 April 2008. This is unlikely to be achievable because even the deduction of £1 in bank fees would mean that the individual would not to be able to remit all such foreign income and gains. The RBC should, therefore, be reviewed as a flat rate charge for the year in order to access the remittance basis.

A further issue to be considered when choosing to pay the RBC is the fact that the individual's tax affairs will be dealt with by a specialist HMRC area. This may mean greater scrutiny in terms of their domicile status and/or remittances to the UK than might otherwise be the case. This briefing note covers some of the basic facts and practical issues with respect to the RBC.

The exceptions: where access to the remittance basis is automatic

There are various categories into which foreign domiciliaries and UK domiciliaries who are not ordinarily resident in the UK can fall which will mean that the remittance basis of taxation can apply without the need for a claim. Where the individual meets various conditions, access to the remittance basis is automatic (though there is the facility for the individual to choose to be taxed on the arising basis) and the individual suffers no financial penalty in terms of loss of tax free allowances as a result of accessing the remittance basis. However it is important to note that where the remittance basis applies as a result of an automatic exemption (see below) that any remitted dividend income will be taxed at the rates applicable to interest rather than dividends. As such, in some cases it may be better for the individual to give notice that the exemption is not to apply so that they are taxed on the arising basis in the year.

The first category is where the individual has no UK income or gains (or only taxed UK investment income of £100 or less) and no foreign income or gains are remitted to the UK. In addition the individual must either be a short term resident (ie resident for not more than 6 of the previous 9 tax years) or under 18 for the whole of the tax year. In this case no formal claim is required to access the remittance basis. Such individuals would not be liable for the RBC but it does mean that a tax return or specific claim is not required.

The second category relates to employees in the UK where their foreign earnings are £10,000 or less and subject to a foreign tax and that their only other foreign income or gains relates to foreign interest of £100 or less (and also subject to a foreign tax). Provided that the individual would not otherwise be liable for higher rate tax and is also not otherwise required to submit a tax return, then the remittance basis can be used without making a claim.

The third category applies where the individual has aggregated unremitted foreign income and gains of less than £2,000 for the tax year. This can apply potentially to any individuals eligible to claim the remittance basis and qualification under this category is the only way an individual who is an adult long term UK resident can access the remittance basis without having to pay the RBC.

The position of those who are UK resident and UK domiciled but not ordinarily resident in the UK

In theory individuals who can claim the remittance basis only through being not ordinarily resident in the UK (that is they are UK domiciled) may have to pay the RBC. In practice it is unlikely that an individual who has been UK resident in seven of the preceding nine tax years will be able to support a claim to being not ordinarily resident in the UK.

Decisions taken with respect to claiming the remittance basis have no impact on the individual's domicile status

It is important to remember that whatever the individual decides to do with respect to claiming or not claiming the remittance basis of taxation it does not impact on their domicile status. The concept of domicile that prevails in England and Wales (and Scotland though the law is different) is a matter of general law and cannot be changed by any provision of UK tax law.

Provided the individual is entitled to access the remittance basis (that is he or she is either foreign domiciled or UK domiciled but not ordinarily resident in the UK) the individual will be entitled to make the claim for a tax year regardless of their previous claims history.

The rules defining "remitted to the UK" mean that no foreign income or gains drop out of charge where an individual switches from one basis of taxation to another.

However it is important to remember that the individual's domicile status is relevant in relation to:

  • whether they are taxed as settlor in relation to capital gains arising in offshore trusts;
  • the transitional provisions in relation to capital payments to beneficiaries of offshore trusts;
  • whether they can benefit from a rebasing election made by an offshore trust to reduce the amount of post 6 April 2008 gains taxable on beneficiaries when matched to capital distributions.

These rules apply even if the individual is taxed on the arising basis in the year, provided he remains non UK domiciled.

In addition, although it may not be cost effective for the individual to claim the remittance basis in a 'normal' year, if a foreign asset is sold and the proceeds are not required to be remitted to the UK, the RBC may still be paid for the year if the individual is still non UK domiciled.

As such it is suggested that a white space note is included in the tax return to the effect that the individual is non UK domiciled. This is because the Residence pages are not required unless the foreign domicile status is relevant to the particular tax year.

The additional claim requirements where the RBC is in point

In addition to making the basic remittance basis claim an adult long-term UK resident foreign domiciliary (or UK domiciliary who is not ordinarily resident in the UK) who has more than £2,000 of unremitted foreign income or gains and wants to use the remittance basis for a given tax year must:

  • make an actual nomination of at least £1 of foreign income or foreign chargeable gains that have arisen in the relevant tax year (ITA 2007 s 809C(2));
  • avoid making an excessive actual nomination such that the nominated foreign income or chargeable gains gives rise to a relevant tax increase exceeding £30,000 (as this invalidates the remittance claim); and
  • pay the £30,000 RBC.

New legislation is to be introduced so that, from 6 April 2012, provided that the amount nominated is £10 or less the penal matching rules (see below) will become less of an issue.

The nomination process

The legislative provisions pertaining to the RBC are complex. This is because they were framed with two objectives in mind:

1) to make it highly unlikely that remittance basis users will ever be able to receive credit against their UK tax bill for the £30,000 RBC paid; and

2) to enable remittance basis users to obtain credit for the RBC against the tax they pay in foreign territories.

As discussed the first objective has been met given that credit will only be given for the RBC where the individual remits all their remittance basis foreign income and gains arising since 6 April 2008. Such individuals will commonly use their foreign income and gains to fund their offshore expenditure so even if they should have an emergency and need to remit all funds within their offshore accounts to the UK it is very unlikely that the remittance will include all their remittance basis foreign income and gains arising since 6 April 2008.

It is still unclear whether there has been success with respect to the second objective. The complicated nomination process was designed to enable the £30,000 RBC to be classified, for the purposes of obtaining relief in foreign jurisdictions, (particularly the US) as income tax or CGT rather than it being seen as a stand- alone tax charge. However, it may be an academic question as the higher UK tax rates may mean that, such individuals will not be able to claim credit in an offshore jurisdiction for the RBC paid. This is because generally double tax relief is limited such that overall the individual suffers tax on the relevant income or gains at the higher of the two rates that the different territories impose.

The IRS announced in August 2011 that they would allow a credit for the RBC against US tax payable even where only a token nomination is made. However it may be necessary to pay the RBC prior to 31 December in order to ensure that credit is available in the US in the relevant year. Separate US tax advice on this issue should be taken.

How to make a successful nomination

In basic terms an individual has to nominate at least £1 of foreign income and/or gains arising in the tax year with respect to which the claim is made and whatever is nominated is taxed on the arising basis.

When making the nomination there are basically three possibilities:

  • an insufficient nomination is made – meaning that the actual nominated income and/or gains is insufficient to increase the tax charge by the necessary £30,000:
    • provided at least £1 of actual foreign income and/or gains for the relevant tax year is nominated there will be a valid claim;
    • provisions kick in to deem sufficient foreign income to have been nominated that the necessary £30,000 increase is achieved (note that it is irrelevant whether the individual does or does not have such foreign income that could have been nominated).
  • a full nomination is made – meaning that the nomination is such that the nominated income and/or gains for the tax year give rise to an increased tax liability of £30,000 exactly:
    • a valid nomination is made;
    • it is anticipated that an individual making such a nomination either wishes to have the best possible chance of claiming the foreign tax credit or thinks that there is a realistic possibility that he or she might remit all remittance basis foreign income and gains arising since 6 April 2008 and wishes to be in a position to be able to claim a UK tax credit for the £30,000 made.
  • an excessive nomination is made – meaning that the actual nominated income and/or gains increases the tax charge by more than £30,000:
    • this would be an invalid nomination which needs to be corrected before a valid remittance basis claim can be said to have been made.

The nomination is made on the "Residence, remittance basis etc" supplementary pages of the tax return with details with respect to the nominated income or gains being shown in the space for additional information.

The choice the individual makes with respect to the foreign income or gains to nominate has no impact on his nomination choice in future years.

Can you nominate attributed income or gains?  

The UK has anti-avoidance rules which can attribute income and gains to individuals where there is a specified connection with an offshore entity (such as a settlement or a company). Where these provisions apply specialist advice should always be taken given the general complexity of the legislation and the risk of actions taken being highly tax inefficient.

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