UK: UK Resident Foreign Domiciliaries - The Remittance Basis Charge

Last Updated: 4 February 2013
Article by Smith & Williamson

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.

For the purposes of this briefing note it is sufficient to say that where the provisions apply, such that the individual would (if taxed on the arising basis) be subject to an income tax or a capital gains tax charge on deemed foreign income or foreign chargeable gains, it should be possible to nominate foreign income or gains attributed to him or her as a result of the provisions. Indeed in some cases it may be necessary to make such a nomination as for some individuals this will be their only remittance basis income or gains.

Nominating foreign income as opposed to foreign gains

For the reasons explained below, one will want to avoid remitting the actual nominated income and/or gains. Since the funds cannot be brought into the UK, in cases where one will nominate more than a token amount of income or gains it would be sensible to nominate the category of income and/or gains that would be least tax efficient to remit. Foreign income from which foreign tax has not been deducted would give rise to the highest tax charge if remitted and so if a foreign domiciliary has such income in the relevant tax year, all other things being equal (such as ensuring the nominated amount can be ring-fenced to avoid inadvertent remittances) it would seem sensible to use it for the nomination. The level of available foreign tax credits needs to be considered but generally if the individual has no such income it is still likely that remitting income (with a potential 50% income tax rate) would give rise to a higher liability than remitting gains (where the CGT rate post 22 June 2010 will generally be 28%). As discussed below whatever the choice made, nominated income and gains should be ring-fenced to minimise the risk of an inadvertent remittance to the UK.

Note that the proposed rules from 6 April 2012 in relation to the nomination of de minimis amounts of £10 or less, may mean that ring fencing of the nominated accounts for 2012/13 and later years is not required. However nominated accounts for earlier years (2008/09 to 2011/12) will still require careful monitoring so that inadvertent remittances are not made.

Where foreign income is nominated or deemed to have been nominated (as happens where there is an insufficient nomination) there is an impact on the payments on account situation going forward (and with respect to the current tax year if a reduction claim was made). In contrast if there is a full nomination of foreign gains the payments on account are unaffected with the £30,000 being part of the balancing payment due by 31 January following the tax year. Accordingly, in cash flow terms it would be advantageous to make a full nomination of foreign chargeable gains where an individual:

  • is certain he or she can ring-fence proceeds from a gain/gains sufficient to increase their tax liability by £30,000 and will never remit these proceeds;
  • is happy to provide details with respect to the capital disposal to HMRC; and
  • is confident that their tax liabilities will not be increased overall through not being able to remit the proceeds as there will be no need to remit from funds which would give rise to a liability in excess of that attaching to foreign gains (for remittances prior to 23 June 2010 the liability being 18% and for remittances after 22 June 2010 the liability being 28%).

There is no "one size fits all" answer. Individual circumstances need to be carefully considered and specialist advice taken.

Note that for 2010/11 a foreign chargeable gain is treated as accruing on the day that it is remitted. Hence where the gain arose prior to 23 June 2010 but it was remitted after that date it may be preferable to pay tax on the arising basis for 2010/11. This ensures that the foreign chargeable gain is taxed at 18% rather than 28%.

WHY ONE SHOULD NOT REMIT NOMINATED INCOME OR GAINS

It is important to remember that remitting nominated income or gains does not invalidate the nomination. However doing so may have very unpleasant tax consequences. This is because the rules provide that potentially penal statutory matching rules will be triggered where nominated income or gains are remitted prior to the remittance of all foreign income and gains subject to tax on the remittance basis since 6 April 2008. Very broadly matching is done on a tax year basis (current year and then preceding years in a last in, first out basis) in the following order:

  • remittance basis foreign income without tax credits;
  • remittance basis chargeable gains without tax credit;
  • remittance basis foreign income with tax credits;
  • remittance basis chargeable gains with tax credits.

These penal matching rules do not override the general rule that there is only a taxable remittance if (i) it can be traced to remittance basis foreign income or gains; and (ii) the remittance provisions are not overridden by a transitional provision or ongoing exemption. For tax purposes one therefore determines the quantum of remittances in the tax year using the normal rules. Once this has been done, where these rules have been triggered, one must disregard reality and apply these potentially penal statutory matching rules to the amount that has been remitted in order to determine the remittance basis foreign income and gains deemed to have been remitted.

For example an individual would be deemed to have remitted £100,000 of untaxed foreign bank interest where he:

  • has triggered these potentially penal matching rules (by remitting some of his previously nominated income);
  • received £275,000 of untaxed foreign bank interest in a tax year; and
  • made a remittance of £100,000 from an account which had been specifically opened in the tax year to receive the £1 million proceeds from the disposal of a chargeable asset (with a gain of £100,000 being realised).

The taxable quantum of the remittance is the £100,000 of gains actually remitted (that is these rules do not impact on the actual amount brought into charge). However, the matching rules determine that for the purposes of his tax liability the individual is deemed to have remitted untaxed foreign bank interest in priority to the untaxed foreign chargeable gains that he actually did remit.

Generally these potentially penal matching rules will result in a higher tax liability for the individual. Any planning to make the remittance from segregated funds where there would be a lower tax liability (perhaps because they represent gains rather than income or have a high foreign tax credit attached) is negated.

THE NOMINATION DECISION

As discussed above for the nomination to be valid there is a minimum level (£1) and a maximum level (the nomination must not give rise to a relevant tax increase of in excess of £30,000). Within these limits an individual has complete discretion. It is likely, however, that individuals will choose between making a token insufficient nomination and a full nomination.

The best way of minimising the problem of making inadvertent remittances would be to make a token nomination (the minimum being £1). Making a token nomination has significant advantages in that the funds that have to be ring-fenced are greatly reduced. The potential drawbacks are with respect to being able to claim credit for the RBC against:

  • foreign tax; and/or
  • UK tax.

Where claiming credit for the RBC against foreign tax is an issue

Where an individual's tax affairs are such that they would wish to claim credit for the RBC against foreign tax they will not want to make an insufficient nomination. Making an actual nomination such that the increase in the tax liability can be traced to actual foreign income or gains would appear to be the only prospect for being successful in making a claim for credit for the RBC in a foreign territory. However following the IRS announcement in August 2011 that a credit for the RBC would be available a de minimis nomination may now be sufficient. Local advice should be taken where a foreign credit for the RBC is required.

Where the individual has to make an actual nomination that will give rise to the £30,000 tax increase in order to have a chance of getting foreign tax credit for the £30,000 it would be advisable to:

  • evaluate the most practical and tax efficient foreign income or foreign chargeable gains that could be nominated such that tax on the actual nominated funds would yield an additional £30,000; and
  • after identifying the appropriate income or gains, put controls in place to ring-fence the funds so that they cannot be remitted to the UK.

On the basis that the foreign jurisdiction may not give credit for the RBC and even if it does they may not be able to obtain any benefit due to excess foreign tax credits such individuals may want to plan to keep their options open. This could be done by isolating two accounts: one with sufficient income or gains to make an actual nomination that would give rise to an additional tax liability of £30,000 and the other with a nominal foreign income (such that a token nomination could be made). The individual can opt for the token nomination approach and so preserve greater flexibility with respect to future remittances if:

  • foreign tax credit will not be given; or
  • credit will be given but the individual cannot utilise the credit as he or she has excessive foreign tax credits.

The possibility of claiming credit for the RBC against the UK tax liability

In theory there is one other category of taxpayer who will want to make a full actual nomination. That is a taxpayer who may be in a position to remit all remittance basis foreign income and gains arising since 6 April 2008 and would then be in a position to remit the nominated foreign income and gains and claim credit for the RBC paid.

Where there is an "insufficient nomination" it would appear that the tax credit can only be claimed with respect to the tax liability pertaining to the actual nominated income or gain. It is thought unlikely that an individual who would opt to pay the £30,000 RBC would ever be in a position where they were able to remit all remittance basis foreign income and gains arising since 6 April 2008 as such individuals commonly use such funds to finance offshore expenditure. Where, however, there is a genuine possibility that an individual will not use their foreign income and gains offshore one may want to make a full nomination so that should there be a situation where the individual did remit all foreign income and gains since 6 April 2008 they could then remit the nominated income and gains and obtain a full credit for the RBC.

AVOIDING REMITTING FOREIGN INCOME AND GAINS

As discussed above there are good reasons why an individual would not want to remit nominated foreign income or gains. As such it is recommended that a strategy is put in place to minimise the risk of an inadvertent remittance.

Ring-fencing nominated income and gains by establishing a special account

Whatever nomination decision is made it is recommended that to avoid inadvertent remittances the nominated income or gains are ring-fenced by being paid into a special bank account. Ideally such an account would have a prohibition on transfers to the UK within its set up instructions. Note that this ring-fencing is recommended purely to ensure that there can be no remittance of nominated income or gains.

This special account could either:

  • itself be the source of the foreign income that will be nominated in the tax year; or
  • receive the foreign income or gains that will be nominated for the relevant tax year.

Where the account is to receive the foreign income or gains rather than be the source of the foreign income one may, for example, seek to divert into the special nominated account:

  • income from investments (such as a dividend due before the end of the relevant tax year);
  • proceeds from the sale at a gain of a foreign situs asset;
  • foreign employment income (for a token nomination say one week's worth of salary); or
  • a distribution from an offshore trust.

Where the individual's position is such that it is too late in the tax year to divert foreign income or gains directly into the account one may still be able to transfer the desired amount and kind of income or gain into a special account. As this would be an offshore transfer one would need to apply the mixed fund rules and ensure that the transfer is such that the appropriate amount of foreign income or gains for the relevant year is deemed to have been transferred into the special account.

For example assume a case where one wished to make a nomination of £5 of untaxed 2010/11foreign bank interest and the individual identifies his offshore account L as being the most appropriate account to take the necessary income from. Offshore account L contains £20,000 of which:

  • £18,000 relates to 2009/10 foreign employment income (with a 13% foreign tax credit);
  • £1,900 relates to 2010/11 foreign dividend (with a 15% foreign tax credit); and
  • £100 relates to 2010/11 untaxed foreign bank interest.

In such a case one would need to transfer £1,000 (the transfer representing 5% of the pre transfer funds in the account) from offshore account L to the special account so that the special account will be deemed to contain the desired £5 of untaxed foreign bank interest (where there is a transfer of £1,000 then £5 [£100 x 5%] is deemed to be transferred to the special account).

In terms of disclosure it is vital to remember that one is nominating the foreign income or gains that arose in the tax year. This means that details of the foreign income or gains nominated must be disclosed for the election to be valid rather than just providing details of the bank account where the funds are deposited. At a minimum for the nomination to be valid one must specify the amount of income, the type of the income and the source country. However, it is suggested that since one has gone to the trouble of ring-fencing the funds one should disclose to HMRC the account where the nominated income or gains are kept in addition to providing the necessary detail pertaining to the nominated income or gains. Doing so should make it easier to show that nominated foreign income and/or gains have not been remitted if there is a future enquiry.

Where it is not possible to ring-fence the nominated income or gains it may be that it is possible to provide evidence of the fact that it has been spent abroad in such a fashion that it cannot be remitted to the UK. In such a case one might also want to provide details in the white space of the "Residence, remittance basis etc" supplementary pages to show that the nominated income or gains can never be remitted.

Note that for nominations of £10 or less for 2012/13 onwards such ring fencing may not be required.

Establishing the special account

Many banks have standard terms meaning that there is cross–collateralisation of debts. This standard provision could lead to an inadvertent deemed remittance of the nominated income should the individual go into an overdraft situation or take out a loan and in either case remit the funds to the UK. To avoid this risk one would, therefore, want the account containing the nominated income or gains to either be (1) with an institution with respect to which the individual has no other accounts or (2) for the nominated account to have specific terms such that there can be no right of set off with respect to that account.

An account opened specifically for the purpose of ring-fencing nominated income or gains is to be preferred as it does not have any history and one would be happy to provide HMRC with copies of all the bank statements to confirm that the nominated income or gains have not been remitted. Where a new account for this purpose cannot be established and an account which has been used for other purposes has to be utilised the individual should:

  • be comfortable to provide details of the account name and number on their tax return (as discussed this is not strictly necessary but is recommended so they can show exactly what they have nominated and are able to prove they have not remitted the actual nominated income and/or gains);
  • be confident that there have been no remittances of the income and/or gains they envisage nominating; and
  • going forward be able to ring-fence the funds within the account (such that the funds or property derived from the funds would never be remitted directly or indirectly to the UK).

Potential trap where a special account was set up in a prior year to provide the source of the nominated income

Given the current low interest rate levels care must be taken to ensure that a special account set up to be the source of the foreign income has actually received the requisite amount (at least £1) of actual income in the relevant tax year. Where this is not the case (as potentially the interest rate has dropped to zero) alternative action will need to be taken. If one is aware of the issue prior to the end of the tax year one might be able to take action prior to the end of the tax year to divert a source of income to the account or to pay in the proceeds from the sale of a chargeable disposal.

If the problem is only uncovered after the end of the tax year in order to ring-fence the nominated income or gains one would have to transfer funds from an existing account which contains the desired foreign income or gains (see below).

What to do if the year end has passed and no action has been taken to ring-fence the foreign income or gains one would like to nominate

One should still be able to transfer the desired amount and type of either nominated income or gains to a special account. As this would be an offshore transfer one would need to apply the mixed fund rules and ensure that the transfer is such that the appropriate amount of foreign income or gains for the relevant year is deemed to have been transferred into the special account. An example of how this could be done is provided in a slightly different context (when considering the issues where the tax year had not ended but it was too late for foreign income or gains to be paid directly into the special account established) on page 8. The basic principles with respect to how the offshore transfer rules work are the same whether the transfer occurs prior to the year end or after year end. Where the transfer happens after year end one does of course have to take into account any funds added to the account in the tax year in which the transfer will be effected (this being a different year to the relevant year in which the nominated income or gains must relate).

If a mistake is made: amending a tax return where within the amendment window one discovers that nominated income or gains have been remitted

A self-assessment tax return can be amended up to one year after 31 January following the end of the relevant tax year. As such if there is an inadvertent remittance in this period one can amend the tax return to nominate foreign income or foreign chargeable gains that have not been remitted.

PAYMENTS ON ACCOUNT

The £30,000 RBC is collected through the self-assessment system and where the RBC is derived from an actual or a deemed income nomination the resulting income tax feeds into the payments on account calculation. Accordingly, decisions with respect to the RBC have to be taken into account when deciding on the level of payments on account where one is considering making a reduction claim.

The only way to avoid the RBC impacting on payments on account is to make a full nomination of foreign gains (as explained on page 5 this may not be desirable for other tax related reasons). To do this it is necessary for foreign chargeable gains sufficient to give rise to a tax liability of at least £30,000 (ignoring the CGT annual exemption which will not be available to an individual paying the RBC) to have accrued to the individual.

Where the individual has some foreign gains in the relevant tax year, but not sufficient to give rise to a £30,000 tax increase, nominating the gains will reduce the impact on the payments on account situation. For example if the foreign chargeable gains nominated give rise to a relevant tax increase of £6,000 then the deemed income nomination will be deemed to give rise to a tax increase of £24,000 meaning an additional £12,000 is added to each payment on account.

PAYING THE RBC TAX EFFICIENTLY

Ongoing exemption for payment made directly to HMRC to settle the RBC

This exemption can only be in point where:

  • the individual is an adult long term UK resident (that is someone who has been UK resident in at least seven of the nine preceding tax years and is 18 or over at some point in the relevant tax year); and
  • has to make a remittance basis claim (that is he or she does not qualify for the automatic remittance basis as a result of having unremitted foreign income and gains of less than £2,000).

In such circumstances the remittance basis charge (RBC) will be payable by the individual for the relevant tax year and so the individual can take advantage of this special exemption for payments made directly to HMRC.

Where the conditions are met the exemption overrides the standard remittance definition. A total of £30,000 (that is one or more payments can be made provided cumulatively they do not exceed £30,000) can be transferred from funds representing or derived from foreign income and/or foreign gains, to settle the tax liability for a tax year for which the remittance basis charge (RBC) is payable.

The £30,000 must be transmitted to HMRC either:

  • by an electronic transfer (or a series of such transfers) directly to HMRC's account from an offshore account; or
  • by a cheque(s) drawn on an offshore account(s).

Note that the RBC can be paid in foreign currency if required direct to HMRC. However there is a greater risk that funds may be lost and the HMRC exchange rate may not be as favourable as those available commercially. There is therefore a risk that the RBC may be over or under paid unless a Sterling payment is made. An individual will need to retain sufficient records to demonstrate that the payment was sent direct to HMRC.

The exemption is specifically targeted at the direct payment of the remittance basis charge from funds representing or derived from foreign income and/or foreign gains. Where payments are made direct to HMRC, and it is then decided not to make the remittance basis claim with respect to the tax year for which the tax payments were made, the exemption will NOT apply as the payment has not been made in relation to a tax year in which the remittance basis charge applies. Furthermore, if it is decided (within the allowed one year amendment period) to withdraw the claim the exemption will again be switched off such that a remittance will be deemed to have been made.

There is a concern that once the remittance basis claim has been made and the amendment time limit has expired that there is no mechanism to withdraw the claim and be taxed on the arising basis. In contrast, there is the standard four year time limit in which to make the remittance basis claim. Payment may be made by someone other than the individual and still come within the exemption if the qualifying conditions are me It should be noted that whilst the legislation specifies that for the exemption to apply the payment to HMRC must be from an offshore account it does not specify that the payment must be made from an offshore account belonging to the individual. HMRC in its guidance specifically confirms this analysis giving the example of a payment made direct to HMRC by an employer from an employee's foreign chargeable earnings. Similarly the payment could be made directly by an offshore trust on behalf of the individual by way of a distribution to them.

Joint accounts

It is not possible for one individual to settle the remittance basis charge from his or her remittance basis foreign income and gains for him/herself and other individuals and claim more than one exemption of £30,000. Making the payment from a joint account complicates the issues as there are questions of whose funds are being used. Given the complications added, if possible, it would be better not to make the payment from a joint account. Indeed remittance basis users should if possible avoid joint accounts generally. If the payment must be made from a joint account specialist advice should be taken.

Potential traps

It is important that foreign domiciliaries take note of the restrictions. An individual remitting funds representing or derived from foreign income or gains to their UK account and then paying the RBC will not come within the exemption and so the transfer of funds to the UK will constitute a taxable remittance. In addition the following will constitute a remittance even though payments are made directly to HMRC to settle tax liabilities:

  • making aggregate taxable remittances (that is from property representing or derived from foreign income and/or foreign gains) in excess of £30,000 with respect to tax liabilities pertaining to a tax year in which the RBC is payable;
  • taxable remittances (that is from property representing or derived from foreign income and/or foreign gains) made with respect to tax liabilities pertaining to a tax year in which the RBC is not payable.

Practical ways to deal with the problem issues as regards paying the RBC

The premise behind the exemption is simple, but given the complexity with respect to the RBC decision and the potential interaction with payment on account issues determining the correct course of action can be difficult. The aim is not to trigger inadvertent remittances whilst still being able to benefit from the £30,000 remittance exemption in a tax year with respect to which the RBC is payable.

Where it is known that the long term UK resident foreign domiciliary will pay the RBC every year the issues are relatively straightforward. The problems arise where the situation is uncertain from year to year. In such cases the only certain way to achieve the two objectives set down in the above paragraph is to have appropriate segregation of income and gains such that there is segregation not just by type but also by tax year. If this is done the individual can ensure that for each tax year the £30,000 is paid at the earliest opportunity from funds which match to foreign income or gains arising in the relevant tax year (that is the tax year with respect to which the tax payments are being made). By doing this:

  • if the remittance basis claim is made use will have been made of the exemption; and
  • if the remittance claim is not made there is no additional tax with respect to the remittance as the foreign income or gains used to settle £30,000 of the tax liability for the year will be subject to tax on the arising basis anyway.

Note that to get the most advantage from the exemption the £30,000 should be paid from the foreign income or gains that would give rise to the highest tax liability if remitted (that is foreign non-dividend income without any foreign tax credit).

The level of segregation suggested may not be practical and where one is certain to make the remittance basis claim each year it will not be an issue. Specialist advice should be taken to ensure optimal decision making.

USING NOMINATED INCOME OR GAINS TO PAY THE RBC

The following concepts are completely separate:

  • the nomination of foreign income of gains for the relevant tax year in order to make a valid remittance basis claim for the year;
  • the payment of the RBC.

The exemption with respect to the payment of the RBC is such that where the conditions are met for all tax purposes one says that there has been no remittance. As such the individual can use nominated income or gains to settle the RBC and there will be no remittance provided the exemption terms are met (see pages 10 to 11). However, there would be a problem if for any reason the remittance basis charge is repaid. Accordingly, given the consequences should this occur, one would not recommend settling the RBC from nominated income or gains.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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