Taxable remittances outline
Being a foreign domiciliary can have significant tax advantages and there may be opportunities for successful planning and arranging of affairs in a tax efficient manner. This is because the general position is that overseas income and gains not remitted to, or giving rise to a benefit received in, the UK are potentially not subject to UK tax. This briefing note provides a brief outline as to what constitutes a taxable remittance. The rules are, however, highly complex and there are significant traps and pitfalls such that a UK resident foreign domiciliary who has not received proper advice can find themselves faced with significant unexpected tax liabilities.
In basic terms, there will be a taxable remittance where any property representing or derived from foreign income or foreign chargeable gains is brought to, received or used in the UK for the benefit of a relevant person. This wide definition encompasses far more than just cash remittances to the UK. It includes the remittance of any form of property and the payment for services provided in the UK Remitted funds deriving from offshore capital gains will be taxed at 18% or 28% as applicable. Remittances derived from income will be taxed at the individual's marginal rate. Some foreign income and gains will have suffered tax in other territories such that relief for foreign tax can be claimed.
The 'relevant person' concept
There is a deemed remittance by the individual to whom the foreign income or gains arose where any relevantperson remits property representing or derived from that income or capital. The individual will be taxed onthe remittance in exactly the same way whether it is effected or enjoyed by themselves or any other relevantperson. Relevant person is defined to include the following:
a) the individual;
b) the individual's husband or wife;
c) the individual's civil partner;
d) a child under 18 or grandchild under 18 of someone in category (a) to (c);
e) a close company in which a person within any other category is a participator;
f) the trustees of a settlement where a person falling within any other category is a beneficiary.
The meaning of relevant person is widely drawn and great care must be taken to avoid accidentally triggering the alienation provision. However, there are no restrictions on offshore gifts from foreign income or gains to non-relevant persons such as adult children, parents and siblings.
The core remittance definition
The standard core definition of a remittance is given in one of two conditions: Condition A relates to the use made of the money or other property and is met where:
- money or other property is brought to, received, or used in the UK by or for the benefit of a relevant person; or
- a service is provided in the UK to or for the benefit of a relevant person (this will be the case regardless of whether the service is paid for offshore or the payment is made in the UK).
Condition B relates to the actual property used and whether it represents or derives (directly or indirectly) from an individual's remittance basis income or gains. This very wide definition covers cash remittances, the remittance of goods, services provided and the payment of UK related debts where there is tracing to directly or indirectly to previously unremitted foreign income or gains.
The amount subject to tax is not confined to the market value of the asset on the date that it is remitted to the UK but is measured by the amount of foreign income or foreign chargeable gains used to acquire the asset, meaning it is necessary to trace to the source of the original funds and where at any point there is unremitted foreign income or gains, there will be a tax liability.
There are also two further definitions to prevent avoidance, being the gift recipient provision (Condition C) and the third party connected operation provision (Condition D).
A gift recipient is a non-relevant person who receives a gift from a UK resident foreign domiciliary which represents or derives from the donor's remittance basis foreign income or gains. In the event that the property is used such that the donor or a relevant person receives a UK benefit there will be a taxable remittance. This anti-avoidance legislation is sufficiently wide in scope to catch reciprocal arrangements intended to confer benefit on a relevant person.
A third person is neither a relevant person nor a gift recipient. Condition D catches arrangements between a UK resident foreign domiciliary and a third party involving a qualifying disposition in favour of the third party where the disposition represents remittance basis income or gains. There will be a remittance where the UK resident foreign domiciliary or any other relevant person consequently receives a UK benefit.
Where there is any use of property derived from foreign income or gains in connection with a UK relevant debt, a remittance will be triggered. This would include repaying debt, servicing the interest and (in certain non-commercial circumstances) using the property as collateral. The definition of relevant debt is broad and covers debt ranging from a credit card liability to a long term mortgage and including the payment of interest to service the debt.
The wide definition of relevant debt means it is no longer possible to avoid a remittance by settling a debt offshore with respect to the acquisition of UK property or the provision of a UK service.
Paying for services provided in the UK
A taxable remittance is triggered where foreign income or gains are directly or indirectly used to pay for a service provided in the UK and either the service is provided to or for the benefit of a relevant person; or the services are enjoyed by relevant persons. A charge cannot be avoided by the simple step of a service being provided in the UK but invoiced by an offshore connected company.
Provided the payment is made offshore there is no taxable remittance for foreign income or gains used directly or indirectly to pay for a service provided offshore. However, payment for travel costs into and out of the UK are taxable remittances regardless of where the payment is made.
Where there has been a taxable remittance, it is necessary to identify the foreign income or gains in charge. In many circumstances the funds in a bank account or represented by another asset, such as an investment portfolio, will result from a mixture of income and gains. Mixed funds potentially include employment income, investment income, chargeable gains and clean capital. The income and gains may, or may not, have already suffered overseas tax. Where there are mixed funds and there has been only a partial remittance of the money or other property, there are special rules to determine what has been remitted to the UK. The mixed fund rules are highly complex with there being two very different sets of rules which can apply. There are statutory rules where the income or gains arose after 5 April 2008 and the remittance to the UK falls within the standard core remittance conditions. In all other cases, common law rules based on case law and accepted practice are used.
In brief outline, the statutory rules entail looking at the income and gains of each year taking the most recent year first. The order of matching is broadly against employment income, then relevant foreign income and third against chargeable gains. These categories are matched first where there is no foreign tax credit. If the amount of benefit is not exhausted by this matching the process is repeated against income and gains that have been subjected to foreign tax and in the same descending order of priority. The last matching is against any clean funds. Where there has been a remittance it is therefore necessary to identify in detail the sources of income and gains which have been brought into charge to UK tax as a result.
Business Investment Relief
From 6 April 2012 a UK resident non-UK domiciliary is able to remit overseas income and gains to the UK tax-free in respect of certain qualifying business investments in the UK, including companies in which they or their associates are involved. In order to qualify for Business Investment Relief the following conditions are to be met:
- the investments must be in a qualifying company which meets the eligibility conditions;
- the investments may be in the form of shares or loans;
- the investments must be made within 45 days of the foreign income or gains being brought to the UK;
- no benefit can be received by a relevant person, attributable to the investment;
- a claim is made on the Self-Assessment tax return for the year in which the investment is made;
- on disposal of the investment the proceeds of sale up to the amount of the investment must be taken offshore or reinvested in another qualifying investment within 45 days.
If any of the conditions for the relief are breached, or certain other events occur, the investor is treated as having remitted the amount of the investment to the UK and the remittance will be chargeable to UK tax unless appropriate mitigation steps are taken.
The detail of the Business Investment Relief legislation is explained in NTBN212 titled 'The Business Investment Relief for UK resident non-UK domiciliaries'.
Ongoing exemptions and transitional relief
Property acquired pre-arrival in the UK can be brought to the UK without there being any tax liability. The same is the case with any property derived wholly from "clean capital" or any income or gains on which UK taxation has already been paid on the arising basis.
Important transitional provisions narrow the definition of a relevant person where the remittance basis foreign income or gains arose prior to 6 April 2008. In that circumstance the individual to whom the foreign income or gains originally arose is the only relevant person. Provided that individual does not receive any UK benefit then funds representing or derived from pre-6 April 2008 remittance basis foreign income or gains can be gifted offshore to any person and remitted to the UK without there being a taxable remittance.
There are transitional provisions which could potentially run until 5 April 2028, where interest is paid from relevant foreign income. The interest must arise on a loan qualifying pre-12 March 2008 as an offshore mortgage which has been used either to acquire an interest in UK residential property or facilitate a remortgaging transaction where the original loan was used to acquire an interest in a UK residential property. Where the conditions are satisfied the use of relevant foreign income to pay the interest on the loan is deemed not to be a taxable remittance. The qualifying conditions are strict and any changes to the loan terms after 11 March 2008 will result in the conditions being breached.
There is also an ongoing exemption where foreign income or foreign gains are used to pay the remittance basis charge to HMRC. Payment must be transmitted to HMRC either by electronic transfer directly to HMRC's account from an offshore account or by a cheque drawn on an offshore account.
Where foreign income or gains are used directly or indirectly to pay for a service performed in the UK, to or for the benefit of a relevant person, the general rule is that there is a taxable remittance. However, there is an exemption if the UK service relates wholly or mainly to property situated outside the UK. There must be a direct link to offshore property and in excess of 50% of the work carried out must relate to that offshore property. To qualify for the exemption the payment for the services must be made by direct transfer to the UK service provider's offshore account. Where the conditions for exemption are met, the foreign income or gains used to pay the service fees are deemed not to be remitted to the UK.
There are also ongoing exemptions in relation to property other than money. There is an exemption where the amount remitted is less than £1,000. Clothing, footwear or jewellery are exempt provided for the personal use of a relevant individual. If an item is temporarily imported and it will not be in the UK for more than 275 days the remittance is disregarded. This is also the case if an item is brought to the UK for repair or restoration, or is of heritage quality and will be accessible to the public at an approved establishment. From 6 April 2012 such items may be sold to an unconnected third party in the UK without incurring a tax liability provided the proceeds are removed from the UK, or invested in a qualifying UK business, within 45 days of the proceeds of sale being released.
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.