The Finance Act 2008 changes radically the operation of the remittance basis of taxation.

All UK residents, irrespective of domicile, are taxed on the arising basis on UK income and gains. The remittance basis of taxation is an alternative basis for taxing relevant foreign income and, for foreign domiciliaries, employment income and foreign gains.

From 6 April 2008 the remittance basis rules changed fundamentally and basic issues, such as the definition of what constitutes a remittance, have been extended significantly. The rules are complex but here we touch on some areas of importance.

Anti-Alienation Provisions

Prior to 6 April 2008, the law allowed a foreign domiciliary to alienate foreign income and gains by making an offshore gift to an individual (such as a close relative) or an offshore vehicle. As the income had been alienated the transferee was then able to remit the gift to the UK and, provided the transferor did not receive a monetary benefit, there was no deemed remittance.

Special anti-alienation provisions have been introduced for foreign income and foreign chargeable gains arising or accruing from 2008/09 onwards. Broadly, a remittance is deemed to have been made by the individual to whom the foreign income arose or the foreign gains accrued where a person with a specified degree of connection with the individual either:

  • remits funds representing or derived from foreign income or foreign chargeable gains to the UK, or

  • receives any UK benefit directly or indirectly derived from foreign income or foreign chargeable gains.

Importing Goods To The UK

The rules with respect to what constitutes a remittance have been extended significantly. All property imported into the UK that is derived from foreign income or foreign chargeable gains, represents a remittance unless:

  • the transitional provisions apply

  • the property derives from relevant foreign income and has a notional remitted value of less than £1,000 (this means that less than £1,000 of relevant foreign income was used to acquire it)

  • one of the four specific relevant rules applies (the public access rule, the personal use rule, the repair rule and the temporary importation rule).

Services Performed In The UK

Unless a special services exemption applies, a remittance now covers the offshore payment of fees for services performed in the UK. Where the exemption is in point, it applies regardless of the source of the funds used to make the payment. For the exemption to apply, the services' condition and the payments' conditions must be met. Broadly, the services must be wholly or mainly (over 50%) in connection with foreign property, and the payment must be made by a direct transfer to the UK service provider's offshore account (or an offshore account held by someone else on behalf of the relevant service provider).

Payment for travel costs when travelling into and out of the UK is not covered by the exemption and consequently does constitute a remittance.

Source Ceasing

For remittances occurring after 5 April 2008 (regardless of when the relevant foreign income arose), the Finance Act 2008 overturns the principle that there can only be a taxable remittance of relevant foreign income where the source existed in the tax year of remittance. There will not, however, be a charge with respect to funds derived from successful source ceasing exercises, which were brought to the UK before 6 April 2008. This is the case whether or not the funds remain within the UK.

The Need For Advice

The changes are so radical that an individual relying on advice obtained when he/she first came to the UK, and before the rule changes, could find themselves non-compliant and might inadvertently make remittances which, if specialist advice had been obtained, could have been avoided.

If you are affected by the changes, we would be pleased to provide practical advice on how you can structure your affairs and investments tax efficiently under the new regime.

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.