This article summarises the key points for international advisers 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 non-UK domiciled but UK-resident (ND) 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) is remitted to the UK. So for example, if John 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.
You will need to decide whether it is appropriate for your clients to use the remittance basis each year, as it depends on their individual circumstances and any plans for the coming year.
To what income or gains does the remittance basis apply?
Non-domiciled UK resident clients can apply the remittance basis to both foreign income and capital gains.
Clients who elect to use the remittance basis automatically lose their entitlement to various personal tax allowances, for example personal allowance and Capital Gains Tax allowance.
It should be noted that following the introduction of the 45% tax rate in the UK and the removal of the income tax personal allowance for individuals by reducing the personal allowance by £1 for every £2 of net relevant earnings over £100,000. This means that an ND with earnings over £122,000 (based on an income tax personal allowance of £11,000 (2016/2017) would no longer benefit from an income tax personal allowance anyway.
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 2016/17 tax year onwards, 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 where they have been resident for at least seven out of the nine years preceding the current tax year; or
- £60,000 in addition to any UK tax liabilities where they have been resident for at least twelve out of the fourteen years preceeding the current tax year or,
- £90,000 in addition to any UK tax liability where they have been resident for at least seventeen out of the twenty years preceeding the current tax year
When a client 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.
Chris has been ND for 8 years, and subject to UK income tax at the additional rate of 45%. In 2016/17 he receives £140,000 in interest paid into his Jersey bank account. In his 2016/17 claim, Chris is able to nominate a maximum of £66,666.67 (i.e. £66,666.67 x 45% = £30,000 RBC) of the total £140,000.
Clients 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.
Exemptions to the remittance basis charge
There are various exemptions referred to in the remittance rules. The following is a summary of these.
Remittances of income and gains that are remittances because they are used:
- to pay the RBC as long as paid directly to HMRC from an overseas account.
- as consideration for the preovision of certain UK services that relate wholly or mainly to property situated outside the UK.
In addition, there are five exemptions relating to exempt property which is brought to, or received or used in the UK by or for the benefit of the ND individual that is to be treated as not remitted to the UK.
- certain property (for example, works of art) which meets the public access rule
- clothing, footwear, jewellery and watches which meet the personal use rule.
- property of any description which meets the repair rule
- property of any description which meets the temporary importation rule
- property where the notional remitted amount is less than £1,000
- Overseas income or capital gains remitted to the UK for making commercial business investment in an unlisted company or a company listed on an exchange-regulated market.
A compromise for non domiciled individuals
- The remittance basis does not apply to offshore bonds but for ND individuals who would prefer not to pay the £30,000, £60,000 or £90,000 ‘remittance basis charge’, an offshore bond might provide a suitable compromise.
- ND individuals who would be liable to the £30,000 RBC with offshore assets producing less than £75,000 gross income (which at 40% income tax would be charged £30,000) or £66,667 gross income (for the 45% tax payers) 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 who are subject to the £30,000 RBC.
- However, the actual cost of maintaining the remittance basis is greater than is first apparent, given the loss of the personal allowance for income tax, annual allowance for CGT, etc.
- Those with assets substantially above £3 million in value and preferring not to pay the £30,000 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.
- Although, it should be noted that following the introduction of the 45% income tax rate and the impacts on personal allowance where net relevant earnings are over £100,000, the ND would have lost their personal allowance anyway.
ND individuals were encouraged to ensure they did not mix their offshore funds. So it was not uncommon for clients to have three offshore bank accounts, containing:
- clean capital;
- income; and
- 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.
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.