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 either:
- non-UK domiciled but UK-resident (ND), or
- not ordinarily resident (NOR) in the UK (regardless of domicile, which includes UK domicile)
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?
For clients who are not ordinarily resident in the UK, the remittance basis is only available on foreign income. 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 income tax across all age bands and CGT allowance. These tax allowances are removed regardless of whether the client is NOR or ND. So, even though an NOR client cannot claim remittance on foreign capital gains, they still lose their CGT allowance.
It should be noted that following the introduction of the 50% 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 a NOR or ND with earnings over £114,950 (based on an income tax personal allowance of £7,475 (2011/2012) 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 2008/09 tax year onwards, NOR or 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.
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 highest rate of 50%. In 2010/11 he receives £140,000 in interest paid into his Jersey bank account. In his 2010/11 claim, Chris is able to nominate a maximum of £60,000 (i.e. £60,000 x 50% = £30,000 RBC) of the total £140,000.
In 2011/12 Chris receives a further £60,000 of interest paid into his Jersey bank account. He can only nominate foreign income which occurred in the same tax year as his remittance claim, ie in 2011/12. He cannot use his used 2010/11 non-nominated income of £80,000 (£140,000 minus £60,000 = £80,000).
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.
Changes to the remittance basis charge
Following the UK Budget 2012 and prior consultation, the following changes will apply to the remittance rules from 6 April 2012.
- Introduces a higher annual charge of £50,000 for those non-domiciles who claim the remittance basis in a tax year and have been resident in at least 12 of the previous 14 tax years.
- Removes the charge to UK tax on 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.
- Introduces simplifications to the existing remittance rules in respect of nominated income and the taxation of assets remitted and sold in the UK.
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 ‘remittance basis charge’, an offshore bond might provide a suitable compromise.
ND individuals with offshore assets producing less than £75,000 gross income (which at 40% income tax would be charged £30,000) or £60,000 gross income (for the 50% 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 £2.4 million or less are most likely to benefit.
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 £2.4 million in value and preferring not to pay the 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 50% 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.
For more information on the new residence, domicile and remittance rules please contact your regional office or see HMRC6 booklet on Residence, Domicile and the Remittance Basis which describes the law in detail and how it applies from 2008/09.
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.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.