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Malcolm Finney considers how the Finance Act 2008 provisions on the remittance basis affect non-UK domiciled individuals.

Background

Before Finance Act 2008, (FA 2008), the options available to the non-UK domiciled but UK resident individual (hereafter simply referred to as “the individual”) to “enjoy” the fruits of offshore income and gains tax free in the UK were much greater. FA 2008 has, however, severely tightened up the position post 6th April 2008 although transitional provisions to some degree ameliorate the transition from the pre- to the post- FA 2008 position.

This article examines the new rules applicable to those individuals wishing to claim remittance basis treatment.

Categories of non-UK domiciled individual

The claim for remittance basis treatment is an annual claim. It may be made for some tax years but not for others. Where a claim is not made for a particular tax year the individual is subject to income and capital gains tax for that year on the same basis as a UK domiciled, resident and ordinarily resident individual i.e., on the arising basis.

However, not all individuals are required to formally claim the remittance basis for a tax year, yet may still be taxed as if such a claim had in fact been made.

Those individuals where a claim must be lodged (subject to falling into one of the categories (a), (b) or (c) below) may conveniently be allocated to one of the following three categories:

1. aged eighteen or over in the relevant tax year and has been UK resident in at least seven out of the nine tax years immediately preceding the relevant tax year, or
2. under age eighteen in the relevant tax year and has been UK resident in at least seven out of the nine tax years immediately preceding the relevant tax year, or
3. irrespective of age, has not been UK resident in at least seven out of the nine tax years immediately preceding the relevant tax year

Example 1

X is non-UK domiciled but UK resident and aged fifty.
 
X has resided continuously in the UK for the last fifteen tax years.

For the tax year 2008/09 X will need to lodge a claim for remittance basis treatment. (Category 1 above)

Example 2

Y is non-UK domiciled but UK resident and aged seventeen.
 
Y has resided continuously in the UK for the last three tax years prior to 2008/09.

For the tax year 2008/09 Y will need to lodge a claim for remittance basis treatment. (Category 3 above)

Where the individual satisfies any one of the following three categories (i.e., (a), (b) and/or (c)) however, no formal claim for remittance basis treatment is required as such treatment will apply automatically:

(a) those individuals whose “unremitted foreign income and gains” (basically foreign income and capital gains arising in the relevant tax year less the amount of such income and/or gains which are remitted to the UK in that tax year) for the relevant tax year is less than £2,000;

(b) those individuals who have no UK-source income or gains, who have been UK resident in not more than six out of the nine tax years immediately preceding the relevant tax year and who have remitted no income or gains to the UK in the relevant tax year;

(c) those individuals who have no UK-source income or gains, who are under eighteen throughout the relevant tax year and who have remitted no income or gains to the UK in the relevant tax year

Example 3

Z is non-UK domiciled but UK resident and aged fifty.
 
Z has resided continuously in the UK for the last fifteen tax years.

For the tax year 2008/09 Z’s non-UK source income amounts to £65,000 of which £64,000 has been remitted to the UK in 2008/09.

For the tax year 2008/09, Z falls into (a) above and thus will not need to lodge a claim for remittance basis treatment.

Example 4

B is non-UK domiciled but UK resident and aged fifty.
 
B has resided continuously in the UK for the last seven tax years prior to 2008/09.

For the tax year 2008/09 B’s non-UK source income amounted to £65,000 of which £56,000 has been remitted to the UK in 2008/09.

For the tax year 2008/09 B will need to lodge a claim for remittance basis treatment as he does not fall into (a), (b) or (c) above.

Consequences of a claim

Where it is necessary for the individual to claim remittance basis treatment such a claim will be made as part of the individual’s Self Assessment Tax Return.

One of the consequences of the making of such a claim is the loss of entitlement to both personal allowances and the capital gains tax annual exemption.

Where the individual is aged eighteen or over in the tax year and UK resident for at least seven out of the immediately preceding nine tax years (i.e., category (1) above), two additional consequences follow where a claim for remittance basis treatment is lodged:

• a requirement to pay £30,000 for the relevant tax year
• a requirement to “nominate” foreign income and/or foreign chargeable gains of the relevant tax year

It is important to appreciate that the individual, when forming a view as to whether a claim for remittance basis treatment should be made (in particular if this means the £30,000 charge has to be paid) needs to take account of any non-UK source income and/or capital gains which would be imputed to the individual under the various anti-avoidance provisions with respect to non-UK resident trusts (and companies), should no claim be lodged.

The £30,000 charge

The £30,000 is to be paid through the Self Assessment system. Where the £30,000 is paid from a non-UK source directly to HMRC by cheque or electronic transfer the £30,000 itself will not be treated as a remittance; otherwise it will be so treated.

Nomination

As part of the claim for remittance basis treatment the individual falling within category (1) above is required to “nominate” either foreign income and/or foreign chargeable gains of the relevant tax year. This area of the new provisions is extremely complex.

Broadly, sufficient income/gains need to be nominated such that a tax charge of £30,000 arises on the nominated amount. For example, a 40% tax payer needs to nominate, broadly, £75,000 of income or £167,000 of capital gains or some mixture of the two. A failure to nominate such amounts as give rise to the £30,000 charge simply causes HMRC to deem additional amounts to have been so nominated which produces the £30,000 charge. This deeming by HMRC may not be desirable from the individual’s perspective.

In principle, any actual (but not “deemed”) nominated income/capital gain may be remitted without precipitating an additional tax charge, as tax will already have been paid thereon (i.e. the £30,000). It might therefore be thought that the “best” strategy for the non-UK domiciled but UK resident individual claiming the remittance basis would be always to remit the nominated amount to the UK (as the tax thereon will already have been paid i.e. the £30,000).

Unfortunately, under the rules, where any part of the actual (not deemed) nominated income or capital gains, whether for the current tax year or any previous tax year (beginning with the tax year 2008/09) is remitted to the UK but the individual has other non-UK source income and or capital gains (not nominated) whether arising in the tax year or any previous tax year, (beginning with the tax year 2008/09) which have not in their entirety been remitted to the UK, then effectively the quantum of actual nominated amount actually remitted is treated as a remittance out of the non-nominated amount and thus subject to tax (the £30,000 not being deemed to apply to this substituted amount); in effect, a complete fiction is created under which actual nominated amounts actually remitted are deemed not to have been so remitted and non-nominated amounts are substituted (which are taxable)).

The implication of these rules is that until the individual’s entire non-UK source income and capital gains (other than the actual nominated amounts) arising since 6th April 2008 have been remitted to the UK, it is not possible for the individual to access the “tax-free” actual nominated amounts for each tax year.

In this regard, the £30,000 is a real additional annual burden of claiming remittance basis treatment (where it applies).

Where no claim is necessary

For the three categories of individual where no claim for remittance basis treatment is necessary (i.e., (a), (b) and (c) above) none of the above discussion relating to the £30,000 or the need to nominate income/gains applies.

Conclusion

For those individuals who may be exposed to the £30,000 charge if the remittance basis treatment is sought, in broad terms, annual overseas income needs, probably, to be in the region of £75,000 to £100,000 for the higher rate taxpayer. Below these figures, claiming would seem not to be appropriate in pure tax terms; there may, however, be other reasons to nevertheless lodge a claim (e.g., avoids the need for disclosure of overseas income/gains).

The need to nominate income/gains increases the complexity of monitoring remitted and unremitted income/gains if tax is to be mitigated. Depending upon circumstances the “better” approach may simply be to accept the £30,000 charge as a “cost” of residing in the UK and not to remit any of such nominated income (in effect to “ring fence” it).

For those individuals aged eighteen or over and who have not resided in the UK for at least seven out of the preceding nine tax years (but who wish to claim remittance basis treatment) there is no need to pay the £30,000 charge (or indeed nominate income/gains) although a loss of personal allowances and the annual exemption occurs.

In the case of two non-UK domiciled spouses it may be sensible to ensure that two lots of annual £30,000 are not payable by ensuring only one spouse has overseas income/gains; this may raise other issues (e.g., what happens on divorce?).

Great play is being made of offshore investments which give rise to no annual income/gains (as such income/gains are rolled up within an appropriate wrapper) and which may thus avoid the need to claim remittance basis treatment (e.g. single premium bonds). Care is required, as in the case of such bonds the remittance basis is inapplicable even to non-UK domiciled individuals and in the event the bond is surrendered, sold or matures any gain is an income gain subject to, possibly, 40% not the more attractive 18% capital gains tax rate.

The claim is a tax year by tax year claim and thus the individual’s circumstances will need to be monitored carefully to ensure a claim is lodged only where it makes sense to do so.

The above article is based on the author’s new book “Wealth Management Planning: The UK Tax Principles” published by Wiley & Sons and available here.