Sehjal Gupta – Private Client Director
UK resident individuals are generally taxed on the arising basis which means they are liable to pay UK tax on worldwide income and gains, regardless of where they arise or accrue.
In the UK, the “remittance basis” is an alternative tax treatment available to people who are resident in the UK but are non-UK domiciles (“non-doms”). The remittance basis is relevant if the taxpayer has foreign income and/or gains and gives non-doms a tax advantage over UK domiciles.
The rules for non-doms are complex and it is imperative to obtain tax advice prior to becoming UK resident to ensure the taxpayer’s tax affairs have been arranged in a tax efficient manner including the segregation of bank accounts. For those who are already UK resident, advice remains crucial to ensure you abide by the complex non-dom tax rules and indeed, where possible, utilise the tax advantages available to UK resident non-doms.
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A claim for the remittance basis allows non-doms to pay no UK tax on their foreign income and capital gains, provided the income or sale proceeds are not ”remitted” to the UK, i.e. brought into the UK. The rules of what constitutes a remittance are vast and are not just limited to bringing offshore funds to the UK. Individuals need to be careful to avoid making deemed or constructive remittances unknowingly which could result in tax liabilities.
What is a remittance basis?
A remittance is any money or other property which is, or which derives from, an individual’s offshore income and gains which are brought, either directly or indirectly, into the UK for their own benefit or for the benefit of any other relevant person.
The simplest form of remittance is the transfer of cash from an overseas account to a UK account. However, there are many other ways in which a taxable remittance can be made some of which are summarised below:
Bringing Property to the UK
Prior to 6 April 2008, it was generally accepted that where property such as artwork was purchased with foreign investment income and subsequently brought into the UK, there would not be a taxable remittance unless the asset was sold here. Under the old regime, the importation of the property may have been treated as taxable if the goods were purchased with foreign employment income or capital gains.
Since 6 April 2008 new rules are applied which would treat the importation (whether by the taxpayer or by a relevant person) of goods derived from foreign income or foreign chargeable gains as a taxable remittance.
Reliefs are available where the property is either in the UK for less than 275 days, is brought to the UK for repair, or is to be made available for public viewing in the UK (e.g. for an exhibition).
Personal use items of the taxpayer or the immediate family such as clothing, watches, jewellery, handbags, footwear and other items worth less than £1,000 are exempted from this importation rule. However, if these items are sold in the UK, they would no longer qualify for the exemption and will be a remittance.
Payment for UK services
Use of an overseas credit card in the UK is a constructive remittance as is settlement of the balance on a UK credit card using overseas monies.
Payments in respect of professional fees from UK advisors may also be treated as a remittance unless the advice relates mainly to assets outside the UK and payment is made to a non-UK bank account of the advisors.
A deemed remittance would also occur if a service is provided to the taxpayer or a relevant person in the UK which is paid for by overseas monies. An example is if payment of a flight which either lands or takes off in the UK was made via an overseas travel agent and/or payment was made using overseas monies.
Acquiring UK investments
A remittance would also be made if overseas funds are used in the UK to acquire intangible assets such as UK company shares. If Business Investment Relief (“BIR”) is available different rules apply and we would advise for this to be discussed with your tax advisor.
BIR is an attempt to encourage UK resident non-doms to invest in the UK by allowing them to use offshore income and/or gains for investment in the UK without incurring a UK tax charge which would otherwise arise on remittance. Various conditions must be met for eligibility so advice should be sought prior to investment or remittances being made.
Offshore loans
The rules on collateral provided to secure loans were changed in 2014 and became more stringent. If borrowed funds are brought to the UK from overseas, a remittance of the collateral occurs when the borrowed funds are brought to the UK. This does not apply to loans where the loan monies were brought into or used in the UK before 4 August 2014.
Similarly, where a mortgage/loan has been taken out with an offshore bank to buy property in the UK, any repayment to the bank of the interest would be considered a remittance by the taxpayer or a relevant person.
Offshore loans are a complex area so we would encourage you to speak to your advisor should you feel you are impacted by this.
When does remittance basis tax come into play?
The remittance rules highlighted above are naturally of interest and of consequence for UK resident non-doms. However, as referred to above, a remittance can also be triggered by a ‘relevant person’.
Relevant persons
An individual may be treated as making a remittance where someone, who is a “relevant person” in relation to them, makes a remittance.
Relevant persons include:
- The taxpayer
- The taxpayer’s spouse or civil partner
- A child or grandchild of the taxpayer or anyone within 2) above, where they are under 18 years old. Adult children/grandchildren do not meet the definition of a relevant person.
- A close company (i.e. one controlled by five or fewer persons) in which any other category of relevant person is a participator, i.e. has an interest or a company which is a 51% subsidiary of such a close company
- An offshore company in which any category of relevant person is a participator, and which would be a close company if it were UK resident, or a company which is a 51% subsidiary of such a company.
- A trustee of a settlement of which any category of relevant person is a beneficiary, i.e. any person who receives, or may receive any benefit under or by virtue of the settlement
- A body connected with such a settlement.
The relevant person rule could apply as follows:
The taxpayer transferred overseas income arising in 2019/20 to their spouse offshore. The spouse remits these funds in 2020/21 to their personal account in the UK. Although the taxpayer is not benefitting from the remitted funds in any way, this will be treated as a remittance by the taxpayer in the 2020/21 tax year and included on the tax return accordingly.
The following is an example of what will not be considered a taxable remittance:
If foreign income/gains are transferred to an adult child/grandchild by the taxpayer outside the UK which is then remitted to the UK, this should not be treated as a taxable remittance by the taxpayer provided that neither they nor any other relevant person in connection with the taxpayer, benefit (whether directly or indirectly) from the remitted funds.
The rules are complex and care should be taken in respect of any offshore structure such as a trust or company where the income is treated as that of the taxpayer’s under anti-avoidance rules or where the taxpayer has transferred personal remittance basis income or capital gains to the structure. In these circumstances, please discuss with your tax advisor.
Mixed Funds
The opportunity to “cleanse” mixed funds has now passed. Therefore, if remittances are made to the UK from “mixed funds” (i.e. monies made up of income, capital gains and/or clean capital), detailed analysis will need to be carried out to determine each component remitted on a year by year basis.
To avoid unnecessary tax liabilities arising, it is always best to discuss the details of a transaction and the amount of the remittance with your tax advisor in advance to ensure any overseas monies are remitted to the UK in the most tax efficient manner.
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