Over the past couple of years there has been a fair amount of interest in the residency and domicile statuses which people can adopt. For someone deciding their tax status though, there are many considerations and I’m going to talk through one aspect.
Each year, a resident non-domiciled individual will need to decide whether or not to use the remittance basis. For example, an investor could be expecting a large offshore income or gain during the year, and may choose to claim the remittance basis.
However, if in the following year, no such gain is expected, it may be more appropriate to be taxed on an arising basis. It may help you to be aware of the tax strategies around the remittance basis to ensure that clients are taxed efficiently. By performing regular reviews with investors, you can ensure that appropriate plans are in place, and that they are demonstrating the value of advice.
UK residents are generally liable to UK tax on their worldwide income and gains as they arise. However, where individuals are considered to be either non-UK domiciled and UK resident, or not ordinarily resident in the UK (regardless of domicile) they are able to claim an alternative tax treatment, known as ‘the remittance basis.’
Why pay remittance?
Even though an individual is eligible to use the remittance basis, they do not have to elect to do so. The decision will be driven by individual circumstances, and could change each year. The individual would need to assess whether the loss of income tax personal allowances and CGT annual exemption, plus the cost of the remittance based charge outweighs the savings in tax on an individuals unremitted income and/or gains.
What is the Remittance Based Charge?
From the 6th April 2008 a UK resident, non-domiciled individual who has been resident in the UK in seven of the preceding nine tax years and has £2,000 or more unremitted foreign income or gains will be liable for an annual charge of £30,000 (the remittance based charge (RBC).
The RBC allows the individual to nominate un-remitted foreign income and gains, which will not be taxed again when they are remitted to the UK. It is not necessary to nominate the whole £30,000.
For example, if Susan elected to pay her RBC charge by using £25,000 of nominated income, and a further £5,000 from un-nominated income, then it is only the £25,000 which would be free from a further tax liability when it is remitted to the UK
Those who choose to be taxed on the remittance basis will, as well as suffering the £30,000 charge, lose their entitlement to various personal tax allowances e.g. personal and CGT allowance. However, all the individual’s other (“un-nominated”) foreign income and gains are treated as remitted first before any of the nominated foreign income and gains.
As the RBC is now structured as a tax charge on nominated income and/or gains, it may be possible to offset any tax paid in another jurisdiction under a double tax treaty. If the RBC is funded from abroad and paid directly to HM Revenue & Customs this is not treated as a remittance.
Who is eligible?
The remittance basis is relevant only if the individual has foreign income and/or gains. A Resident Non-Domicile will pay tax on their UK income and gains and will also pay UK tax on foreign income and gains when these are brought, or ‘remitted’ into the UK.
For example, Paul is resident in the UK but is a French domiciled individual. He has UK income of £45,000 which he pays income tax on as it arises. He also has money in an offshore bank account. He will only be liable to pay UK income tax on the money held within the offshore bank account if it is ‘remitted’ to the UK.
As ever, the need for advice in this area is paramount, and advisers who have an understanding for remittance will be able to provide a valuable service for relevant clients.
Rachael Griffin is head of financial planning and product law for Skandia International
