Huw Witty Partner, Head of Tax
Domicile remittance basis
This article looks at the practical issues arising from the remittance basis. The remittance basis is an alternative tax treatment that's available to individuals who are resident but not domiciled or treated as domiciled in the UK and have foreign income and gains.
Non domiciled individuals coming to the UK can elect to pay tax on overseas income on a remittance basis for up to 15 years. If a taxpayer elects to be taxed on a remittance basis he will not pay tax on his non UK source income or gains unless they are remitted to the UK. The definition of remittance is widely drafted and complicated but put at its simplest, income or gains will be remitted if they are either directly brought into the UK, used to buy goods or services which are used in the UK or otherwise applied for the benefit the taxpayer or someone connected to him in the UK.
Generally, the game plan is to set aside income or gains which have arisen before the individual comes to the UK as these monies should not be taxable when they are brought into the UK. These funds are often referred to as “clean capital”. Clean capital can be used to fund the individuals UK related expenditure whilst income and gains arising outside of the UK can be used to fund overseas expenditure without any UK tax cost. Clean capital is a useful resource and should only be spent after the taxpayers UK source income (on which he will have to pay UK tax) has been spent.
Clearly the taxpayer will need to separate his clean capital from other funds. To separate out income and gains arising before the non-resident becomes UK tax resident he needs to determine the date on which he becomes UK tax resident. This is where the first problem can arise. Commonly, an individual is resident throughout a tax year. As such, if an individual becomes tax resident in the tax year 2020/21 he will be deemed to have been tax resident from 5 April 2020. If a taxpayer first takes tax advice on coming to the UK, say, in September 2020 he may have up to six months taxable income and gains which cannot be separated from the clean capital.
Split year tax treatment
This statutory rule is subject to two important qualifications. The first is termed split year tax treatment (STT). Under STT an individual may become resident in the UK from the date on which he arrives. STT applies in eight sets of circumstances. Three apply to an individual leaving the UK and so are not relevant here. Another relates to an individual returning to the UK after a secondment overseas so again this will not assist here. Two apply were an individual or his partner come to the UK to take up full time work. They could assist perhaps when a footballer transfers to a UK club. The other two apply when 1) an individual has his only home or homes in the UK or 2) when an individual starts to have a UK home. If the person relocating to the UK is an international individual whose business is managing his investments and who has houses in a number of jurisdictions around the world he is unlikely to qualify for STT.
The second qualification may arise under a double tax treaty between the UK and the jurisdiction which the individual is leaving to come to the UK. If the individual is treated as tax resident in both the UK for UK tax purposes and in another jurisdiction for the country’s tax purposes he will be treated as resident for the purposes of the tax treaty made between those jurisdictions in accordance with a formula in that tax treaty. If the individual is yet to arrive in the UK because he is still living and working in the other jurisdiction he is likely to be resident for the purposes of the tax treaty in that other jurisdiction. If he is treated resident in the other jurisdiction he may be entitled to relief from UK taxation on his overseas income and gains until he becomes resident in the UK under the terms of the tax treaty. As such, income earned up to that date may form part of his clean capital.
Segregation of income and capital
Once an individual has determined the date on which he effectively becomes UK tax resident and consequently the amount of his clean capital, he will need to transfer it into a bank specific account to separate it from other income and gains. However, income and gains are taxed a different rates and so it may be sensible to open a series of accounts. Ideally it is recommended that the individual opens:
- An account for the proceeds of capital assets
- An account for dividend income
- An account for savings and rental income
- An account for overseas earnings
In addition it may be necessary to create further accounts to take into account double tax relief in respect of the overseas source income and open new accounts on an annual basis. However, operating the various accounts will result in the client incurring banking charges and may create operational difficulties so in practice a client may open fewer accounts.
Finally, the individual may have overseas structures (for example, trusts or companies) which hold income producing assets. Under UK anti-avoidance rules income and gains arising to these structures could be taxable in the individual’s hand’s on a remittance basis. Further, distributions from the structures may be taxable on a remittance. If however money can be taken out of the offshore before the individual it may qualify as clean capital. The disadvantage is that as an economic matter it may be preferable to invest the clean capital through the offshore structure. The danger here is the if money distributed from the offshore structure to the individual is lent back to the offshore structure a repayment of the loan could give rise to tax under the anti-avoidance provisions.
A final thought…
In summary, the remittance basis is relatively simple in principle but the practicalities of residence, segregation of income and gains whilst making sure that the individual’s invests profitably mean in practice it is far from straightforward.