However, it is important to bear in mind two aspects of the remittance basis. The first, which I have been discussing in recent articles, permits foreign income and gains to avoid tax as they arise, subject to the payment of a £30,000 charge if the non-dom is a long-term resident, over 18 and with unremitted foreign income and gains above the £2,000 de minimis limit. The second aspect means that amounts remitted to the UK will be subject to tax up to the amount of unremitted gains and income.
The fact that the £30,000 charge has been given tax payment status will mean that whatever income or gains it is matched to will effectively be franked and can be remitted tax-free. This does not prevent tax on the rest of any untaxed income and gains that are remitted.
For individuals with income and gains potentially available when remitted, the changes being introduced to close down loopholes permitting the use of funds without paying tax under the remittance basis will be of interest. This surplus income and gains that is potentially subject to tax under the remittance basis remains potentially assessable even if remitted in a tax year when the individual is not a remittance basis user and is being taxed on the arising basis. This is because the arising basis only applies to income and gains actually arising in the year in question.
What are these anti-avoidance rules? They are borne out of the Revenue’s belief that the old regime made it too easy to bring funds into the UK and not pay tax on them. To the extent that these funds are fuelled by past unremitted gains and income, the Revenue believes they are fair game.
One of the most well known ways to remit sums into the UK while not making them subject to tax on the remittance basis was to remit clearly identifiable capital. This opportunity would still seem to exist. Basically, if one could retain, say, three accounts – one holding one’s original capital, another holding any gains that had been realised and the other holding any income that had been generated from the capital – and one only remitted from the capital account, the remittance would not be assessable.
Another obvious method that has now been closed was the ceased source rule. Provided the source of the income or gains that were remitted had ceased in the tax year when the amount was remitted, there could be no liability. Say an individual had a bank account with company A which generated £10,000 of interest. If the account was closed in year X and then an amount including the income that had arisen in the account was remitted to the UK in year Y, there would be no tax on it as the source of the income would have ceased. This capability will now no longer facilitate tax-free remittances.
It was also possible to turn unremitted income and gains into other assets which would not count as a remittance. This possibility is also now prevented but some leeway still exists. For example, it is possible to bring assets to the UK for repair and it is also possible to bring in assets of any value for personal use. This includes clothing and jewellery. This opens up enormous scope for substantial value remittance for UK-resident non-domiciled professional footballers. Just think how many Rolex watches you could remit free of tax. A fully blinged-up footballer is a sight to behold, so there may be substantial scope here.
There is some fairly complex legislation within the Finance Bill dealing with the alienation of assets, the use of offshore companies and the use of offshore trusts by UK-resident non-doms.
Let us look first at the alienation rules. The main thrust of the new provisions is to ensure that the concept of taxing sums received in the UK is not limited solely to the receipt by the person whose income or gain has benefited from the remittance basis. This new provision is needed because there appears to be no effective tax charge where overseas income and gains are gifted by an individual to a connected person and then brought into the UK, even where this is done in such a way that the individual whose income or gain it was may effectively have the use or enjoyment of it in the UK.
The same position may apply where an individual’s overseas income or gains are passed through an entity, such as a non-resident trust or a company, but the individual then effectively has the use or enjoyment in the UK. This is sometimes referred to as alienation. I will look at the rules and their potential effects in more detail next week.