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Tony Wickenden: When is it worth non-doms claiming the remittance basis charge?

For non-doms with assets overseas there is a decision to be made

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According to a recent report in the Financial Times, nearly 6,000 of the wealthiest foreigners living in Britain paid £178m in remittance basis charges in the calendar year 2012.

This represented a 6 per cent increase over the previous year.

The remittance basis charge is the charge paid by UK resident “non-doms” to exclude their non-UK income and capital gains from UK taxation on the arising basis.

So how does the remittance basis charge work? What are the ground rules?

Broadly speaking, if unremitted foreign income and/or capital gains of UK resident non-doms are less than £2,000 at the end of the tax year, the remittance basis automatically applies without the need to make a claim. This means there is no tax cost to the individual. UK tax will be due only on any amounts of foreign income/gains remitted to the UK. In other words, the RBC does not have to be considered.

Note that the measure is unremitted income – the exception from the RBC can be secured even if total income and gains arising abroad is over £2,000, provided the balance is remitted (and so taxed in the UK anyway).As a small postscript, it is really important to be well informed about what does and does not constitute a remittance in this context. The rules are not easy but I might attempt to look at them in a future article.

If, however, unremitted foreign income is over £2,000 then the remittance basis can still be claimed, but at a cost. And the cost of claiming the RBC is quantified like this:

  • In all cases the person claiming the remittance basis will lose the use of their UK personal reliefs and annual capital gains tax exemption.
  • People who have been resident in the UK for at least seven out of the prior nine tax years have to pay a RBC of £30,000 in order to use the remittance basis. Effectively, this provision represents a revenue raising measure aimed at wealthier long-term UK resident non-doms. But it does not stop there.
  • From 2012/13 an RBC of £50,000 is payable for non-dom individuals who have been UK resident in at least 12 of the prior 14 tax years. Basically, a higher cost version of the £30,000 RBC.

Alternatively, it is possible for a UK resident non-dom to be taxed on the arising basis, that is on all income and gains wherever they arise. The only way to decide whether or not to choose to be taxed on the remittance basis (and pay the RBC) or on the arising basis is to calculate and compare the tax liability under both options.

Basically, if the UK tax expected to be saved through not remitting income and gains (especially if it is not just deferment but likely to be real and legitimate eg by accessing investments that allow the investor “tax-advantaged” timing over when and if to trigger a tax charge) exceeds the “hard” sums of £30,000 or £50,000 (as appropriate) under the RBC, then securing the RBC basis of taxation would make economic sense.

There are a number of other factors that should also be taken into account in making the decision, including:

  • Whether it is planned to remit the income in the future – if it is not taxed now on the arising basis it is likely to be taxed on remittance to the UK.
  • If the offshore income has been taxed in the country where it arose the UK will usually allow a credit for those foreign taxes against the UK tax liability. This means UK tax is reduced by the amount of foreign tax paid. Therefore the effective UK tax rate charged on the foreign income may be quite small.
  • Capital and income earned before arrival in the UK would generally not be taxed if remitted to the UK. But the financial administration required to ensure such monies are properly segregated from unremitted income and gains is complex.
  • Financial advisers should remember that, under current legislation, income and gains generated by investments held in an offshore bond belong to the (offshore) life company managing the investment and so do not count as income of the investor for the purpose of the RBC.

This therefore does not need to be taken into account in determining whether or not to elect for the remittance basis.

Care needs to be taken in respect of withdrawals though if the investor funded the purchase of the bond with unremitted foreign income or gains.

So, non-dom resident clients? Plenty to think about.

Tony Wickenden is joint managing director of Technical Connection

Access accredited CPD, essential technical updates, business generation ideas and get answers to your case-related technical questions from our consultancy team through Techlink Professional. And bi-weekly client and professional connection e-mail content through Techlink Communicator.  Go to www.techlink.co.uk and click the Contact Us link at the top of the screen and then request your free trial of both services from the drop down menu.

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