Remittance Basis

From 6 April 2008, individuals who are resident but not domiciled in the UK will need to make a specific claim each year if all non-UK income and capital gains for that year is to be taxed on the remittance basis - otherwise they will be taxed in the UK on their worldwide income. As a result of this many non-doms are going to pay significantly more tax.

In simple terms, under the Remittance basis, Non-UK Domiciles do NOT pay tax on income retained overseas unless they bring it into the UK. This is referred to as the remittance basis of taxation.(This is much more favourable than the tax rules for UK domiciles who are taxed on worldwide income whether or not they bring it into the UK). To take advantage of this option, the HM Revenue and Customs require certain non-domiciled individuals to pay a charge of £30,000 on top of the tax that would be due under the remittance basis unless their unremitted foreign income and capityal gains amounts to less than £2,000.

It is important for individuals making use of the remittance basis to pay their £30,000 charge from a source OUTSIDE the UK. If the money is brought into the UK, and then used to pay the tax charge, the £30,000 is treated as a remittance and is therefore taxed as income on the individual concerned. If the money is paid direct from an overseas bank account, the money is not deemed to have been remitted, and therefore does not form part of the individuals taxed income.

The rules for determining what is/is not taxable under the remittance basis are extremely complicated and often confusing. The following is a summary of the remittance rules including some tax planning hints on how to get access to monies abroad without it being taxed in the UK

(i) Income earned/accrued before moving to the UK

Income earned/accrued before moving to the UK and subsequently remitted to the UK is NOT taxable in the UK.

(ii) Purchase of Assets abroad (for example, cars, valuable collectables) with foreign income

Purchase of assets abroad (cars, valuable collectables) with foreign income and brought into the UK are NOT taxable in the UK. There is no taxable remittance because the asset received is not "money" (or equivalent to money).

This is confirmed by the Inland Revenue - the Inspector's Manual reads:

(i) Paragraph 1564. "... the mere transfer to the United Kingdom of such investments or assets [cars etc] other than commercially recognisable forms of money does not constitute 'sums received'."

(ii) Paragraph 1569. "If an overseas credit card is used abroad and the account is settled direct to the card company out of overseas income, no liability to United Kingdom tax will arise. But if an asset purchased using the card is brought to the United Kingdom and subsequently sold here, there will be a taxable remittance, at the date of disposal, up to the amount of any income used to settle the original account."

(iii) Spending money when abroad

Similarly to (ii) above, foreign money can be used to to pay for any expense incurred whilst abroad i.e. on holiday or business and will NOT be taxable in the UK. Similarly you could also use an overseas credit card. The Inspector's Manual provides: "If an overseas credit card is used abroad and the account is settled direct to the card company out of overseas income, no liability to United Kingdom tax will arise. But if an asset purchased using the card is brought to the United Kingdom and subsequently sold here, there will be a taxable remittance, at the date of disposal, up to the amount of income used to settle the original account."

(iv) Gifts/Loans to Third Parties Completed Abroad

If a Non-UK Domiciliary wishes to make gifts/loans ("gifts") to UK residents (spouse, other relatives and/or friends) he can do so out of his foreign income without him or the recipient incurring any UK tax liability. It is only necessary to arrange for the sums of income to be received by the recipient abroad i.e. paid into the recipients foreign bank account. The recipient can subsequently bring the gift into the UK without any tax consequences. It is important to note that the Non-UK Domiciliary making the gift cannot benefit from it i.e. if the gift is to his wife then she cannot use the gift to pay his "bills" such as a loan on the car or joint mortgage payments.

The Inland Revenue Inspector's Manual (paragraph 1565) states: "It may be claimed that income arising abroad has been alienated from the taxpayer's possession by gift abroad (for example, to a relative) so that it is no longer his income when received in the United Kingdom. This may be challenged on the grounds that the gift was not completed until the income was received in the United Kingdom or that financial consideration for the 'gift' has been received in the United Kingdom. Before any such claim is accepted, a full report should be made to International Division.