Given the recent headlines we thought it a good time to provide a detailed explanation of the remittance basis and its importance in the UK tax system.
UK resident individuals are subject to tax on their worldwide income and gains on an arising basis. Individuals who are UK resident, but non-UK domiciled can elect to keep their overseas income outside the scope of UK taxation by making a claim to use the remittance basis. Residence and domicile status are completely separate and as anyone attempting to leave the UK and permanently reside in another country can attest, domicile status is extremely hard to change. For a full explanation of ‘domicile’, please see our previous article.
A claim to use the remittance basis results in the loss of the individual’s personal allowance. Furthermore, once the person has been long-term UK resident, they will have a to pay a charge when making the claim: £30,000 if resident for seven of the previous nine tax years, rising to £60,000 once resident for twelve of the preceding fourteen years. In addition, since 6 April 2017 a person who has been UK resident for fifteen of twenty years is deemed UK domiciled for all tax purposes.
So, what is a remittance? The legislation is purposely broad and includes “any money or other property which is, or which derives from, your offshore income and gains which are brought to, received or used either directly or indirectly, in the UK for your benefit or for the benefit of any other relevant person”. A relevant person includes your spouse or civil partner, minor children or grandchildren of yourself or your spouse or civil partner, and a close company with which any of the above is a participator.
It therefore follows that overseas income and gains can only be kept outside the scope of UK taxation if they are never enjoyed in the UK (unless Business Investment Relief is claimed). Indeed, when making the remittance basis claim, the individual should elect income to which the claim relates – if that income is ever enjoyed in the UK it immediately becomes taxable. If no income is nominated or if income and gains from multiple sources and tax years are held in the same account such that it has become impossible to identify the particular type of income being remitted (known as a mixed fund), the legislation taxes the remittance in the following order:
- UK employment income;
- Foreign income which has not been taxed in another country;
- Foreign chargeable gains which have not been taxed in another country;
- Foreign income which has been taxed in another country;
- Foreign chargeable gains which have been taxed in another country;
- Income or capital not stated above.
The ordering starts with income and gains from the latest year first, and then from each previous year in turn. Essentially this is a worst system for the taxpayer.
Whilst we understand the outrage that, whilst the Chancellor has announced tax changes that affect the majority of the working public, his wife is able to earn significant offshore income without paying UK tax on it, this is not a ‘scheme’ that she has entered into – it is the law as it is set out at this time. Furthermore, the income remains taxable in its country of origin and relief would be given in the UK for any tax paid overseas or depending on the provisions of the double-taxation agreement may be outside the scope of UK taxation altogether (not so with dividends from Indian companies).