Annual remittance basis charge Print

The remittance basis charge, which is a UK tax on unremitted overseas income or gains, applies to those individuals who have been resident in the UK for more than 7 out of the past 9 years. For 2016/17 this annual charge is £30,000 and is payable by individuals claiming the remittance basis. Once the individual has been resident in the UK for more than 12 out of the past 14 years the remittance basis charge increases to £60,000 per annum.

A higher tax band of £90,000 was introduced from April 2015 for those individuals who have been resident in the UK for 17 out of the past 20 years. This band will only be chargeable up to April 2017 when the new rules for long-term UK residents will apply instead.

In the July 2015 Budget the Chancellor announced that from April 2017 once an individual has been resident in the UK for more than 15 out of the past 20 tax years he will no longer be entitled to claim the remittance basis, and will be treated as deemed UK domiciled for all tax purposes. Accordingly all worldwide income and gains will be taxable on the arising basis.

The table below sets out the RBC payable where the remittance basis is claimed for 2016/17 and the proposed changes for 2017/18:

2015/16 and 2016/17

£

2017/18

£

First 7 years of residence in UK Nil Nil
Resident in UK for more than 7 years
out of past 9 years (Maximum period 5 years)
30,000 30,000
Resident in UK for more than 12 years
out of past 14 years
60,000 60,000
Resident in UK for more than 15 years
Out of the past 20 years
60,000 N/A*
Resident in UK for more than 17 years
Out of the past 20 years
90,000 N/A*

*Remittance basis no longer available, and all worldwide income and gains taxed on the arising basis.

The individual may be able to claim tax credit relief for the payment of the remittance basis charge in their home territory. This is particularly relevant to American taxpayers residing in the UK. The Internal Revenue Service (“IRS”) confirmed that US taxpayers may claim credit relief for the payment of the remittance basis charge, and that it would not limit this relief to the amount of income on which the RBC is paid.

The remittance basis tax charge does not apply to:

  • Children under the age of 18, and
  • Individuals whose unremitted offshore income and gains is less than £2,000 for the relevant year.

Example:

Julia became resident in the UK on 1 July 2010. She became 18 in March 2014. She will have been in the UK for more than 7 years on 6 April 2017 and if her overseas income and gains exceeds £2,000 for the year 2017/18 she will either have to pay tax on her worldwide income and gains for that year on the arising basis, or pay the £30,000 remittance basis charge. If she had arrived in the UK before 6 April 2006, then her choice would be between paying tax on the arising basis, or paying the £50,000 remittance basis charge as she would have been resident in the UK for more than 12 out of the past 14 years by 6 April 2017.

Based on the new rules from April 2017, by 6 April 2025 Julia will have been resident in the UK for more than 15 years out of the past 20 years, and from that date she will no longer be entitled to claim the remittance basis.

The remittance basis charge is payable as part of the individual’s normal tax under self-assessment.

Where the remittance basis tax charge paid for a year is categorised as income tax, it will also be necessary for the individual to make payments on account for the following year. Accordingly if the charge is paid for 2016/17 on 31 January 2018, the individual will also have to consider paying the first instalment of the 2017/18 charge at the same time, and the second instalment by 31 July 2018. If he does not intend to use the remittance basis for the year 2017/18 he may be able to make a claim to reduce his payments on account to the level of his anticipated tax liability for that year.

If the non-domicile decides not to pay the remittance basis charge, then unless his unremitted overseas income and gains are less than £2,000 he will have to pay UK tax on his worldwide income and gains. For many non-domiciles this will be the less costly option, and each individual will have to review his position to see whether it will be beneficial to claim the remittance basis. As a rule, for a £30,000 remittance basis charge, if the offshore assets generally produce income of less than £70,000 during 2016/17 for a 45% taxpayer, or £80,000 for an individual whose top rate of tax is 40%, then it will not be worthwhile claiming the remittance basis and it would probably be beneficial to pay tax on the arising basis.

For an individual who has been resident in the UK for more than 12 years the amount of offshore income increases to £112,000 for a 45% taxpayer, and £125,000 for a 40% taxpayer, before it is worthwhile considering payment of the remittance basis charge.

Where the individual has been resident for more than 17 years, then for the years 2015/16 and 2016/17 the £90,000 remittance basis charge will apply, and the corresponding levels of offshore income required for a claim to be beneficial will be £200,000 for a 45% taxpayer, and £225,000 for a 40% taxpayer.

Where the remittance basis charge is paid, the individual will no longer be entitled to the following allowances:

  • Personal allowance, including the Married Couple’s Allowance
  • Blind Person’s Allowance
  • Relief for life assurance payments
  • Capital Gains Tax annual exemption.

There is a de-minimis limit where if the unremitted overseas income and gains are less than £2,000 in any year, the remittance basis automatically applies, and the above allowances are not withdrawn. There is some scope for tax-planning here, albeit on a fairly minor scale:

Example:

Jeff knows that his offshore income for 2016/17 will be £2,850. If he remits £851 to the UK by 5th April 2017 then the unremitted portion of his offshore income for the year will be less than £2,000, and the de-minimis exemption will automatically apply. In this case Jeff would only need to pay UK tax on the sum of £851 he remits to the UK, and would be able to retain the remaining £1,999 untaxed offshore without losing his personal allowances etc.

The remittance basis is claimable annually, and individuals may switch from one basis to the other depending upon which is more beneficial for a particular year. However anti-avoidance provisions bring into charge to tax any income or gains which arise in a year for which the remittance basis is claimed, even where this is brought into the UK in a year for which no such claim is made.

In the event that the individual pays the remittance basis charge he will have the choice of treating the payment as income tax, or capital gains tax (“CGT”), or a mixture of both. The unremitted income or gains on which the tax is paid will not be taxed again if and when it is remitted to the UK. This is discussed below in the section titled “Nominated Account”

Where the remittance basis charge is paid directly to HMRC from an individual’s overseas bank account, either by electronic transfer, or by cheque drawn on that account, the payment will not be regarded as a taxable remittance by that individual. HMRC advise that the individual should keep sufficient records, such as a copy of the cheque to demonstrate that the payment was sent direct from an offshore account.  The funds should not be transferred to a UK account before payment is made as this will be treated as a remittance for tax purposes even where a specific remittance is made to the UK bank account to cover this payment.

HMRC state that payment of the remittance basis charge may be made out of overseas income in one or more amounts. It appears that they are also content that payments on account made from UK funds may subsequently be replaced with a payment of the whole amount of the remittance basis charge from untaxed foreign income at a later date. This may produce a repayment of the original tax paid out of UK income or gains.

It is possible that HMRC perceive the direct receipt from an overseas account as a way of obtaining details of the taxpayer’s offshore accounts, and it may be that the taxpayer should consider opening a further offshore account, possibly with another bank for the sole purpose of making these payments if he does not want HMRC to have details of his other offshore bank account.

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