Residence, Domicile and Remittances Manual (RDRM) Section 3 - Remittance Basis

Transcription

1 Residence, Domicile and Remittances Manual (RDRM) Section 3 - Remittance Basis 1 Version 2

2 Residence, Domicile and Remittances Manual (RDRM) Remittance Basis - Table of Contents About the Remittance Basis Chapters Chapter 1- Introduction to the Remittance Basis Chapter 2 - Accessing the remittance basis Chapter 3 - Identifying remittances Chapter 4 - Exempt remittances Chapter 5 - Quantifying amounts remitted Appendices Appendix 1 - Starter for 10: Some Frequently Asked Questions about the remittance basis and the remittance basis charge. Appendix 2 Residential Property Appendix 3 Works of Art etc Appendix 4 Non-Domiciles with small amounts of foreign income: Arising or Remittance Basis Offshore Personal Tax Team - Contact Details Version Control: Updates and Changes 2

3 Chapter 1 Introduction to the Remittance Basis Contents Overview of remittance basis regime Overview of the remittance basis regime from 6 April 2008 Map of Part 14 Chapter A1 ITA 2007 What is the remittance basis? What income and gains does the remittance basis apply to? Effects of using the remittance basis Glossary key definitions Foreign Income and Gains Foreign income and gains - overview Employment income - relevant foreign earnings Employment-Related Securities - specific employment income Relevant foreign income Relevant foreign income - allowable expenses Dividends from foreign companies - dividend tax credits and remittance basis Foreign chargeable gains Foreign chargeable gains accruing on disposal made otherwise than for full consideration Exchange rates Comparisons with pre-april 2008 regime Key differences between new (post 5 April 2008) and old regime (pre 6 April 2008) Using the remittance basis automatic versus claim Changes to old regime - ceased source Changes to old regime alienation Changes to old regime cash only Changes to old regime claims mechanism Changes to old regime offshore loans Changes to old regime - gifts and deemed disposals Other key changes mixed funds Other key changes extending the definition of remittance Other key changes extending existing anti avoidance measures Other changes higher rate tax charge on foreign dividends Other changes income arising in the Republic of Ireland Other key changes capital gains foreign losses Transitional Provisions Transitional provisions - overview General earnings for years prior to 6 April 2008 Relevant foreign income arising prior to 6 April 2008 remitted after 5 April 2008 Relevant foreign income and temporary non-residents rule Relevant foreign income and section 809E ITA2007 Property derived from relevant foreign income not treated as a remittance (1) Property derived from relevant foreign income not treated as a remittance (2) Relevant persons and foreign income and gains arising before 6 April Relevant persons and foreign income and gains arising to a settlement before 6 April

4 Chapter 1 Introduction to the Remittance Basis Contents Transitional Provisions continued Relevant foreign income and offshore loans Loans in existence before 12 March 2008 grandfathering no longer applicable Chargeable gains accruing prior to 6 April 2008 remitted after 5 April 2008 Republic of Ireland Employment-related securities Gift recipients receipt of pre 6 April 2008 foreign income or gains Connected operations pre 6 April foreign income and gains 4

5 Chapter 2 Accessing the Remittance Basis Contents Claiming the remittance basis Who can claim - status conditions Making a claim Claims - Time limits Loss of Personal Allowances and the Annual Exempt Amount Loss of Personal Allowances exception for dual-residents Claiming the remittance basis foreign chargeable gains loss election Calculation of income tax liability exemption for non-domiciles with small amounts of foreign employment income Exceptions to the claim requirements Overview Unremitted foreign income and gains below 2,000 threshold Below 2,000 threshold users: Years of arrival/departure - interaction with Extra Statutory Concession (ESC) A11 Below 2,000 threshold: Years of arrival/departure - interaction with Extra Statutory Concession (ESC) D2 Long-term residents: - Below the ' 2,000 threshold - exception Application of remittance basis without claim: other cases (ITA07/s809E) Long term UK residents (7 years plus) Long-term residents and the remittance basis charge overview Counting years of UK residence (seven out of nine) ITA 07/s809C Counting years of UK residence - Minors Interaction with Extra Statutory Concession (ESC) A11 Dual Residents - treaty non-resident Below 2,000 threshold - exception Remittance basis charge - Nomination of foreign income and gains Overview Making a nomination Relevant tax increase Relevant tax increase: Example 1 Relevant tax increase: Example 2 Insufficient nomination - automatic additional nomination of income Example Insufficient Nomination Completing the SA Return Remittances of nominated income and gains Payments on account - interaction with the remittance basis charge Payments on account - nominations involving chargeable gains Payments on account - first year of paying RBC Payments on account - no remittance basis charge due in following year Claim to reduce Payments on Account (PoA) Double taxation relief claims Charitable Donations and Gift Aid Temporary Non Residents and Relevant Foreign Income Temporary Non-Residents - charge on relevant foreign income Temporary Non Residents - qualifying conditions Temporary Non Residents - residence requirements 5

6 Chapter 3 Identifying Remittances Contents Overview Meaning of remittance - overview of Conditions A, B, C and D Relevant person - definition Relevant debt - definition Conditions A and B Conditions A and B - the basic remittance conditions Condition A - money and property Condition A - provision of a service Condition B - direct remittance of income and gains Condition B - remittances derived from income or gain Condition B - relevant debt Condition B collateral in respect of relevant debt Transitional provisions - loans taken out prior to 5 April 2008 Loans in existence before 12 March grandfathering no longer applicable Condition C Gift Recipients - overview Gift recipients - remittances arising from enjoyment of qualifying property by relevant person Gift recipient - definition of Gift recipients cannot be relevant persons Gift recipients - making of gift Gift recipients - qualifying property Remittances - enjoyment by a relevant person ignored Gift recipients transitional provisions in relation to receipt of gift Condition C - relevant debt Gift recipients - timing of remittance Condition D Condition D Connected operations - overview Qualifying disposition - definition Connected operation - definition Qualifying disposition - full consideration given Connected operation - timing of remittance Connected operation - involvement of a relevant person Connected operation disregard of certain remittances Condition D - relevant debt Transitional provisions arrangements entered into before 6 April 2008 Specific Topics Joint accounts Joint accounts - example Credit Cards and Debit Cards Partnerships 6

7 Chapter 3 Identifying Remittances Contents Chargeable event gains Accrued income scheme Banking issues Foreign Currency Bank Accounts Foreign Currency Bank Accounts Interaction with Mixed Fund Rules Settlements Chapter 5 Part 5 ITTOIA 2005 Settlements - Chapter 5 Part 5 ITTOIA settlement for minor child 7

8 Chapter 4 Exempt Remittances Contents Overview Remittance basis charge - money paid directly to HMRC Remittance basis charge repayment by HMRC Relevant services provided in the UK Relevant services provided in the UK not included in exemption Relevant services provided in the UK location of overseas property Exempt Property introduction Property ceasing to be exempt property Exempt Property - public access rule Public access rule - Condition A; property definitions Public access rule - Condition A; works of art Public access rule - Condition B; available for public access at an approved establishment Public access rule - Condition B; approved establishment - definition Public access rule - Condition B; available for public access - definition Public access rule - Condition C; two year period Public access rule - Condition D; relevant VAT relief Exempt Property - The personal use rule - clothing, footwear, jewellery or watches Exempt Property - Notional remitted amount less than 1,000 Exempt Property - Repair rule Repair rule - allowable repair premises Exempt property - temporary importation rule Temporary importation rule - countable days Temporary importation rule - period of importation 8

9 Chapter 5 Quantifying Amounts Remitted Contents Quantification: Overview Overview Conditions A and B - remittances of foreign income or chargeable gains Conditions A and B remittances derived from foreign income or gains Conditions A and B remittances in respect of relevant debt Condition B - Collateral in respect of relevant debt Condition C - remittances of relevant income or chargeable gains property Condition C - remittances of relevant income or chargeable gains relevant debt Condition D remittances of foreign income or chargeable gains Remittances of nominated income or gains Overview Application of ordering rules to remittances of nominated income or gains Order of remittances Remittances of nominated income or gains miscellaneous Example 1 Example 1a Mixed Funds Remittances from mixed funds overview Remittances from mixed funds - definition of mixed fund Remittances from mixed funds Remittances from mixed funds identifying nature of remittance Remittances from mixed funds in asset form Remittances from mixed funds containing UK or non-taxable income or gains Remittances from mixed funds: Collateral in respect of relevant debts Example 1 purchase of asset Example 2 sale proceeds Example 3 single remittance Example 3a (continuation) remittance of funds covering two years Example 4 - remittances before 6 April 2008 Example 4a (continuation) remittances involving pre 6 April 2008 income or gains Offshore Transfers Offshore transfers - composition of a mixed fund Offshore transfers composition of transfer Composition of mixed funds - offshore transfers - Example 1 - purchase of asset Composition of mixed funds offshore transfers - Example 1a transfer to another account Composition of mixed funds offshore transfers - Example 2 - offshore transfer covering two years Composition of mixed fund debts Composition of mixed fund debts - example Mixed Funds Anti avoidance provisions Miscellaneous Timing of remittance - deemed income and gains 9

10 About the Remittance Basis Chapters Introduction This manual does not attempt to reproduce material that is found in other manuals or information sources. Instead its purpose is to explain the remittance rules introduced by Finance Act More guidance will be produced over the coming months regarding various aspects of the new rules introduced by Finance Act In particular, it is envisaged that extra examples will be added to illustrate the working of the rules in less straightforward circumstances. The Remittance Basis and Finance Act 2008 The remittance basis has been available for many years, first appearing in tax legislation over 200 years ago. In more recent years it has largely applied to the taxation of foreign income and gains arising to UK residents who are either Not Ordinarily Resident and/or Not Domiciled within the UK, but there were some differences between the treatment for foreign income arising from employment and that arising from investments, and between the availability of the remittance basis in respect of capital gains (restricted to non-domiciled individuals only). Finance Act 2008 Schedule 7 introduced new rules at Chapter A1 Part 14 of ITA 2007 about the remittance basis. These apply with effect from 6 April 2008, and this manual describes the law as it applies to and later years. There are certain transitional provisions that deal with foreign income and gains arising in years prior to and remitted in or later, which are covered in this manual. For the treatment of remittances and remittance basis users in tax years prior to please see the relevant guidance in the employment income manual, savings and investment manual or capital gains manual as appropriate. If you are dealing with any year before you must use the guidance in these manuals and not just the guidance in this manual. Please note that the remittance basis regime rules introduced by Finance Act 2008 are complex in parts. Many sections of Chapter A1 Part 14 ITA 2007 interact with each other, and with other Taxes Acts. We have endeavoured to note and provide links to pages or other guidance manuals where possible. It is strongly advised that you do not simply dip into pages of this section without reading and understanding the broader context from the surrounding pages and links. If you need any further assistance in the application of the new or the old rules to a particular situation please contact CAR: Offshore Personal Tax - Remittance Basis Technical Team. 10

11 Chapter 1 Introduction to the Remittance Basis Overview of the remittance basis regime from 6 April 2008 Finance Act 2008 Schedule 7 introduced a package of measures for the taxation of foreign income and gains of certain UK residents on the remittance basis. The remittance basis is an alternative basis of taxation in respect of foreign income and gains only, which is available to some UK residents who are either: not ordinarily resident (NOR) and/or not domiciled (ND) within the UK. These new rules are found at Chapter A1 of Part 14 of ITA 2007, from section 809A to section 809Z7. There have also been some consequential changes to certain sections of ITEPA 2003, ITTOIA 2005 and TCGA 1992 to reflect the new rules; further details are contained below or, where appropriate, in the relevant manuals dealing with the specific type of income or gain. The main features of the remittance basis regime, which applies from 6 April 2008, are: The introduction of a 30,000 annual tax charge for certain long-term resident individuals over the age of 18 who use the remittance basis. This charge is in addition to any tax due on any foreign income and gains remitted to the UK. (See Chapter 2 Long term-residents) The introduction of a claims mechanism to apply the remittance basis across income from employment as well as from savings and investments (relevant foreign income) and foreign chargeable gains (where applicable). Claims are made through the SA Return - (see Chapter 2 Making a claim). Ending the entitlement to certain personal allowances and to the capital gains Annual Exempt Amount for many individuals who claim the remittance basis, although there are exceptions to this. (See Chapter 2 Loss of Personal Allowances/Annual Exempt Amount) Other changes to the regime include the introduction of statutory rules governing the meaning of remittance, and the identification (See Chapter 3) and quantification (See Chapter 5) of such remittances for UK tax purposes. In addition there are a series of exemptions to these statutory rules covering certain types of remittance, for example, allowing certain personal items, or items such as works of art in the UK for public display or repair to be brought into the UK without creating a taxable remittance (See Chapter 4). 11

12 Chapter 1 Introduction to the Remittance Basis Map of Chapter A1 Part 14 ITA A Overview of Chapter 809B Claim for remittance basis to apply 809C Claim for remittance basis by long-term UK resident; nomination of foreign income and gains to which section 809H(2) is to apply 809D Application of remittance basis without claim where unremitted foreign income and gains are under 2, E Application of remittance basis without claim: other cases 809F Effect on what is chargeable 809G Claim for remittance basis: effect on allowances etc 809H Claim for remittance basis by long-term UK resident: charge 809I Remittance basis charge: income and gains treated as remitted 809J Section 809I: order of remittances 809K Sections 809L to 809Z6: introduction 809L Meaning of remitted to the United Kingdom 809M Meaning of relevant person 809N Section 809L: gift recipients, qualifying property and enjoyment 809O Section 809L: dealings where there is a connected operation 809P Section 809L: amount remitted 809Q Sections 809L and 809P: transfers from mixed funds 809R Section 809Q: composition of mixed fund 12

13 Chapter 1 Introduction to the Remittance Basis 809S Section 809Q: anti-avoidance 809T Foreign chargeable gains accruing on disposal made other than for full consideration 809U Deemed income or gains not to be regarded as remitted before time when they are treated as arising or accruing 809V Money paid to the Commissioners 809W Consideration for certain services 809X Exempt property 809Y Property that ceases to be exempt property treated as remitted 809Z Public access rule: general 809Z1 Public access rule: relevant VAT relief 809Z2 Personal use rule 809Z3 Repair rule 809Z4 Temporary importation rule 809Z5 Notional remitted account 809Z6 Exempt property: other interpretation 809Z7 Interpretation of Chapter 13

14 Chapter 1 Introduction to the Remittance Basis What is the remittance basis? The remittance basis is described as an alternative basis of taxation, to contrast it from the usual basis of UK taxation, which is known as the arising or accruals basis. Arising basis Most individuals who are resident in the UK are taxable on the arising basis and pay tax on their worldwide income and gains. So, on the arising basis, the foreign income of UK residents is charged to tax in the year in which it arises overseas. For example, an employee is taxed on the full amount of earnings from a foreign employment for the tax year. Likewise, any capital gains are subject to UK tax in the tax year in which the gain accrues. In most cases that is the year in which the asset is disposed of. Remittance basis The remittance basis provides what may be viewed as a deferral of the UK tax charge in respect of foreign income and gains, that is, there is no charge when these foreign income or gains arise or accrue. Instead, foreign income and gains are only taxed in the UK when they, or amounts in respect of or amounts representing those income or gains, are remitted to the UK. If foreign income and gains remain offshore and are never regarded as remitted to the UK, the tax charge is effectively deferred indefinitely. As long as they meet the status criteria (see Chapter 2 Who can claim: status conditions), individuals can decide on a year by year basis whether to use the remittance basis. If they choose not to use the remittance basis the arising basis will apply. Foreign income and gains are remitted to the UK if: they are brought to, or received in or used in the UK (see Chapter 3 Conditions A and B) a service is provided in the UK which is paid for overseas using foreign income or gains (see Chapter 3 Conditions A and B) they are used overseas in respect of a relevant debt in the UK. In simple terms a relevant debt is a debt that relates to property brought to or used in the UK, or a service provided in the UK (see Chapter 3 Condition B: relevant debt). Indirect or derived from remittances There may be a taxable remittance even if, on the surface, it appears as if the individual s foreign income or gains have simply moved around overseas. This will occur when an amount that is received or used in the UK, or a service which is provided in the UK is in respect of the individual s income or gain, and/or is said to derive from those income or gains. 14

15 Chapter 1 Introduction to the Remittance Basis It is therefore important to identify the exact source of any monies used or consideration given for services in order to determine whether there has been a remittance. NOTE: You may sometimes hear this referred to as a constructive remittance, which is a term largely derived from the older case law. This term is not strictly relevant to the new rules, but if you hear the term you should consider the derivation provisions. 15

16 Chapter 1 Introduction to the Remittance Basis What income and gains does the remittance basis apply to? For individuals who are Not Ordinarily Resident (NOR), the remittance basis only applies to foreign income. It applies to both foreign income and foreign capital gains for individuals who are not domiciled within the UK (ND). There is a key difference between NORs and NDs in respect of capital gains. Any capital gains arising to individuals who are domiciled within the UK but are NOR cannot be taxed on the remittance basis, even if the individual uses the remittance basis in respect of their foreign income. NOTE: An individual who is UK domiciled but NOR and who claims the remittance basis still loses their capital gains Annual Exempt Amount. (See Chapter 2 Loss of Personal Allowances/Annual Exempt Amount). There are also differences in what is classified as relevant foreign earnings depending on whether the employees is NOR or ND. These are discussed at Chapter 1 Relevant Foreign Earnings - see also the Employment Income Manual EIM40001 onwards. Finally, there are some differences in the treatment of foreign income on the remittance basis, depending on whether it is foreign employment income or other types of income (referred to collectively as Relevant Foreign Income). This applies especially in the application of certain exemption provisions, so it is important that the nature of the foreign income is identified. For further information on all of these provisions refer to the relevant subject headings in Chapter 1. 16

17 Chapter 1 Introduction to the Remittance Basis Effects of using the remittance basis With a few important exceptions (see Chapter 2 exceptions to the claims requirements) individuals who use the remittance basis from 6 April 2008: lose their entitlement to UK personal tax allowances (PAs) for income tax purposes lose their Annual Exempt Amount (AEA) for capital gains tax purposes. This applies even to individuals who are UK domiciled but NOR have to make a claim to use the remittance basis. In addition some remittance basis users who are regarded as long-term UK residents (see Chapter 2 Long term residents) may have to pay the Remittance Basis Charge (RBC) of 30,000. For further information on all of these provisions refer to the relevant subject headings in Chapter 2 Claiming the remittance basis. 17

18 Chapter 1 Introduction to the Remittance Basis Glossary Key definitions Important Note on Interpretation This glossary is intended to be used as a compilation of practical working descriptions of the terms contained in it, for those who may not be familiar with them. It is not a list of legal definitions used by HMRC or in the legislation. The descriptions have been drawn from a range of media, and alternative, although similar, descriptions may exist. No legal reliance may be placed on this list. Arising Basis Connected Operation Domicile Exempt Property Foreign Chargeable Gains Foreign Income Foreign Securities Income Foreign Specific Employment Income Gift Recipient Insufficient Nomination The normal, or default, basis of UK taxation for UK residents. It means that UK income and capital gains tax is due on all worldwide income and gains as they arise or accrue. An operation which is effected with reference to a qualifying disposition, or with a view to enabling or facilitating a qualifying disposition. A general law concept that connects an individual to a system of personal law in the territory in which they have their permanent home. For adults this is normally the territory in which they intend to live permanently or indefinitely. See HMRC6 for further details. Domicile is distinct from nationality and residence. Exempt property includes, among other things,: clothing, footwear, jewellery and watches purchased out of relevant foreign income (not gains) that is brought to the UK for personal use. any property that is brought to the UK temporarily, for repair or has a notional value of less than 1,000. Chargeable gains accruing from the disposal of an asset which is situated outside the United Kingdom. Income arising from outside the UK, e.g. foreign employment income, foreign pensions. This concept applies to remittance basis users only, in respect of employment-related securities income. Foreign securities income ( FSI ) is the amount of employment-related securities income that is foreign. As with earnings from foreign employment, the definition is slightly different for employees who are NOR and employees who are ND. This term is used in the remittance basis rules to refer to any part of an individual s employment income of a tax year that is foreign securities income. A person, other than a relevant person, to whom the individual makes a gift of money or other property that is income or chargeable gains of the individual, or derives from income or chargeable gains of the individual. This term is not within the legislation, but has been coined by HMRC to describe the situation when an individual who is claiming the remittance basis, and is liable to pay the remittance 18

19 Chapter 1 Introduction to the Remittance Basis Long Term UK Resident Mixed Fund Nominated Income and Gains Ordinarily Resident Qualifying Disposition Relevant Debt Relevant Person Relevant Tax Increase basis charge has not nominated enough of their foreign income or gains on their SA return to produce the 30,000 charge. The remittance rules provide an automatic additional nomination of income to ensure the charge stays at 30,000. An individual who is resident in the UK in the current tax year and was also resident in at least seven of the immediately preceding nine tax years. An offshore asset that is, represents, derives from or contains more than one type of income or capital, and/or income and capital from more than one tax year. Special rules apply to determine the nature of remittances where there is a remittance of the whole or part of a mixed fund, or of any property derived from the mixed fund. The foreign income or gains of a tax year that a long-term resident remittance basis user nominates and on which they will pay the income tax or capital gains tax that will constitute the remittance basis charge for that tax year. These must be reported on their Self Assessment tax return for that year. Someone who is resident in the UK year after year will usually be ordinarily resident here. See HMRC6 for further details. The disposal of money or other property that is, or derives from, income or chargeable gains of the individual, to someone else in circumstances where property of that other person is somehow enjoyed by a relevant person or used to provide a service in the UK. The term is used in relation to a connected operation. An offshore debt relating to property in the UK or the provision of a service in the UK, serviced from foreign income and/or gains. A relevant person is: The individual him or herself The individual s spouse or civil partner, or a couple living together as if they are spouse/civil partners The individual s children or grandchildren under 18 years of age. This includes grand/children of their spouse/civil partners. Trustees, if the individual or another relevant person is a beneficiary of the trust. Close companies in which a relevant person is a participator (for example a shareholder). Under the legislation, taxable remittances of an individual s income or gains may be made by, and/or for the benefit or enjoyment of a relevant person, and this will result in a tax charge on the individual. This term is used in relation to computing the remittance basis charge payable by long-term residents. Broadly, it is a calculation that is the difference between the total amount of: income tax and capital gains tax payable by a longterm resident remittance basis user subject to the remittance basis charge for the relevant tax year 19

20 Chapter 1 Introduction to the Remittance Basis less income tax and capital gains tax that would be due from a remittance basis user if they did not have to pay tax on their nominated income and gains. The term is mostly used in relation to special ordering rules that may apply in certain circumstances; for example When computing the relevant tax increase and identifying whether a nomination of income or gains is needed in a relevant tax year. Relevant Tax Year When identifying the nature and amount of a transfer from a mixed fund. The year in which the transfer occurs is the relevant tax year. When nominated income and/or gains are remitted. The first time the rules apply, the relevant tax year is the year in which the nominated income or gains are remitted. The year which is the relevant tax year in any situation will depend on which legislative provision is being considered. Remittance Basis Remittance Basis Charge Residential Property Transitional Provisions Unremittable Income An alternative basis of taxation which can be used only by individuals who are resident in the UK but not domiciled in the UK, or individuals who are resident but not ordinarily resident in the UK. For individuals using the remittance basis, their foreign income and foreign chargeable gains (for non-uk domiciled individuals only) are subject to UK income tax or capital gains tax only when remitted to the UK. An annual tax charge of 30,000 payable by UK resident individuals who claim the remittance basis, and who, in the year of claiming are: aged 18 or over, and have been resident in the UK for at least seven of the last nine tax years (long-term residents), and have 2,000 or more unremitted foreign income and/or gains arising/accruing in the tax year. A building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use. Building includes part of a building. Land that is or forms part of the garden or grounds of a building above, (including any building or structure on such land). This includes an interest in or right over land. Rules introduced in Finance Act 2008 Schedule 7 to deal with the move from the previous legislation dealing with the remittance basis (up to and including ) to the new legislation (from ). This term is used at ITTOIA05/s841 and is largely relevant to taxpayers using the arising basis. It refers to any foreign income 20

21 Chapter 1 Introduction to the Remittance Basis which is not able to be brought into the UK because of exchange controls, or a shortage of foreign currency in the foreign country. Unremitted Foreign Income and Gains It should not to be confused with the term unremitted foreign income or gains. Any foreign income or gains of a remittance basis user that arises (or accrues) during the tax year, but which remains abroad and is not brought into the UK or otherwise regarded as remitted. These foreign income or gains may be unremitted because, for example, the individual chooses to use or to leave the money offshore. 21

22 Chapter 1 Foreign Income and Gains Foreign income and gains overview Chapter A1 Part 14 ITA 2007 applies to foreign income or gains that are remitted or are treated as having been remitted to the UK if the remittance basis of taxation applies to a taxpayer for a tax year under sections 809B, 809D and 809E of that chapter. Under ITA07/s809F, from 6 April 2008 the remittance basis of taxation applies to: relevant foreign earnings sections 22 or 26 ITEPA 2003 * *the meaning of relevant foreign earnings means different things depending on the individual taxpayer s ordinary residence and domicile status. foreign specific employment income chapter 5A of Part 2 of ITEPA 2003 relevant foreign income section 830 ITTOIA 2005 foreign chargeable gains section 12 TCGA 1992 Note: this only applies to non-domiciled individuals. Nominated income or gains Income or gains nominated by the individual for the purposes of the remittance basis charge (see Chapter 2 Making a nomination) are not taxed on the remittance basis; instead they are taxed on the arising basis. Because tax, in the form of the remittance basis charge, is paid on nominated income or gains on the arising basis in the process of paying the charge, UK tax has already been paid on any nominated income or gains. So when these nominated income or gains are remitted to the UK there is no further tax due. (ITA07/s809F(6)). However there are some special ordering rules that apply in certain circumstances when nominated income and/or gains are remitted, which broadly apply if the individual has other foreign income or gains subject to the remittance basis. These rules are complex, but broadly they result in nominated income or gains being treated as the last of the individual s foreign income or gains to be remitted, even if this is not actually the case. You should refer to Chapter 5 Remittances of nominated income and gains for more information. Foreign income or gains not covered by remittance basis There are some items of foreign income and/or gains that the remittance basis may not apply to, or which have their own rules which interact with the remittance rules covered in this manual. For example: gains under a policy of life assurance, life annuity or on a capital redemption policy. These are always taxable on the full amount on the arising basis, irrespective of your domicile or residency status. See Chapter 9 of Part 4 of ITTOIA 2005 for details, including relief for periods of non-residence. 22

23 Chapter 1 Foreign Income and Gains Employment income - relevant foreign earnings The meaning of relevant foreign earnings depends on the individual s residence and domicile status. So relevant foreign earnings has two possible meanings (ITA07/s809Z7(3)). 1. R/OR but Non-dom: Chargeable overseas earnings ITEPA03/s22 These are the relevant foreign earnings of individuals who are: resident and ordinarily resident in the UK (R/OR) but not domiciled in the UK and that arise from an employment that is: with a foreign employer, i.e. an employer who is not resident in the UK and for duties performed wholly outside of the UK See Employment Income Manual EIM40102 for further details. 2. R/NOR: General earnings (non-uk earnings) - ITEPA03/s26 These are the relevant foreign earnings of individuals who are: resident (R) but not ordinarily resident (NOR) in the UK Their domicile status is not relevant. General earnings are non-uk earnings and so relevant foreign earnings for the purposes of the remittance basis rules if they are: - earnings for employment duties which are performed outside the UK, and they are not - earnings for employment overseas by the Crown See Employment Income Manual EIM40304 for further details. Employees who are resident but not ordinarily resident in the UK and who perform duties of an office or employment both inside and outside the UK can choose not to apply the mixed fund rules (see Chapter 5) in respect of transfers from an account if, broadly, that account only contains employment income from that employment, gains from employees share scheme related transactions and interest arising on that account in respect of these. For the tax year only HMRC will continue to operate Statement of Practice SP5/84 on the same basis as in The statement of practice will continue to operate on a concessionary basis until the end of the tax year This 23

24 Chapter 1 Foreign Income and Gains temporary measure is intended help ensure a smooth transition to the new legislation for employers and employees who use the statement of practice. For full details of the practice that applies from 6 April 2009 see Statement of Practice SP1/09. These statements of practice also contain details about the apportionment of earnings where the duties of an office or employment are performed both inside and outside the UK. 24

25 Chapter 1 Foreign Income and Gains Employment-Related Securities specific employment income NOTE: This section provides an overview of the position after 6 April 2008 only; please see the Employment Related Securities Manual (ERSM) for full details about the taxation of employment related securities, particularly for options etc. granted prior to 5 April As ERSM explains, where employment-related shares are acquired as shares in a UK company, the shares are UK assets and therefore they are used in the United Kingdom by and for the benefit of the employee. Where those shares, share options and such, or any cash derived from them, is either the foreign securities income, or derives (whether wholly or in part, directly or indirectly) from the foreign securities income, the shares are wholly remitted to the UK when acquired, because the shares are UK assets. Thus there will be an immediate UK tax charge on this remittance of foreign employment income. If the UK shares are later sold, the sale proceeds consist or derive from the shares which are property that is regarded as consisting of or deriving from employment income, so the proceeds themselves consist of/contain that employment income, up to the amount of the original income. See Chapter 5: Remittances from mixed funds - example 2 sales proceeds. There may also be a capital gain on the sale; this will be a UK gain rather than a foreign chargeable gain because the shares are UK-situs assets. If the sale proceeds are sent offshore and later brought back to the UK there will be no further charge on these monies, to the extent that they have already been subject to tax in the UK. Foreign specific employment income Foreign specific employment income (FSI) is any part of an individual s employment income of a tax year that is foreign securities income (ITA07/s809Z7(4)). Foreign securities income is the amount of employment-related securities income that is foreign. In determining the amount of FSI, there are differences between Not Ordinarily Resident and non-domiciled remittance basis users Broadly speaking, an employee who is not ordinarily resident in the UK will have employment-related securities income that is foreign in a tax year if all the following conditions in ITEPA03/S41C(6) are met: they are using the remittance basis in the tax year (under ITA07/s809B, 809D or 809E), and some or all of the duties of the employment are performed outside the UK. Likewise, an employee who is ordinarily UK resident, but who is non-domiciled in the UK will have FSI in a tax year if all the following conditions (in ITEPA03/S41C(4)) are met: 25

26 Chapter 1 Foreign Income and Gains they are using the remittance basis in the tax year (under ITA07/s809B, 809D or 809E), and the employment is with a foreign employer, and the duties of the employment are performed wholly outside the UK If an amount of employment-related securities income counts as employment income under Chapters 2, 3 or 3C to 5 (excluding section 446UA) of Part 7 ITEPA, and the remittance basis applies during any part of the relevant period then ITEPA03/S41A will apply to determine the amount of that income which is regarded as foreign securities income. If an employee has FSI it will only be taxed when it is remitted to the UK. Broadly, the rules in ITEPA03 provide that, instead of the whole amount which counts as employment income being taxable in the UK on the arising basis, only that part which relates to the UK is taxable as it arises. It achieves this by use of a formula: taxable specific income = SI FSI where SI is the amount of the securities income, and FSI is the amount of the securities income that is foreign The Employment-Related Securities Manual (ERSM) has been re-written to take account of the new rules introduced by Schedule 7, Finance Act See ERSM

27 Chapter 1 Foreign Income and Gains Relevant Foreign Income Relevant foreign income (RFI) is a general collective term for income that arises from various sources outside the UK, for example: profits from a foreign property business, foreign dividends and foreign interest - see ITTOIA05/s830 for full list. The most common types of RFI, which arise from a source outside the UK, include: Trade Profits - the profits of a trade, profession or vocation carried on wholly outside the UK Profits of a property business where the property is overseas Interest, such as interest paid on a foreign bank account Dividends from Non-UK resident companies, excluding dividends of a capital nature Purchased life annuity payments annuity payments made under a foreign purchased life annuity; tax is charged on the full amount of payments Profits from deeply discounted securities Proceeds from sale of foreign dividend coupons Royalties and other income from intellectual property Profits from a business which involves films or sound recordings; classed as a non-trade business. 27

28 Chapter 1 Foreign Income and Gains Relevant Foreign Income - allowable expenses Where a taxpayer elects to pay tax on the remittance basis, the taxable amount of their relevant foreign income is the amount remitted in that tax year ITTOIA05/s832. This means that it is not possible for a taxpayer to deduct expenses (such as the cost of collection or legal costs) from, for example: foreign dividends, interest or royalty payments. However, taxpayers who carry on a trade, profession or vocation wholly outside of the UK are able to claim the same deductions as are allowed to an individual who carries on a trade, profession or vocation in the United Kingdom - ITTOIA05/s832B. See Business Income Manual BIM for information about allowable deductions. Note 1 - Remittance basis users are taxable on the profits from overseas property income as relevant foreign income. They are taxable on the amount of property letting income (net of expenses) that they bring into the UK. The profits of the overseas property business are determined in the usual way, and any taxable remittances will be restricted to the amount of profit. This may be relevant if, for example, prior year losses are used to reduce taxable profit, or if capital allowances reduce profit as the property income that could be remitted could exceed the profit. Note 2 - Individuals can usually deduct 10% of the value of their overseas pensions, annuities and social security pensions, so that only 90% of the amount is taxable in the UK, under ITEPA03/s575 see EIM However this does not apply to foreign pensions taxed as relevant foreign income. This means that remittance basis users are taxable on the full amount of pension when remitted to the UK. See Chapter 3 for the meaning of remitted to the UK. 28

29 Chapter 1 Foreign Income and Gains Dividends from foreign companies - dividend tax credits and remittance basis UK residents who receive dividends from foreign companies are entitled to a dividend tax credit equal to one ninth of the grossed up dividend in certain circumstances (ITTOIA05/s397A). This entitlement to a dividend tax credit commenced on 6 April 2008 but the circumstances in which the tax credit is due changed from 22 April April April 2009 For dividends received before 22 April 2009, an individual qualified for the dividend tax credit only where the individual s shareholding was less than 10% of the issued share capital of the company paying the dividend (and the foreign company was not an offshore fund). An offshore fund is an offshore collective investment scheme that may take the form of a non-resident company. After 22 April 2009 For dividends received on or after 22 April 2009 an individual qualifies for the dividend tax credit if they meet one of the following tests: They own less than 10% of the issued share capital, or any class of share, of the company paying the dividend, or The company paying the dividend is an equity based offshore fund, or The company paying the dividend is resident for tax purposes in a territory with which the UK has a double taxation agreement that includes a nondiscrimination article. The above is only a brief summary; for full details of the changes introduced see Schedule 19 to the Finance Act This entitlement to the tax credit only applies so far as the dividend is brought into charge to tax. For a remittance basis user the tax credit is available in respect of relevant distributions from a non UK resident company received in, or treated as received, in the UK. Example In June 2009 (tax year ) Jacinda, a remittance basis user receives a dividend from a foreign company and qualifies for a tax credit under the rules to the extent that the dividend is brought into charge. The dividend is 25,000, inclusive of withholding tax of 3,750. The withholding tax rate that is provided for in the double taxation agreement between the UK and the country in which the company paying the dividend is established is 15%. Jacinda pays UK tax at a higher rate of 40%. Jacinda actually remits 6,885 of this dividend in cash to the UK. The calculation is as follows: 29

30 Chapter 1 Foreign Income and Gains Dividend remitted as cash 6,885 *Including proportion of withholding tax (6,885/21,250 x 3,750 1,215 Dividend taxed as remitted 8,100 Tax credit 1/9 900 Gross income for tax 9,000 UK tax charged at 40% 3,600 Less: withholding tax at 15% tax credit ( 1,215) ( 900) Net UK liability 1,485 30

31 Chapter 1 Foreign Income and Gains Foreign chargeable gains Foreign chargeable gains means chargeable gains accruing from the disposal of an asset which is situated outside the United Kingdom - see TCGA1992/s12(4). An individual who is Not Ordinarily Resident in the UK but is UK domiciled and who claims the remittance basis of taxation does not qualify to be taxed on the remittance basis in respect of their chargeable gains and is still taxed on the arising basis. They will, however, still lose the Annual Exempt Amount for capital gains purposes as well as their personal allowances if they claim the remittance basis. (See Chapter 2: Loss of Personal Allowances/Annual Exempt Amount). NOTE: The examples in this and later Chapters are designed simply to illustrate the basic principles. The Chapters use the phrase remittance of foreign chargeable gains, or refer to such gains being remitted. This phrase is used throughout as convenient shorthand. Foreign chargeable gains will usually be part of the proceeds from the sale of an asset, which will likely be a mixed fund. You will need to refer to this Chapter together with Chapter 5 in order to identify and quantify remittances of gains out of proceeds. Foreign losses With the exception of individuals who may use the remittance basis under ITA07/s809D or s809e without claim (see Chapter 2: Exceptions to the claim requirements), non-domiciled remittance basis users are required to make an election under TCGA1992/s16ZA if they want their overseas losses to be offset against foreign chargeable gains. The election should be made for the first year for which the remittance basis is claimed, irrespective of whether the individual has any foreign chargeable gains or overseas losses in that year. The election will usually be expected to be made within the white space in the Capital Gains supplementary pages of the same SA Return as the first remittance basis claim is made. The election is irrevocable. The usual time limits for claims/elections at TMA70/s42 and 43 apply. See the Self Assessment Claims Manual (SACM) for further information about claim time limits. If an election has been made then, in a tax year in which the remittance basis applies (and the individual is not domiciled in the United Kingdom), special rules apply to determine how gains are to be relieved by losses. In summary, the allowable losses under TCGA92/S2 are matched: Firstly, against foreign chargeable gains accruing in the tax year to the extent that they are remitted to the United Kingdom in that year Secondly, against foreign chargeable gains accruing in that year to the extent that they are not so remitted and Thirdly, against chargeable gains accruing in that year other than foreign chargeable gains. You should refer to the Capital Gains Manual (see CG25330+) for full details. 31

32 Chapter 1 Foreign Income and Gains If the individual does not make an election, relief cannot be allowed in respect of any foreign losses accruing to them in that year, or any future tax year in which they remain not domiciled in the United Kingdom (whether or not they claim or use the remittance basis in those later years). 32

33 Chapter 1 Foreign Income and Gains Foreign chargeable gains accruing on disposal made otherwise than for full consideration Foreign chargeable gains may accrue to a non-domiciled individual following disposal of an asset or assets located outside the UK without full consideration being received, for instance on making a gift. Where such a disposal occurs the capital gains rules on disposals other than by way of bargains at arm s length normally apply. This means that the rules apply as if the disposal was at market value (TCGA92/s17; see Capital Gains Manual CG14530+). Independently of these computational rules, ITA07/s809T requires us to treat the asset itself as deriving from the chargeable gains in such cases. Prior to the introduction of section 809T it was not possible to tax such a gain on an individual chargeable on the remittance basis as it was not represented by money or money s worth in the hands of the individual making the gift. It was not therefore possible for the individual to remit the gain. Section 809T is not a computational provision; the TCGA rules apply to quantify the amount of the gain. ITA07/s809T applies whenever a foreign chargeable gain accrues and the disposal consideration is not at least equal to the market value of the asset. So where ITA07/s809T applies, the asset that was gifted or otherwise disposed of otherwise than at market value is itself treated as deriving from the gain which accrues on its own disposal. So when you consider whether there has been a remittance, references to anything deriving from chargeable gains include the asset. Example 1 Jean, a non-domiciled remittance basis user, gives the chef at his French chateau a picture off the wall there when he retires. As this is not a disposal at arm s length, Jean is deemed to receive consideration equal to the market value of the picture and his foreign chargeable gain is computed using that figure. Example 2 Ahmeda transfers his property in Dubai to a trust receiving no consideration in return. The deemed gain computed using the market value of the property at date of transfer is 400,000. The trustees subsequently sell the property for 550,000. The trustees then make a capital payment of 300,000 to a UK close company in which Ahmeda s spouse is a participator. 300,000 of Ahmeda s foreign chargeable gain has been remitted to the UK. This is because the property is treated as deriving from his gain (ITA07/s809T) and the proceeds from the sale of the property therefore also derive from the gain. The company is a relevant person (ITA07/s809M(2)(f)) and property (that is, money) which derives from Ahmeda s gain has therefore been received in the UK by or for the benefit of a relevant person (ITA07/s809L). The gain which accrues to the trust on the actual sale of the property will be subject to normal rules. 33