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Efficient use of the remittance basis

Every year, a significant number of individuals and families relocate abroad, whether this be leaving the UK or settling in this country. Whatever clients’ reasons for moving, there are numerous things to consider, particularly in relation to taxation and, therefore, your financial planning. This article is one in a series, providing an overview of key topics within this area.  In this article we will focus on the issues surrounding the remittance basis of taxation.

In our “An Introduction to Remittance Basis” guide we looked at the key elements of who can use it and what the key rules and consequences are. In this article, we will explore how planning and maintenance is essential to make efficient use of the remittance basis, highlighting some of the main concepts of which to be aware.

Recap of the remittance basis

Non-domicile individuals that are tax resident in the UK are able to elect to use a special basis of taxation called the remittance basis. Please see our introductory guides on Residence and Domicile for further information and an explanation of these. The essence of the remittance basis is that a non-domiciled individual is not taxed on non-UK income and gains, unless those proceeds are remitted (brought in) to the UK.

This can be a highly advantageous position for some, however, careful planning is required to make the most efficient use of the rules and to avoid some of the pitfalls along the way. Remittances basis could be considered a mechanism by which to defer the taxation from the year the income or gain arises, until the date at which you remit the funds into the UK, rather than tax avoidance.

Some of the consequences to be aware of include:

  • Loss of personal income and capital gains allowances.
  • A Remittance Basis Charge (RBC) starts after 7 tax years of residence.
  • Foreign income and gains are taxable remittance, even if a RBC has been paid.
  • Transfers from ‘mixed’ accounts will likely be treated as income first.
  • Profits from non-UK reporting funds will be treated as income on remittance.

Understanding your asset buckets

To efficiently use the remittance basis and to determine whether it could be beneficial for you, first understand what assets you have and how they are treated. Thereafter, efficient tracking and segregation of these buckets will be vital to your efficient use of the remittance basis.

If claiming the remittance basis, assets can be broadly broken down as:

  • clean capital;
  • foreign income or gains; and
  • mixed assets.

Clean capital is the most precious of these categories as no tax is payable on remittance or use in the UK. Clean capital can be held either in the UK or offshore, the sources of which could include:

  • any income or gains received before becoming UK tax resident;
  • gifts or inheritances received; and
  • income or gains received during UK tax residence on which tax has been paid.

Foreign income or gains maintained outside of the UK are the proceeds that have benefitted from not yet paying UK tax under a remittance basis claim. These proceeds can be held outside of the UK indefinitely, but would be subject to UK taxation if remitted. The source of these proceeds might include:

  • investment income or gains;
  • income from foreign assets like rental property; and
  • in some circumstances, income earned from work overseas.

Mixed assets are those which derive from both capital and foreign income/gains in a commingled account. Usually, this is derived from income or gains being held and reinvested alongside capital, without appropriate segregation. This is best avoided wherever possible as it ‘taints’ the clean capital and any remittances to the UK would first be deemed to come from the income and gains, not the clean capital.

Efficient planning and maintenance

Efficient planning ideally starts before your arrival in the UK, which will not only assist you in identifying when you will become UK tax resident, but also ensure that you arrive in the best possible shape. Some of the pre-arrival planning that should be considered include:

  • Review of existing structures and asset wrappers to ensure they are suitable for a UK resident and your intended use.
  • Consider maximising your clean capital on arrival, and how to “rebase” assets’ cost basis or accelerate receipt of earnings and income.

Pared with the pre-arrival planning or as soon as possible on arrival, modelling scenarios on how you may use your assets and cashflows is key to understanding how best to utilise the remittance basis and how to structure your finances with a balance of efficiency and flexibility. In the first instance, understand whether using the remittance basis is useful in your circumstances or if operating under standard UK tax rules will be just as efficient longer-term, and most likely less complex administratively.

If it is right to utilise the remittance basis of taxation, on-going oversight and maintenance of your holistic financial plans is essential to maintain efficiency.  There is no one strategy that is best for everyone, and the same strategy may not be best from one year to the next. Maintenance items for consideration include:

  • Investment allocation – physically locating assets in the right jurisdiction, structure or investment wrapper to match cashflows optimally to their intended use and tax position.
  • Capital segregation – ensuring clean capital is maintained, separately from income and gains, to ensure that it is easily identifiable and transferable into the UK without taxation.
  • Opt in and out – selecting which years to elect to use the remittance basis can be highly effective, especially when paying the RBC.
  • Keep up to date with rule changes – the rules have and will continue to change over time, so you cannot set up a position and forget about it.

Conclusion

The remittance basis of taxation can be highly effective and efficient for many but taking specialist advice early and on an on-going basis is essential to manage the complexities . Our specialist advisors at Partners Wealth Management have the qualifications and experience to support you throughout, partnering with suitable tax and legal specialists in a collaborative team working on your behalf.

Nathan Prior
Partner, Head of PWM International
nprior@partnerswealthmanagement.co.uk
020 7444 4053

 

 

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.