In the Autumn Statement 2014 the government announced plans to make perhaps the most significant changes to the remittance basis of taxation since the extensive reforms of 2008.
Increase in the remittance basis user charge
With effect from 6 April 2015, the charge for long term UK resident non-domiciliaries (“UK RNDs”) to access the remittance basis of taxation will increase significantly.
The new charges will be as follows:
- For those who have been resident for 12 or more of the preceding 14 years: £60,000
- For those who have been resident for 17 or more of the preceding 20 years: £90,000
These charges replace the current £50,000 charge for UK RNDs who have been resident in at least 12 of the preceding 14 tax years.
However, there is no increase to the £30,000 charge for those UK RNDs who have been UK resident for 7 or more of the preceding 9 tax years, but have not been resident for long enough to face the higher charges referred to above.
For some UK RNDs, the increase in the charge will make it uneconomic to continue to claim the remittance basis as a matter of course. UK RNDs in this position should consider as a matter of urgency whether there is any scope to accelerate receipts of foreign income, for example dividends from offshore companies, or foreign gains they anticipate realising in future years to the current tax year (i.e. pre-6 April 2015).
Proposed minimum claim periods
Until now it has been possible for UK RNDs to opt in and out of the remittance basis tax regime as they see fit. Some UK RNDs (who have been UK resident for long enough to be required to pay a charge to use the remittance basis) opt in and out of the regime, electing only to be taxed on the remittance basis in years in which it would make financial sense to do so, given the quantum of their foreign income and gains and their need to bring funds deriving from such income and gains into the UK. Some of these individuals have the ability to control, at least to some extent, when foreign income/gains accrue, and can arrange for such receipts to be concentrated in a particular tax year – in which the remittance basis is claimed – which makes it feasible for them to be taxed in other tax years on the ordinary (arising) basis of taxation.
At the end of January, HMRC and HM Treasury announced proposals which would reduce this flexibility in relation to the remittance basis. The changes, if implemented, are likely to apply from 6 April 2016. As is often the case, the proposals are somewhat less than concrete and a number of options have been put forward for consultation (which closes on 16 April 2015).
The key proposal is to introduce a minimum three year claim period, in an effort to reduce opportunities for UK RNDs to arrange their tax affairs with the aim of not paying the charge on a regular basis. If the proposals are implemented, a UK RND choosing to use the remittance basis for the tax year 2016/17 will be bound to use it (and pay the required remittance basis charges) for the following two tax years, 2017/18 and 2018/19, as well.
This raises the question of the impact of a decision to use the remittance basis again once a three year claim period has expired. There are two competing proposals raised in the consultation document, in relation to tax years following a three year claim period:
- One possibility is that a claim to use the remittance basis for the tax year following the end of a claim period would lock the UK RND into using the remittance basis for a further period of three tax years. For example, if the final year covered by the initial claim was 2018/19, and the individual elected to use the remittance basis again in the tax year 2019/20, that election would bind the individual to use the remittance basis (and pay the required remittance basis charges) in 2020/21 and 2021/22.
- Another possibility raised in the consultation document is that of “rolling” three year claim periods. Our understanding of the proposal is that, after a three year claim period, a UK RND would be able to extend the period of use of the remittance basis, one tax year at a time, without being locked into use of the remittance basis for the two subsequent tax years. For example, if a UK RND elects to use the remittance basis in 2016/17, he will be locked into it for the following two tax years, 2017/18 and 2018/19; however, a claim to use the remittance basis for 2019/20 would notlock him into the remittance basis for 2020/21 and 2021/22 (because 2019/20 would form part of a “rolling” three year period of use of the remittance basis). However, if the individual chooses not to use the remittance basis for 2019/20, but elects to use it in 2020/21, that election will take effect as another three year claim period, so he will be locked into the remittance basis for 2021/22 and 2022/23 as well.
If an individual opts into the remittance basis and then becomes non-resident during the claim period, the claim would be held over so that on their return to the UK within five years they will have to pay the remittance basis user charge (whatever it might be in that year) for the remainder of the claim period.
There is also a suggestion that the length of time the individual has been resident in the UK could influence the length of the minimum claim period. So, for example, it is proposed that those who have been resident for 17 out of the previous 20 years might have a minimum claim period of five years.
An alternative proposal is that individuals will lose the option to claim the remittance basis for a three year period following a year in which they elect to be taxed on the arising basis.
Impact of these proposals
If the changes are implemented, in considering whether to opt for the remittance basis when filing their tax return, those who have been resident for 17 or more out of 20 years will need to appreciate that they will be committing themselves to pay £270,000 over three years (plus further tax on any UK income or gains, and on any foreign income or gains that they need to remit to the UK). In practice, under the current proposals, taxpayers will still be able to take an educated view on whether this makes financial sense based on a full understanding of their worldwide income and gains as it is possible to make a claim to be taxed on the remittance basis for four years after the end of the tax year. At that stage individuals have the necessary information about their income and gains and their need for funds in the UK in the short term to make a calculated decision as to whether it is economic to pay the charge.
For some long-term UK RNDs the combination of the increased remittance basis charge and the minimum claim period will make the remittance basis regime significantly less attractive. However, it should be stressed that moving from the remittance basis to the arising basis is not straightforward, because foreign income/gains dating from tax years in which the remittance basis were used remain taxable if remitted to the UK. The cash and investment account arrangements required by a UK RND who was formerly a remittance basis user but is now taxed on the arising basis can be extremely complicated.
If these proposals are implemented, in any form, they are almost certain to make what is already a very complicated tax regime even more complex. The need for UK RNDs to seek expert advice, and plan carefully for the future, will be heightened.
Action to take now
With the end of the tax year approaching, UK RNDs who:
- have non-UK assets standing at a substantial gain; or
- expect to receive a substantial distribution from an offshore trust; or
- may be able to procure the receipt of a dividend from an offshore investment company
may wish to arrange their affairs (if they can) so that gains are realised/income received on or before 2 April 2015 (the remainder of the tax year being bank holiday/weekend in the UK), thus potentially avoiding the need to claim the remittance basis in respect of the 2015/16 tax year.