Ordinarily, taxpayers who are resident in the UK pay tax on their worldwide income and gains, wherever they arise. However, taxpayers who are resident but not domiciled (“non-doms”) in the UK can instead elect, subject to certain conditions, to be taxed on the remittance basis of taxation.
Under the remittance basis of taxation, foreign sourced income and gains are not taxable in the UK, as long as they are not brought (remitted) here. However, UK resident non-doms may remit ‘clean capital’ (which includes pre-residence funds, most gift receipts, and income and gains already subject to UK tax) without a tax charge. It is therefore important to understand how to make remittances in the most tax-efficient way.
It should be noted that ‘domicile’ has a particular meaning in UK law, based primarily on parentage rather than fiscal or habitual residence.
Remittances to the UK from a mixed fund
When a non-dom makes a transfer to the UK from a mixed fund (i.e. one containing a mix of income, capital gains and clean capital), there are statutory provisions determining the order in which these components are treated as remitted to the UK. They broadly have the effect of taxing income in priority to capital gains or clean capital, and income and gains of later years in priority to those of earlier years.
Offshore transfers from a mixed fund
When a non-dom makes a transfer from a mixed fund to an account outside the UK (an ‘offshore transfer’), this is deemed to include a pro-rata proportion of the income, capital gains and clean capital within the fund. The deeming provision makes it difficult to utilise mixed accounts tax-efficiently, except for the purpose of discharging non-UK expenditure.
Bank account segregation
In order to facilitate remittance planning, it is common practice for non-doms to segregate their non-UK income, capital gains and clean capital in separate overseas bank accounts. This enables them to choose which sources of funds to remit to the UK (or not to remit, as the case may be). However, maintaining significant amounts of clean capital offshore over long periods comes at a commercial cost, since such funds will need to be held in cash.
Considerations for taxpayers deemed to be UK domiciled
A number of changes to the taxation of non-doms took effect from 6 April 2017, and non-doms who have been resident in 15 out of the previous 20 tax years are now treated as UK-domiciled for tax purposes from the start of their sixteenth consecutive year of residence. From that point onwards they can no longer access the remittance basis.
Once taxpayers become deemed domiciled, their worldwide income and gains will be taxable on the arising basis. Foreign income and gains taxed in this way can be freely remitted to the UK without any further tax to pay. However, foreign income and gains previously sheltered from UK tax under the remittance basis will remain taxable if remitted to the UK in the future.
If a bank account contains funds representing income and gains arising both before and after a taxpayer becomes deemed domiciled, the income and gains taxed on the arising basis are regarded as clean capital and will be treated as remitted in priority to any previously untaxed amounts relating to years when the individual claimed the remittance basis. It is therefore possible in such cases to make tax-efficient remittances without the need for segregated bank accounts, but if the individual wishes to use untaxed funds for overseas expenditure, it is still preferable to have segregated accounts.
Cleansing mixed funds
Under the changes to the taxation of non-doms which took effect in April 2017, there is a two-year window from 6 April 2017 to 5 April 2019 for non-doms to ‘cleanse’ their mixed funds, and to separate out the clean capital element within an offshore bank account so that this can be remitted to the UK without a tax charge.
The cleansing opportunity is available to all non-doms who used the remittance basis of taxation at least once between 2008/09 and 2016/17, other than those born in the UK with a UK domicile of origin.
The cleansing process involves the following steps:
1. Identify and quantify what makes up the mixed fund.
2. Make a transfer to another offshore account.
3. Make a nomination to state what funds the transfer contained.
This cleansing opportunity is most likely to be advantageous to individuals who can identify significant funds, within a mixed fund, which are clean capital and can therefore be brought to the UK without a tax charge. Alternatively, an individual may be able to identify significant funds which, if remitted, would result in a low UK tax charge, such as income/capital gains with a foreign tax credit attached.
As this window will shortly close, individuals who may wish to take advantage of it should take action immediately.
Saffery Champness, UK