Resident but non domicile case study scenarios

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In this article, Ian Richardson gives some examples of the thorny issue of a UK resident individual who is also non-UK domiciled and what the tax consequences may be if he or she received income from various sources both in the UK and overseas.

For simplicity it is assumed that no withholding tax has been suffered in the country of origin. If tax had been paid at source one would need to investigate if there is a double taxation agreement and it is possible that relief to UK tax could be given for tax suffered abroad (but no refund would be received if there was more tax paid abroad on that income than is due in the UK).

Please note also that clean capital sums are not subject to the remittance basis since the definition of a remittance includes reference to sums originating from income or capital gains. Great care is required not to mix funds since with a mixed fund HMRC would assume income and gains are paid out first before the capital.

The client could however bring over capital sums if kept in a segregated account without triggering a charge to income tax. This would include amounts accumulated from income and gains prior to using the remittance basis.

 

Scenario 1 – Remittance basis not used

UK tax resident but Greek domiciled client who has no income offshore in the year of assessment – all his income and capital gains arise in the UK.

May as well just pay tax in the normal way i.e. as it arises.

Entitled to personal allowance and capital gains tax exemption limit

 

Scenario 2 – Remittance basis used but without claim

Same client as above but he has income in Greece of £10,000. He remits £9,000 of it to the UK leaving £1,000 as unremitted.

Since he has less than £2,000 in unremitted income and gains he can automatically use the remittance basis and pay UK tax only on the £9,000 (and of course his UK income and gains on an arising basis). The other £1,000 would only be subject to UK tax if he remits it to the UK.

Since he has not claimed the remittance basis he can keep his personal allowance and CGT annual exemption amount for the year in question.

 

Scenario 3 – Remittance basis claimed but not subject to a charge

Same client but this time he has £100k income in Greece of which he only remits £20k.

He must claim the remittance basis (or just pay tax on an arising basis which would mean he would pay UK tax on all his Greek earnings). This would be done by completing a self assessment return.

Since he has not been tax resident in the UK for 7 years out of the past 9 he would not have to pay for this privilege.

But he would lose his personal allowances and CGT exemption amount.

So if he was a 40% taxpayer he would pay £8k on this income but avoid having to pay UK tax on the other £80k income in Greece.

 

Scenario 4 – Remittance basis claimed and subject to a £30k charge

Same scenario as above but now he has been UK tax resident for 7 years of the preceding 9.

He would have to pay £30k for the privilege of using the remittance basis.

Now this bit is a bit more complicated! He can nominate foreign income to which this charge applies. So assuming he is a 40% taxpayer that would be £75k of foreign income (Grossed up amount of £30k tax at 40%). He has brought over only £20k already so he could then bring over the other £55k without charge in a later year.

He loses his entitlement to a personal allowance and CGT exemption by claiming the remittance basis.

 

Scenario 5 – Remittance basis claimed and subject to a £60k charge

Same scenario as above but now he has been UK tax resident for 12 years of the preceding 14.

He now would have to pay £60k for the privilege of using the remittance basis.

He can nominate foreign income to which this charge applies. So that would be £150k of foreign income (Grossed up amount of £60k tax and assuming he still only pays tax at 40%). He has brought over only £20k already so he could then bring over the other £130k without charge in a later year.

He loses his entitlement to a personal allowance and CGT exemption by claiming the remittance basis.

 

Scenario 6 – Super wealthy long stayer

Has offshore income and gains of £50m but he only remits £20m of them to the UK. He has been claiming the remittance basis for 12 years.

He would pay the £60k charge and so would avoid paying UK tax on the £30m not remitted to the UK.

He would pay UK tax on the £20m remitted to the UK but could nominate the income already deemed to be taxed by the £60k remittance basis charge.

Again, he loses his entitlement to a personal allowance and CGT exemption by claiming the remittance basis.

 

Note: HMRC state on their own website that this matter is very complicated and taxpayers should seek professional advice before using the remittance basis. The above represents our understanding of the situation as things stand but clients should always get professional advice.

Ian Richardson

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