The remittance basis and Business Investment Relief

Claiming the remittance basis 

Your decision to claim the remittance basis can be made each tax year on your UK tax return. By claiming the remittance basis, you should not be subject UK tax on your non-UK sourced income and gains, as long as they are not remitted to the UK, potentially offering significant UK tax savings. A remittance is widely defined but is, very broadly, where money or other property has been brought to or used in the UK and can include circumstances where other people (e.g. your spouse) benefit from your funds in the UK.

A consequence of claiming the remittance basis is that you will lose your entitlement to the income tax free personal allowance and capital gains annual exempt amount (currently £12,570 and £6,000 respectively). Additionally, any non-UK sourced dividend income that is remitted to the UK will not benefit from the dividend tax rates (currently 8.75%, 33.75% and 39.35%) and will instead be taxed at the non-savings rates (currently 20%, 40% and 45%).

There are a few circumstances where the remittance basis does not need to be claimed, as it applies automatically. 

Bringing funds to the UK

If you bring non-UK monies or property (e.g. artwork, wine, cars, etc) to the UK, the remittance tax charge will depend on the nature of the funds remitted, which can broadly be split into three categories; income, capital gains and clean capital (monies arising before you acquired UK residence or from non-taxable sources, e.g. inherited funds). 

This may sound relatively simple, but there are complex rules for matching remittances from mixed accounts (those containing more than one type of monies e.g. income and clean capital), which are often unfavourable. For this reason, operating bank account segregation is recommended and mixed accounts are best avoided. Care needs to be taken to prevent any inadvertent remittances of “tainted” (i.e. taxable) funds leading to unexpected UK tax liabilities.

How does the remittance basis change with long-term UK residency? 

As an individual claiming the remittance basis, you will be subject to the following annual Remittance Basis Charge (RBC) based on your longevity of UK residence:

• If you’ve been UK resident for seven of the previous nine tax years, an RBC of £30,000 per annum applies.
• If you’ve been resident for at least 12 of the previous 14 tax years, the RBC rises to £60,000 per annum.
• Once you’ve been UK resident for 15 out of the previous 20 tax years, you become deemed UK domiciled for UK tax purposes and can no longer make a claim for the remittance basis. 

Given the level of the RBC for longer term residents and the inability to claim the remittance basis at all under the 15 out of 20 year rule, planning and care needs be taken to ensure you achieve the best outcome. 

Business Investment Relief (BIR)

In order to encourage investment in the UK, there is a specific exemption from a remittance tax charge where the conditions for BIR are met and a valid claim made. This could allow you to use some or all of your tainted funds to make UK investments without incurring remittance tax charges on your foreign income/gains. 

There’s no total investment limit for BIR, but there are several conditions that both you and the company you are investing in would need to satisfy. 

A qualifying BIR investment must be in a private limited company and within 45 days that the funds are brought to the UK. Generally, the company needs to undertake a commercial trade, or be preparing to do so, but BIR can also apply to certain holding or hybrid companies. The investment can be in the form of share capital or a loan.

There is an optional BIR advance assurance facility provided by HMRC, to which they are expected to respond within 28 days. So long as the assurance application is completed accurately, this will provide a good indication about HMRC’s view of the availability of BIR, although it’s not possible to obtain certainty that it will not challenge a claim that is included on your tax return. 

Potential chargeable events – clawing back BIR

‘Potentially chargeable events’ are instances that will trigger a remittance tax charge unless appropriate mitigation steps are taken. 

Most commonly, a potentially chargeable event would occur if you disposed of all or part of your investment. In this case, you would have a 45 day grace period to take the amount originally invested offshore or make another qualifying BIR investment in order to prevent a remittance tax charge. 

For certain potentially chargeable events (e.g. the company ceasing to trade), the grace period is extended and HMRC have further discretionary powers in exceptional circumstances. 

Are potential changes to the taxation of RNDs coming?

The taxation of RNDs has received increased media attention in the last 12 months, with the Labour party stating that they would look to abolish non-domicile status (and thus the remittance basis of taxation) should they win the next election. This follows substantial changes to the regime that were introduced by the government with effect from 6 April 2017. 

At the date of writing, there are no official proposals or government consultations to change the taxation of RNDs, but it remains a regular point of discussion, indicating new rules could be seen in the short or medium term. 

What should you do?

In view of potential further changes to the taxation of RNDs, now is a good time to conduct a review of your UK tax affairs in order to identify any available opportunities remaining under the existing rules.