Increased remittance basis charge
Encouraging business investment
Simplification of the remittance basis rules


On December 6 2011, as promised, the government published draft legislation for its proposed changes to the remittance basis of taxation applicable to UK resident non-domiciliaries. The draft legislation was accompanied by a summary of responses to a consultation on the proposed changes, published in June 2011, which ended in September 2011.

At the same time, the government announced in a written ministerial statement that the statutory residence test is to be delayed for a year until April 6 2013 to allow time for further consideration and consultation.

This will no doubt be a disappointment for many international individuals who were looking forward to a degree of certainty in relation to their UK tax residence status. However, it is hoped that the additional period of reflection will ensure that the test which is introduced is as fair and workable as possible.

All the changes to the remittance basis that were originally proposed are to be introduced, in some cases with amendments taking into account points that were raised in the consultation responses. The changes are as follows:

  • Increased remittance basis charge – an annual charge of £50,000 for individuals resident in the United Kingdom in 12 of the preceding 14 tax years.
  • Encouraging business investment – tax-free remittance of income or gains to be permitted for the purpose of certain 'qualifying investments'.
  • Simplification of the remittance basis rules – adjustments to be made to the current remittance basis rules for:
    • nominating income and gains;
    • foreign currency bank accounts;
    • taxation on the sale of exempt assets in the United Kingdom; and
    • Statement of Practice 1/09 in relation to employees with duties in the United Kingdom and overseas (legislation to be delayed until April 6 2013).

Increased remittance basis charge

As originally announced, from April 6 2012 an individual who has been resident in the United Kingdom in 12 of the preceding 14 tax years will pay an annual charge of £50,000 in order to claim the remittance basis of taxation. Individuals who have been resident in the United Kingdom in seven of the preceding nine tax years will continue to pay £30,000.

Encouraging business investment

In order to encourage non-domiciliaries to invest in UK businesses, the consultation proposed to allow tax-free remittances of overseas income and gains for this purpose. Although the idea was generally welcomed by the internationally wealthy and the private client industry, the original proposals were relatively restrictive. Having reviewed the responses that it received on this issue, the government has made a number of changes to its proposals for qualifying investments.

As originally proposed, there will be no upper or lower limit to the amount which can be remitted for investment. A 'qualifying investment' will include a loan as well as an investment in shares, and anyone who qualifies as a 'relevant person' under the general remittance basis rules will be eligible to make such an investment. This would include non-domiciled individuals, specified members of their family and related trustees and companies.

The exemption is to be limited to investment in what is termed a 'target company' - either an 'eligible trading company' or an 'eligible stakeholder company' for the purposes of the regime. As the names suggest, these will be private limited companies which either carry on commercial trades (as all or substantially all of their business) or invest in companies that do so. They will also include companies that are preparing to perform either activity in the next two years.

Companies that are listed on a recognised stock exchange will not be included; however, according to the summary of responses, AIM-listed and PLUS-quoted companies will be able to qualify. Limited liability partnerships will not qualify, but the government has indicated that it will consider this further with a view to extending the relief to partnerships (but not sole traders) in 2013.

The proposal that non-UK companies would need a permanent establishment in the United Kingdom to qualify has been dropped, as have the proposed specific exclusions for residential property and businesses that lease tangible moveable property or provide personal services. Instead, such businesses will have to bring themselves within the conditions for eligible trading companies or eligible stakeholder companies, and the government's concerns will be addressed by exclusions for the provision of personal benefit and anti-avoidance rules.

The exemption will not apply if the remittance or subsequent investment is made as part of a scheme or arrangement of which tax avoidance is the main purpose or one of the main purposes.

The time limits for making the investment after bringing foreign income or gains to the United Kingdom - or for taking them offshore or reinvesting them after a potentially chargeable event - in order to avoid giving rise to a taxable remittance have been extended from 14 days to 45 days.

A 'potentially chargeable event' includes a disposal of all or part of the investment holding, the target company ceasing to be an eligible trading company or an eligible stakeholder company or the investor ceasing to be a relevant person.

A potentially chargeable event also includes a breach of the 'extraction of value' rule (whereby value is received by or for the benefit of the investor or a relevant person, other than by way of a disposal), or of the two-year start-up rule (ie, if the eligible trading company or eligible stakeholder company fails to start trading or investing, as applicable, within two years of the investment being made).

The 45-day grace period begins when proceeds are paid to a relevant person where all or part of the holding is disposed of or, if the extraction of value rule is breached, the day on which the value is received. Otherwise, it begins on the day on which a relevant person becomes aware (or ought reasonably to become aware) of the potentially chargeable event. Her Majesty's Revenue and Customs (HMRC) may agree to extend the grace period in exceptional circumstances. The summary of responses includes the suggestion - not as yet reflected in the draft legislation - that where a target company ceases to meet the qualifying conditions, an investor should have an additional 45 days to dispose of the investment before the grace period begins.

The disposal of an investment may give rise to a chargeable gain. The government wishes to avoid the need for a taxable remittance to be made in order for an investor to meet the capital gains tax charge (in circumstances where this is necessary). It has therefore indicated that it will bring forward draft legislation on the issue for consultation in early 2012 with a view to including it in the Finance Bill 2012.

Simplification of the remittance basis rules

In addition to the qualifying investment exemption, the consultation also proposed a number of minor provisions that are intended to simplify the remittance basis rules. Having considered the responses to the consultation, the government is introducing these on the following basis:

Nominated income
As originally proposed, with effect from April 6 2012, the first £10 of income or gains nominated by a taxpayer electing to pay the remittance basis charge may be remitted to the United Kingdom free of tax and without triggering complex identification rules.

Foreign currency bank accounts
With effect from April 6 2012, all sums in foreign currency bank accounts held by individuals, trustees and personal representatives will no longer be within the scope of capital gains tax. This rule will apply regardless of domicile. The purpose of this measure is to avoid the administrative burden of calculating gains and losses on foreign currency bank accounts, which often ultimately balance out.

The extension of this proposed exemption to include trustees and personal representatives was made having taken account of responses to the consultation.

Taxation of exempt assets sold in the United Kingdom
Certain assets which are otherwise exempt from tax as remittances when brought to the United Kingdom are liable to tax if sold in the United Kingdom. These include:

  • works of art or antiques that are brought to the United Kingdom for public display;
  • items of personal clothing, footwear or jewellery;
  • items brought to the United Kingdom temporarily for up to 275 days in total, or for repair; or
  • items worth less than £1,000.

This tax charge is to be removed for a sale made by a relevant person at arm's length to a purchaser other than a relevant person, in circumstances where no relevant person has an interest in, or benefit from, the item. Sale proceeds must be paid to the seller (whether in instalments or otherwise) within 95 days of the date of sale. Less any legitimate sale costs, the proceeds must be taken out of the United Kingdom or invested in a qualifying investment under the new rules within a further 45 days. If payment is made in instalments, the 45-day period starts with the date of the final instalment. HMRC may agree to extend this period at the request of an individual whose income or gains would otherwise be treated as having been remitted to the United Kingdom.

The exemption will not apply if the sale was part of a scheme or arrangement of which tax avoidance was the main purpose or one of the main purposes.

In the summary of responses, the government indicated that it will introduce legislation in the Finance Bill 2012 to treat gains made on such a sale as foreign chargeable gains, which will be subject to the remittance basis. This should make selling such assets in the United Kingdom more attractive. Draft legislation is to be published early in 2012.

In relation to the provisions on exempt assets generally, the government will consider whether the rules can be extended to cover situations in which assets are lost, stolen or destroyed or if other aspects of the rules can be simplified. Any legislation resulting from these considerations will be included in the Finance Bill 2013.

Statement of Practice 1/09: employees with duties in the United Kingdom and overseas
The consultation proposed that this statement of practice should be put on a statutory footing. Following the consultation, this will be taken forward in the Finance Bill 2013, to take effect in April 2013. This is to allow further consideration of issues raised by respondents, and will also tie in with any changes that the government decides to make to the rules on ordinary residence. The statement of practice will continue to apply in the meantime.

The statement of practice applies to employees who:

  • are resident but not ordinarily resident in the United Kingdom;
  • are taxed on the remittance basis on their overseas earnings; and
  • carry out duties both in the United Kingdom and overseas under a single contract of employment.

Typically, such earnings are paid into a single bank account which, as it holds a mixture of UK and overseas earnings, becomes what is termed a 'mixed fund'. In the absence of the statement of practice, employees would have to apportion each individual salary payment over a tax year between UK and overseas earnings in order to establish their UK tax liability. The statement of practice simplifies this exercise by allowing them to apportion their income over a tax year on the basis of the number of days worked in the United Kingdom compared with those worked overseas, and to calculate their tax liability by reference to the total amount transferred out of the account during the whole tax year, rather than by reference to individual transfers.

Other simplifications
The consultation asked for suggestions for additional areas in which the remittance basis rules might be simplified. Of the suggestions made, the government has indicated that it will consider excluding minor grandchildren from the definition of a 'relevant person' and removing the charge to tax on inadvertent remittances, with a view to implementing any changes in April 2013.


Although it is disappointing to have to wait another year for the statutory residence test, the changes to the remittance basis being introduced in April 2012 are welcome, and it is positive that the government has taken account of respondents' comments.

In particular, the exemption for qualifying investments has been broadened in scope, enabling investment in residential property and other businesses, which were restricted in the original proposals. The lengthening of time limits from 14 days to 45 days for a qualifying investment to take place (or for funds to be moved offshore or reinvested when circumstances change) is welcome, as are the provisions enabling investment in companies that have not yet begun to trade.

Time limits have also been relaxed with regard to the provision for sales of exempt assets, and the proposal to treat gains on sales as foreign gains should make this exemption significantly more valuable. Similarly, the extension of the exemption from capital gains tax for foreign currency bank accounts to include trustees and personal representatives will increase the value of this concession.

There clearly remains significant scope for improving the remittance basis rules, but these provisions are a promising start.

The draft legislation is subject to consultation until February 10 2012. Although the detailed clauses may be amended to take account of any comments, the broad provisions are unlikely to change. As such, any person contemplating a qualifying investment - or potentially wishing to use any of the other exemptions on or shortly after April 6 2012 - should consider taking professional advice now.

For further information on this topic please contact Nicole Aubin-Parvu at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).