Main proposals
Higher remittance basis charge
Encouraging business investment
Simplification of remittance basis rules

With the aim of making the United Kingdom more attractive to foreign investors, the 2011 Budget announced two consultations: one on the introduction of a statutory residence test (for further details please see "Proposed statutory residence test offers greater clarity"), and the other on a number of changes to the remittance basis rules. The consultations have been published and are open for responses until September 9 2011. The changes are to take effect from April 6 2012. This update considers the proposed reforms to the remittance basis of taxation.

Main proposals

The consultation proposes:

  • an 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;
  • encouragement for business investment with a tax-free remittance of income or gains to be permitted for the purpose of investing in companies operating in the United Kingdom in certain circumstances; and
  • a simplification of the remittance basis rules, with adjustments to the existing 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.

The principal proposals - to introduce a £50,000 charge for longer-term residents and to encourage business investment by permitting tax-free remittances - were announced in the Budget.

Higher remittance basis charge

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 for taxation. Individuals who have been resident in seven of the preceding nine tax years will continue to pay £30,000. Other aspects of the rules for claiming the remittance basis will be unchanged.

Encouraging business investment

In order to encourage non-domiciliaries to invest in UK businesses, the consultation proposes to allow tax-free remittances of overseas income and gains for this purpose. The proposed criteria for tax-free remittance are as follows:

  • There will be no upper or lower limit on the amount that can be remitted for investment.
  • The exemption is to be limited to investment in companies (including non-UK companies with a permanent establishment in the United Kingdom and where trades are carried on outside the United Kingdom) in order to prevent tax avoidance and the use of funds for non-commercial purposes.
  • Listed companies and those quoted on exchange-regulated markets, such as AIM and PLUS, may be included, subject to the results of the consultation.
  • A substantial proportion of the activities of a company (or its subsidiary, in the case of investment in a holding company) must involve either carrying out trading activity or developing or letting commercial property.
  • Investment in businesses that hold and let residential property, lease tangible movable property (eg, yachts, cars and pictures) or provide personal services (eg, nannies, cooks and chauffeurs) will not be permitted in order to prevent the incentive from being used for the direct personal benefit of investors or for other non-commercial purposes.
  • Investment in businesses which build and develop residential property will be permitted, as will investment in certain types of residential property, such as nursing homes and hospitals, where a commercial trade is also undertaken.
  • The exemption will extend to offshore trustees and companies, as well as individuals, and will include investment in loans as well as shares.
  • Connections to the business, whether on the part of the investor or of his or her family, will not be a bar to investment, although the receipt of non-commercial payments from a company (rather than commercial remuneration, dividends or interest from profits) will be restricted.
  • The proceeds of sale of an investment, up to the value of the original remitted income or gains, must be either taken out of the United Kingdom or reinvested in another qualifying business within two weeks of receipt; otherwise, they will be liable to tax under the remittance basis rules.
  • Further anti-avoidance provisions will prevent the exemption from applying where the value of the investment 'leaks out' to the investor by means of non-arm's-length loans, or payments or transactions designed to pass value to the investor, and will prevent circular investment in pre-owned businesses.
  • Use of this exemption will not affect the requirement to pay the annual remittance basis charge.

Simplification of remittance basis rules
The consultation proposes a number of minor provisions that are intended to simplify the remittance basis rules.

Nominated income
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
In order to avoid the administrative burden of calculating gains and losses on foreign currency bank accounts, which often ultimately balance out, foreign currency bank accounts will no longer be within the scope of capital gains tax. This rule will apply regardless of domicile.

Taxation of exempt assets sold in the United Kingdom
Assets which are otherwise exempt from tax as remittances when brought to the United Kingdom (ie, works of art or antiques brought to the country to be displayed in public; items of personal clothing, footwear or jewellery; items brought temporarily for up to 275 days in total or for repair; or items worth less than £1,000) are liable to tax if sold in the United Kingdom. This tax charge is to be removed, provided that the proceeds of sale are taken out of the United Kingdom - or, presumably, invested in a UK business under the new rules - within two weeks of receipt. The consultation requests views on whether two weeks is an appropriate period.

Statement of Practice 1/09
The statement of practice in relation to employees with duties in the United Kingdom and overseas is to be put on a statutory footing. It 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 a 'mixed fund' for the purpose of the remittance basis rules. Without 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 employees to apportion their income over a tax year on the basis of the number of days worked in the United Kingdom compared with the number of days 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.

The consultation requests views on whether the proposed legislation should cover situations in relation to employees who:

  • become non-resident part-way through a year, but continue to deposit money in a bank account; or
  • hold bank accounts that contain employee share scheme transactions in respect of non-UK situs assets.


The proposals in the consultation are helpful, although they do not address the overall complexity of the existing remittance rules, compliance with which deters wealthy overseas individuals from living and investing in the United Kingdom. The consultation does, however, ask for other suggestions to simplify the rules, so there may be scope for more sweeping changes in the future.

In the meantime, the proposal to allow investment in UK businesses shows that the government is aware of the need to encourage foreign investment in the United Kingdom. It is hoped that the proposed deadline of two weeks, within which an investor must either reinvest or remove from the United Kingdom the proceeds of an investment up to the value of the original remittance, will be extended in the final legislation.

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