11 January 2010

Election for foreign losses by non-UK domiciliaries

Resident domiciliaries of the UK are taxed on a worldwide basis and so are able to offset their worldwide losses against worldwide gains.

Prior to 6 April 2008, a non-domiciled UK resident was taxed on the remittance basis and relief for foreign losses was, broadly, disallowed. However, changes introduced with effect from 6 April 2008 mean that such non-domiciliaries do now have a choice about whether to use or lose their foreign losses.

From 6 April 2008, the foreign losses of a non-UK domiciliary who uses the remittance basis of taxation will be allowable losses if, in the case of a person who has to make a claim to use the remittance basis, that person makes an appropriate election.

Non-UK domiciliaries who either have not claimed the remittance basis of taxation or who have been able to use the remittance basis without having to make a claim are able to offset worldwide losses against worldwide gains without making the election.

The election

The election for foreign losses to be allowable losses is a one-time election that must be made by the non-domiciliary for the first tax year in which he claims the remittance basis after 6 April 2008. HMRC guidance indicates that the election will usually be expected to be made within the white space in the capital gains supplementary pages of the same self assessment return as the first remittance basis claim is made. For those who first claim the remittance basis in their 2008/09 SA Return, the claim will usually need to be made by 31 January 2010.

If no election is made, foreign losses arising to the taxpayer in the first year he claims the remittance basis and all subsequent years (except years in which the individual is domiciled in the United Kingdom) are not allowable losses.

The effect

If the election is made then all losses, both UK and foreign, must be added together and the total will then be matched against gains in a specified order, i.e. against:

  1. foreign chargeable gains which arise and are remitted to the UK in that tax year; then
  2. foreign chargeable gains which arise in that year but which are not remitted in that year; and then
  3. UK gains.

Any excess of allowable losses will be carried forward to future years to be applied in the same order.

The ordering of gains means that all losses, both UK and foreign, will only be offset against UK gains once all remitted and unremitted foreign gains have been exhausted.

The catch

Making the election may seem advantageous in the short term (in order to utilise existing foreign losses) however, because the election is permanent and irrevocable it could have a detrimental effect in the future. For example, suppose a non-domiciled UK resident who continues to claim the remittance basis of taxation makes the election in his 2008/09 tax return. In a future tax year he makes both UK and foreign gains and realises both UK and foreign losses. Had he not made the election the UK losses would have been offset against the UK gains. As he continues to benefit from the remittance basis the foreign gains are not taxable in the UK so long as they are not remitted. However, by making the election, the combined losses will first be offset against the foreign gains whether or not they are remitted to the UK. If the foreign gains are sufficient to exhaust the losses, there will be no losses available to be matched against the UK gains which will then be taxable.

For many individuals with realised foreign losses the question as to whether to make the election or not may be a ‘no brainer’. Recent events have, however, demonstrated how difficult it is to predict the future. The possible ramifications of making the election must be considered carefully, particularly by those with significant unrealised losses or those who never intend to remit their foreign gains and Withers is well placed to advise.

For further information please speak to your normal contact at Withers LLP or to any of the people listed on the right hand side of this page.

Category: Article