23 February 2009

Paying the £30,000 charge — key considerations pre-6 April 2009

Christopher Groves
Partner | UK

Nominating income and/or gains

In order to bolster arguments that the £30,000 remittance basis charge is creditable against foreign taxes, the Government has adopted a procedure which requires a remittance basis user to nominate an amount of offshore income and/or gains on which the £30,000 is deemed to be levied as a tax irrespective of the actual amount of income and/or gains that are nominated (the ‘nominated funds’).

The Government has also taken steps to ensure that remittance basis users are not able to remit the nominated funds in an efficient manner. So long as none of the nominated funds are ever remitted to the UK, the taxpayer can continue to take advantage of the remittance basis in the usual manner in relation to his or her remaining funds. However, remitting from the nominated funds can result in serious consequences for the remittance basis user: remittance of the nominated funds will lead to all remittances being subjected to statutory rules that ignore the nature of what was in fact remitted (capital gains or income) and instead treat the remittance as having been made in the least tax-efficient manner possible depending on what income and capital gains the taxpayer has realised offshore. For this reason, it is vital that none of the nominated income and/or gains ever be remitted.

Funding the nominated account

Careful thought must be given as to how the account (the ‘nominated account’), which generates the nominated income/gains, is funded. There are two ways in which this can be done:

1. By transferring a small amount that will generate a limited amount of income and/or gains.

To do this a small amount (say £2,000) can be transferred to a separate and clearly identified account prior to 6 April 2009. There is no requirement for this amount to be funded from capital, so an offshore income account can itself be the source for these funds.

As to the amount of funds transferred the only concern is that they are sufficient to ensure that at least £1 of income and/or gains are generated and credited on or before 5 April 2009.

A potential disadvantage with this approach is that it will weaken arguments that the £30,000 charge should be creditable under double tax treaties, which may be relevant to a number of taxpayers, particularly US citizens, although individual circumstances will vary and persons wishing to claim a credit for the £30,000 charge under a double tax treaty should take advice on their particular facts.

2. Taxpayers who wish to nominate the full amount of income and or gains to be taxed should ensure that the nominated account generates either £75,000 of current year offshore income or £166,666 of current year offshore gains (or a combination of the two).

Given the limited time available the most practical way to achieve this is likely to be to identify assets standing at a gain and to transfer those to the nominated account immediately before a disposal sufficient to generate the required gain.

It is important to ensure that taxpayers wishing to claim the remittance basis for the tax year 2008/09 and who will need to pay the £30,000 charge take steps to understand which route is most suitable for them and put the necessary arrangements in place as soon as possible and in any event before 6 April 2009.

Christopher Groves Partner | London

Category: Article