30 August 2011

UK £30,000 remittance basis charge is creditable tax for US taxpayers

The US Internal Revenue Service has now issued Revenue Ruling 2011-19, which rules that the UK remittance basis charge, currently £30,000, is creditable for US income tax purposes.

The UK remittance basis charge is imposed on US taxpayers who are resident (but not domiciled) in the UK in at least seven of the previous nine UK tax years and who elect to be taxed on the remittance basis of income and capital gains tax. After three years of uncertainty Revenue Ruling 2011-19 now provides US taxpayers with the assurance that if they choose to pay this charge it will be included in their foreign tax credit calculation.

Since it was first introduced in 2008, there has been significant controversy regarding whether the remittance basis charge is a fully creditable income tax for US tax purposes. Following representations from US taxpayers, the UK Treasury went to some lengths to redraft the legislation to ensure the tax is creditable for US tax purposes. However, until now, whether this charge is creditable failed to obtain the necessary level of comfort from the US Treasury. The US Treasury has now concluded that the remittance basis charge is not a separate levy from the overall UK remittance basis taxation of foreign source income and capital gains for non-domiciliaries. The conclusion that it must be a creditable income tax naturally follows.

It is now much more attractive for US taxpayers to remain on the remittance basis, as US taxpayers who are resident but not domiciled in the United Kingdom can take advantage of the rate differential on capital gains and qualified dividend income between the US and UK tax systems. This will provide very practical relief for US taxpayers investing in non-UK collective investment schemes such as US mutual funds, the taxation of which in the UK can be subject to a penalty regime.

With the IRS confirmation that the UK remittance basis charge is a creditable tax for US purposes, the UK has become a more attractive jurisdiction for long term UK resident US taxpayers.

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