UK developments in the Remittance Basis of Taxation - EY · PDF fileUK Developments in the...

UK Developments in the Remittance Basis of Taxation

Audrey Lydon Head of Private Client Services, EY, Dublin

Pat O’Brien Executive Director, Human Capital, EY, Dublin

IntroductionNon-domiciliaries (“non-doms”) have enjoyed a protected tax

status in the UK for more than 200 years. When the regime was

reformed in 2008, the anticipated exodus of high-net-worth

individuals to Switzerland and Monaco did not happen.

One of the Labour Party’s election promises was to scrap non-dom

status. This was backed by many UK business people, who argued

that non-doms had an unfair advantage when doing business in

the UK. In May 2015 foreign domiciliaries in the UK, faced with

the real prospect of a Labour Government, contemplated leaving

the UK. The non-dom community may have felt that it was “home

and dry” when the Conservative Party secured another fi ve years

in offi ce. However, in the fi rst Conservative majority Budget in

nearly 20 years, the Chancellor, George Osborne, announced

wide-ranging changes for non-doms in the UK.

2015 Number 3 UK Developments in the Remittance Basis of Taxation 71

The changes proposed will apply from April 2017 and are as

follows:

› Anybody who has been resident in the UK for more than

15 of the past 20 tax years will be deemed to be domi-

ciled in the UK for tax purposes. This includes for

income tax, capital gains tax and inheritance tax, and

the rule would shorten the old 17-out-of-20 rule on

deemed domicile, which applied to inheritance tax only.

› Individuals who are UK domiciled at birth but who

acquire a domicile of choice elsewhere will no longer be

able to claim non-domicile status if they return to the

UK and become tax resident in the UK. Any trusts estab-

lished by such individuals while they are not UK

domiciled will lose their preferential tax treatment,

including for inheritance tax purposes.

Although this will not bring an immediate end to the remittance

basis of taxation in the UK, and will have limited impact on those

foreign domiciliaries residing there for the short and medium term,

it will have signifi cant effect on those who have resided in the UK

for an extended period or who have extensive connections with

the UK. These changes will be consulted on, and the consultation

paper is expected in autumn 2015. In the meantime, non-doms

living in the UK are considering their options. Could Ireland be an

attractive place for them to relocate to?

This article looks at the development of the remittance basis in

the UK over recent years, comparing it to the regime as it currently

applies in Ireland, and considers some key features of Ireland’s

remittance basis regime.

UK Non-Domiciled RegimeMost readers will be aware that the UK has introduced signifi cant

changes to its treatment of non-domiciled taxpayers in recent

years. While not removing the remittance basis entirely, these

changes have modified it in a number of ways that make it

markedly different from its Irish counterpart.

Remittance basis chargeBefore 6 April 2008, a non-dom could elect, free of charge, to be

taxed on the remittance basis. This is still the case in Ireland.

From 6 April 2008, individuals who have been resident in the UK

for tax purposes for at least 7 of the previous 9 tax years have

to make an annual choice between paying a £30,000 remittance-

basis charge (RBC) to protect this position or being taxed on the

arising basis on worldwide income and gains. In addition, a strict

ordering rule for the remittance of funds to the UK was introduced.

From 6 April 2012, a non-dom who has been resident in the UK

for more than 12 of the 14 years before the claim must pay an

increased RBC of £50,000 each year (£60,000 from April 2015) to

continue to be taxed on the remittance basis. This has recently

increased to £90,000 if the non-dom has been resident in the UK

for more than 17 of the last 20 years.

Identifi cation of remittancesRules on “mixed funds” were introduced and apply from 6 April

2008. These rules determine in which order income, capital gains

and “clean capital” should be used in the case of investments

and in the case of remittances to the UK. In addition, in 2008, the

defi nition of a remittance was extended to include a remittance by

a “relevant person”. The existence of statutory rules on the identi-

fi cation of remittances is in contrast to the position in Ireland,

where the identifi cation of remittances as coming from “income”,

“capital gains” or “capital” is still to a large extent based on case

law and practice.

A remittance is made to the UK if:

› any money or other property is brought to, received or

used in the UK by, or for the benefit of, a “relevant

person”;

› a service is provided in the UK to, or for the benefit of,

a relevant person and the consideration for the service

is overseas funds or is property that derives from over-

seas funds; or

› overseas money or other property is used overseas in

respect of a UK debt.

A “relevant person” includes the individual, his or her spouse or

civil partner, and minor children of the individual or of the spouse

or civil partner. The defi nition also includes a close company (or

a company that would be close if it were UK resident) in which

a relevant person is a participator, as well as the trustees of a

settlement of which a relevant person is a benefi ciary and anybody

connected with such a settlement.

72 UK Developments in the Remittance Basis of Taxation

Remittances from a mixed fundA mixed fund is an offshore bank account that contains more

than one of the following: “clean capital”, bank interest income,

employment income, capital gains etc., arising in one or more UK

tax years.

A specific set of rules is applied to any

remittances made to the UK from a mixed

fund. The account balance is analysed

immediately before the transaction

is made to determine what funds are

contained in the account. Then the funds

remitted are deemed to leave the account

on a “last in, first out” (LIFO) basis, i.e.

funds arising in the current tax year are

remitted before those of prior years.

There is also an ordering within the tax

year, with employment income and foreign

bank interest deemed to be remitted

before foreign chargeable gains. “Clean

capital” is deemed to have been remitted

last. Therefore, from a tax perspective,

when an amount is remitted from a mixed

fund, generally the “worst” types of funds

arising in the current tax year are remitted

fi rst.

For example, if a mixed fund receives

£40,000 of untaxed foreign income in May

2013 and a remittance of £30,000 from the

account is made to the UK, the entire remittance will be deemed to

be income and subject to tax at rates of up to 45%. If tax has been

paid on that income in another jurisdiction, a credit for the foreign

tax paid should be available under normal treaty provisions.

Transfers made from an offshore mixed-fund account to a recipient

offshore (rather than a remittance to the UK) are not subject to

the above order. Instead, the funds transferred are deemed to

comprise a pro-rate amount from each type of fund contained in

the account immediately before the transfer, in their respective

proportions. For example, if an account comprises one-third

capital and two-thirds income, a transfer to a recipient offshore

will be a transfer from the account of one-third capital and

two-thirds income. The purpose of this is to ensure that income

cannot be transferred offshore, leaving capital in the account for

remittance.

Treatment of pre-April 2008 income and gainsWith regard to a remittance from funds

that pre-date the introduction of the

mixed-fund rules, there is no legislation on

determining what is being remitted. There

is only HMRC guidance and some case law,

much of it unreported, and the relevant

cases mainly discuss the expenditure of

income. Remittances matched against

pre-6 April 2008 funds will take into

consideration the total make-up of the

account at that time, disregarding the tax

year in which the funds arose. In practice,

remittances from a mixed fund are deemed

to come fi rst out of income and then pro

rata from capital and gains.

Ireland’s Non-Domiciled RegimeAs in the UK, the taxation of individuals in

Ireland is determined by their residence

and domicile status. Domicile is a complex

matter of common law, not of tax law. It

essentially denotes the State that one considers one’s permanent

home, i.e. the country with which one has the closest personal,

family and economic connections, the place in which one would

wish to retire even if one temporarily does not live there.

Remittance basisThe remittance basis is a beneficial tax basis available for

non-Irish-domiciled individuals.1 Briefl y, under the remittance

basis, individuals are taxed on their foreign-source income2 and

gains if and when they bring (remit) them to Ireland. Unlike in

the UK, where it is necessary to opt in to the remittance basis

in certain circumstances and pay the remittance basis charge, in

The remittance basis is a

benefi cial tax basis available

for non-Irish-domiciled

individuals. Briefl y, under the

remittance basis, individuals

are taxed on their foreign-

source income and gains if and

when they bring (remit) them

to Ireland. Unlike in the UK,

where it is necessary to opt

in to the remittance basis in

certain circumstances and pay

the remittance basis charge,

in Ireland the remittance

basis applies automatically to

Irish-resident non-domiciled

individuals.

1 Sections 71(2) and 29(4) TCA 1997.2 Irish income tax will be payable on the arising basis on foreign employment income to the extent that it relates to Irish duties, irrespective of where the income is paid. Irish

income tax will also be payable on the arising basis on income assessable under Case IV, such as the amounts received in respect of some offshore funds.


Ireland the remittance basis applies automatically to Irish-resident

non-domiciled individuals.

It is important that a remittance-basis taxpayer understand when

foreign-source income or gains are considered to be “remitted’ to

Ireland. A taxable remittance may occur when foreign income or

gains are actually brought into Ireland or may be deemed to occur

due to the operation of certain statutory rules.

For example, a remittance will occur where a non-domiciled

individual under normal treaty provisions:

› transfers funds from an overseas bank account con-

taining foreign income to an Irish bank account;

› uses his or her credit card in Ireland then pays off the

credit using funds in a foreign bank account;

› purchases Irish-situs investments through an overseas

broker, paying the purchase price outside of Ireland;

› borrows money abroad, remits the loan proceeds to

Ireland and pays the interest and capital using funds in

a foreign bank account; or

› makes a gift out of income or capital to his or her

spouse or civil partner, where that person subsequently

remits the gifted funds to Ireland.

Although the rules above can be used to determine many situa-

tions in which a remittance will occur, the rules on remittances

are very complex and the above list is by no means exhaustive.

Remittances from a mixed fundUnlike the position in the UK after April 2008, Ireland does not

have specifi c statutory rules dealing with the identifi cation of

remittances out of mixed funds. Consequently, it is sometimes

unclear what is being remitted and whether and to what extent

there has been a taxable remittance. Advisers will fi nd that there

is only limited Revenue guidance and no Irish case law on this

specifi c point.

Irish Revenue takes the view that when a fund (e.g. a bank

account) consists of income, capital gains and capital, monies are

remitted fi rst from income and only then from capital.3

Well-advised Irish-resident non-domiciled individuals seek

to avoid the mixed-fund problem by maintaining at least two

separate bank accounts for income and capital. The situation is

more complex when the individual is also in receipt of foreign

gains.

Scottish Provident v Allan [1903] 4 TC 409/591, an unreported tax

case, held that income is deemed to be used fi rst:

“remittances must be presumed to be paid in the fi rst place

out of interest so far as they are income, and in the second

place of principal or capital…no prudent man of business will

encroach upon his capital for investment when he has income

un-invested lying at his disposal.”

Another case, Sterling Trust v CIR [1925] 12 TC 868, found that

where an overseas “mixed fund” contained an amount that had

already suffered UK tax – for example, UK salary – the taxpayer

was entitled to say that he had remitted income that had already

suffered UK tax in priority to remittance taxable income, i.e.

income that would be chargeable to income tax if it were remitted

to the UK.

Another view is to consider the substance of the remittance to

determine the nature of the fund, depending on what is in the

account at that time. There is a view that the description that

the taxpayer gives to the fund can be decisive but that it must

be backed with actual substance when looking at the account in

question. For example, receiving regular payments for day-to-day

expenditure would be in the nature of income.

In the UK, HMRC guidance suggests that when all of the income

has been exhausted, the balance is to be regarded as “capital”.

In relation to capital gains, HMRC guidance stated broadly that,

before 2008, it was not possible to separate a capital gain from

the full disposal proceeds of an asset when remitting funds to

the UK. The sale proceeds were considered to be an indivisible

sum, comprising the funds used for purchase and any gain made

on disposal.

In practice, this rule on capital gains is very complicated: when an

investment is purchased, the purchase can be made with income

or capital gains or “clean capital”. On a disposal of the investment,

the sales proceeds will include the original purchase funds and

3 See Part 2.3.1 (Persons Chargeable) of Revenue’s Income Tax, Capital Gains Tax and Corporation Tax Manual.


the capital gain. Therefore, what is returned to the account could

be a mix of income, capital gain and/or “clean capital”, with the

capital gain associated with each category, indistinguishable from

the original purchase funds.

In addition, when an investment is acquired and sold, it is also

necessary to account for the foreign-exchange gains. Technically,

the foreign-exchange gain should attach to the asset; however,

there is no guidance on this point.

The Irish position is no clearer. It is generally accepted that income

is remitted first, which appears to be based on the case law

outlined above, but what is less clear is the remittance of capital

and capital gains.

Unfortunately, Irish Revenue’s published guidance on how mixed

remittances out of capital should be treated is limited, and the

position has not been considered by the Irish courts. The Revenue

commentary on the application of s29 TCA 1997 to non-domiciled

persons states:

“Where a person maintains abroad a mixed fund consisting

partly of income and partly of capital, any remittance should

be treated as follows –

(a) firstly, as a remittance of income

up to the full amount of the

income;

(b) secondly, as capital.

Where an individual who is resident or

ordinarily resident but not domiciled in

the State disposes of a foreign asset and

divides the consideration received into

two parts, a sum equal to the original

cost being credited to one account and

the balance to a separate account, both

accounts should be treated for remittance

purposes as a composite mixed fund.”

The authors respectfully suggest that it is not

appropriate to apply the case law that relates

to remittances out of mixed remittances of

income and capital to cases involving capital gains, and that

mixed remittances derived solely from capital gains need to be

considered differently.

For example, where only part of the proceeds of the disposal

of an asset is remitted, should the capital gain be deemed to

be remitted in priority to the capital? Should the remittance

be apportioned between the capital and the gain? What is the

analysis if part of the gain is exempt? What if the bank account

also contains pre-arrival income and gift proceeds? How should

offshore transfers from a mixed fund be treated?

Until this matter is clarifi ed, the taxpayer is in a diffi cult position

as he or she is obliged to fi le a tax return, and if the remittance

is not reported accurately therein, severe interest and penalties

may apply. The taxpayer is therefore usually minded to adopt the

most conservative approach, by treating remittances fi rst from

income, then from capital gains and fi nally from capital. Should

such an approach also be adopted for offshore transfers from such

a mixed fund? Would this approach be acceptable to Revenue if it

can be demonstrated that all of the income and gains were spent

offshore, so the balance in the account that is available to be

remitted represents capital? In this scenario would Revenue argue

that the most conservative approach is to deem the remittance

to be an apportionment of capital and gain?

The authors submit that the better view

may be that adopted by HMRC in respect

of pre-2008 gains and set out in HMRC’s

Capital Gains Manual:

“where a remittance is made to the UK from

a mixed fund into which the proceeds from

the sale of an asset (such as a shareholding)

has been paid the remittance contains a

due proportion of any capital and of any

capital gain arising from the disposal.

That is because, unlike income that can be

identifi ed separately, a capital gain is merely

part of the money received from the sale

and has no separate existence within that

amount.”

The underlying logic for this approach is that, unlike an income

fund, which generates a clearly identifi able “fruit” in the form of

4 Paragraph 2.3.1.6, Revenue Commissioners’ Chief Inspector’s Manual.

The authors respectfully

suggest that it is not

appropriate to apply the

case law that relates to

remittances out of mixed

remittances of income and

capital to cases involving

capital gains, and that mixed

remittances derived solely

from capital gains need to

be considered differently.


interest, dividends etc., the proceeds from the sale of an asset

are a single and indivisible whole, which represent the value of

the asset at the time of its disposal. Accepting that a due portion

of the gain must be taxed when remitted does not automatically

result in the conclusion that what is remitted is the gain fi rst, and

only when that is exhausted, the capital. The suggested approach

would seem to have the merit of logic and consistency while also

providing a fair outcome for the individual and the Exchequer

Older Revenue guidance4 states that “where a diffi culty arises

in determining whether a remittance out of a capital fund is

to be treated as capital gains, the case should be referred to

head offi ce”. Although there is no indication that Irish Revenue

would necessarily follow the UK treatment of a remittance as

representing a due proportion of capital and gain, the wording

suggests that there is at least a recognition that the treatment of

mixed remittances out of capital gains is not “black and white”

and that, in the absence of specifi c legislation or case law, other

outcomes are possible.

ConclusionThe remittance basis has survived in Ireland and the UK for more

than 200 years. Although some may regard it as an historical

anomaly, the fact that it continues to exist is evidence that it is

still considered an important element in the overall tax offering

of both jurisdictions. In the absence of specifi c legislative or case

law guidance, or indeed the absence of specifi c Revenue guidance,

there is a significant grey area in the Irish remittance regime

as it applies to the remittance of capital and capital gains. On

balance, the authors are of the view that it is not possible legally

or practically to separate the capital gain from the base capital on

the disposal of an asset and that any guidance on the remittance

basis should recognise this logic. Notwithstanding the recent and

proposed changes to the UK regime, it seems likely that the remit-

tance basis will continue to be with us for the foreseeable future.

What is clear, however, is that the Irish remittance-basis regime

continues to retain its own distinct character, and for that reason

it is bound to be of interest to those affected by the proposed UK

changes and their advisers.

For more information contact Jackie on +353 1 663 1726 or [email protected]

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