Tax relief for funds ‘trapped’ overseas!

The issue

In this age of globalisation and political unrest, foreign banks are perhaps not as safe as they once were. It is not unheard of for governments to seize accounts and stop funds leaving their country. Although this is a nightmare scenario and the best advice must be to get your funds into the UK as soon as possible (where you can be hit by a weakening currency rather than sanctions!) this can happen and there are some useful tax rules which should not be overlooked when it does.

Unremittable income rules

The legislation allows an election to be made to treat certain income as non-taxable. Here, it is important to understand that income always needs to be included on a tax return but it can be relieved through the election which effectively makes it non-taxable.

The key conditions which need to be met to make a valid election are as follows:

  1. A person is liable for income tax on income arising in a territory outside the UK.

  2. The income cannot be brought back to the UK.

  3. The income cannot be remitted either because of the laws of the territory where the income arises, executive action of its government or the impossibility of obtaining currency that could be transferred to the United Kingdom.

  4. The income has not been realised for currency in another territory which the person could bring to the UK.

Time limit

The time limit here is key because an election needs to be made by a year after 31 January following the tax year in which the foreign income arises. After this time the tax liability will stand even if the funds have effectively been lost.

Claw-back of relief

As you would expect there are also various provisions which bring the income back into charge if it is ‘recovered’. This income would then be taxed in the year of recovery.

Forbes Dawson comment

Ideally, tax payers will take care to keep their earnings in ‘safe’ jurisdictions, but this will not always be possible. Where there is a cause for concern it makes sense to test whether funds can be remitted before the 31 January deadline (above). If the funds are ‘trapped’ then it should at least be possible to ‘un-trap’ the tax that has been paid!

 

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