The remittance basis of taxation, although its accessibility has been curtailed in recent years, allows certain non-domiciled individuals to only be taxed on certain offshore income and gains to the extent that they are remitted to the UK. The prime minister’s Indian wife hit the headlines a few years ago for making use of these rules. The rules on remittance are very complicated and unless the various bank accounts for receiving income and capital proceeds have been carefully managed then the precise tax implications of bringing back mixed funds have been the cause of many headaches. This is because a ‘mixed account’ can contain a mixture of income, gains and original clean capital. The complexities involved can lead many non-domiciled individuals to simply view unremitted funds as ‘holiday money’ that they only spend while offshore.
You may think that it would be a good idea for non-domiciled individuals to use their cash to buy a Porsche in Germany (say) and then drive it back to the UK (dealing with any import duty as appropriate). Unsurprisingly, the rules will generally catch this by tracing any income and gains into the car and making these taxable when the car enters the UK (the remittance). However, there are some acceptable items that can be brought into the UK without giving rise to a taxable remittance.
The personal item exemption
The personal use rule applies to remittances involving clothing, footwear, jewellery and watches that have been acquired or that derive, directly or indirectly, from an individual’s foreign income or foreign chargeable gains. These are exempt property and meet ‘the personal use’ rule if:
Clearly jewellery and watches can have significant value and so in the right circumstances their acquisition can ‘make a dent’ in the unremitted funds without triggering remittances and (importantly) without the need to undertake complicated workings to ascertain the tax consequences.
Jason and his wife (who used to benefit from the remittance basis of taxation) have £50,000 of unremitted funds in a mixed account in Guernsey. They travel to Guernsey, withdraw the funds and each treat themselves to a Rolex watch for £25,000 each. They fly back to the UK happy in the knowledge that they have not made a remittance.
What if the watches are sold?
The more observant of you may be asking the question of whether the couple can then sell the watches in the UK to effectively convert the remittance basis funds into tax-free remitted cash. Unsurprisingly there are rules to stop this. Although the watches could be sold in the UK, any proceeds would then have to be promptly (within 45 days) moved offshore to prevent the sale causing a remittance.
Forbes Dawson view
This exemption may provide a useful mechanism for individuals with unremitted funds to gradually ‘erode’ the offshore funds, although generally this strategy should only be used for assets that they will be using personally. Given the choice between making significant purchases from clean UK capital or ‘messy’ unremitted offshore funds, the latter strategy will often make a lot of sense. Non-domiciled individuals should bear this in mind when making that annual New York clothes shopping trip! It is important to remember that this only works if the items are purchased abroad with offshore funds and then brought back into the UK. If unremitted funds are brought into the UK to buy a watch (say) then this would be a taxable remittance.
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