How the £30,000 annual tax charge works after the 2008 Budget

This charge was first announced in the 2007 Pre Budget Report, however the 2008 Budget has now watered this down (along with many of the other original proposals).

Crucially the new rules state that the £30,000 payable is to be regarded as a tax on overseas unremitted income or capital gains rather than just a standalone tax charge. It is essentially a 'minimum tax charge' on overseas unremitted income or capital gains.

It will however be payable in addition to income tax or capital gains tax on remittances in the year.

What has changed is that you will now need to elect what overseas income or capital gain the £30,000 tax charge relates to. Any future remittance of that income or gain would then not be subject to UK tax again (as it has already been subject to UK tax).

From the provisions to date it appears that you can choose whether £30,000 tax charge is levied on:

• unremitted non-UK source income,or
• unremitted non-UK source capital gains, or
• a combination thereof.

The £30,000 tax charge is calculated on the amount of unremitted overseas income or gains that would give rise to a £30,000 liability, after taking into account overseas losses, taxes and allowances.

This certainly complicates matters and now there will be a system of pools and specific rules to keep a track on:

• the amount of unremitted overseas income and capital gains which the £30,000 charge has been levied on
• the amount and type of overseas unremitted income and gains that haven't been taxed
• the amount of overseas tax on the overseas income and gains.

To prevent you arguing that income that was remitted to the UK was income that had already been subject to the £30,000 tax charge there to be are new ordering provisions.

These will treat remittances as being from income or capital gains that haven't been subject to the £30,000 before then moving on to the exempt income and gains.

Example

If you had overseas income of £100,000 and were taxed at the higher rate you'd need to pay £40,000 income tax under the arising basis.

If you retained that overseas income overseas you may decide to claim the remittance basis. In this case you would need to pay the £30,000 tax charge as well as any tax on other remittances in the tax year. If there were no other remittances in the tax year remittance basis may therefore be preferred.

You would also elect for the £30,000 to be based on the relevant overseas income. Assuming that this represented the £100,000 of overseas unremitted income (after taking account of foreign taxes etc) you could remit this £100,000 in the future free of UK tax.

However this £100,000 could only be remitted once you had remitted all other non taxed income and capital gains (calculated since the first day of UK residency or if later 6 April 2008).

Essentially you would need to compare the UK tax on the overseas income with the £30,000 tax charge. If it was less you'd be better off opting for the arising basis.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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