Some numerical examples to show how the £30,000 tax charge could apply after the Budget

The 2008 Budget statement included some significant changes to the operation of the new £30,000. We've looked at them in another article, however it's worthwhile running through some numbers to see how they could apply.

In essence the changes brought by the Budget will ensure that the £30,000 tax charge is now a minimum tax charge levied on unremitted overseas income and gains, rather than a standalone tax charge as was first intended.

The two main implications of this are:

1) It will qualify for double tax relief in many other countries now as it is a direct tax on income or gains, and

2) It will mean that the charge is actually levied against specific income or gains overseas.

Point 2. is of key concern here. This will mean that anyone paying the £30,000 tax charge (and therefore having unremitted overseas income or gains exceeding around £80,000) would need to elect the overseas income or gain that the charge relates to.

The precise mechanics of this haven't been released yet but you'll be able to take account of overseas allowances and tax when assessing the amount of overseas income or gain that would give rise to the £30,000 tax charge.

At its simplest for a higher rate taxpayer £30,000 would equate to £75,000 of overseas income or around £167,000 for an overseas gain.

This would be elected and would be 'franked' income in that it would have already have been taxed. This could therefore be remitted in the future free of further UK tax.

However this would only be remitted when any 'untaxed' income had been fully remitted.

As stated above the details of this are still pretty vague but we've put together the example below to show how we could see it operating.

Example

Jack is a non UK domiciliary and has overseas investment income.

Year 1

He earns overseas investment income of £100,000, £10,000 of which is remitted to the UK. He is a UK higher rate taxpayer.

He would need to compare the arising basis (£40,000) with the remittance basis. The remittance basis in this case would be the minimum £30,000 tax charge plus £4,000 tax on the remittance.

Therefore he'd be likely to claim the remittance basis and pay the £34,000 tax charge. He would then elect the overseas income that gave rise to the £30,000. We'll assume that this was £75,000.

Therefore he's have 2 pools:

1 -- Taxed Income

This would show the £75,000

2 -- Untaxed Income

This would show the £15,000 that was earned but not classed as taxed. Note we assume he has sufficient funds in the UK to satisfy the £34,000 tax charge.

His overseas bank account (1) will show cash of £90,000 which ties into these pools.

Year 2

He earns £100,000 but this time remits £50,000.

He would again compare the arising basis (£40,000) with the remittance basis.

The remittance basis would be £30,000 + £20,000 (£50,000*40%) = £50,000. Therefore he would choose the arising basis.

He could put the £50,000 into a UK account or a separate overseas account ensure it was separated from the overseas income taxed on the remittance basis. If kept overseas this income could be remitted free of UK tax whenever. Therefore assume this £50,000 is held in overseas account (2). His pools of taxed and untaxed income remain as above.

Year 3

He earns £200,000 and remits £50,000.

Again compare the arising basis (£80,000) with the remittance basis: £30,000 + £20,000 (£50,000*40%) = £50,000.

Therefore he would opt for the remittance basis. He'd elect the overseas income which which we'll assume is £75,000.

This would therefore increase the pools as follows:

Pool 1 -- Taxed income

B/F 75,000 Elected in year £75,000 C/f £150,000

Pool 2 -- Untaxed income

B/f £15,000 In year £75,000 C/f £90,000

His Bank accounts will show:

Account (1) £90,000 + £150,000 = £240,000

Account (2) £50,000

Year 4

He earns income of £100,000 and this time remits £20,000 for his own personal expenses and £30,000 directly to the Revenue to settle his tax charge in an earlier year.

Therefore he'd compare:

Arising Basis (£40,000)

Remittance Basis (£30,000 + £8,000 (£20,000*40%) = £38,000)

We'll assume he opts for the remittance basis (although in practice the loss of allowances may not make this worthwhile).

He'll then elect the £75,000 as above.

This will make the pools:

Pool 1 -- Taxed income B/F 150,000 Elected in year £75,000 C/f £225,000

Pool 2 -- Untaxed income B/f £90,000 In year £5,000 C/f £95,000

Year 5

Income of £100,000 which he remits and he remits £250,000 from bank (1) and £50,000 from bank (2)

He would opt for the arising basis as he's remitting all his current year income. He'd therefore pay £40,000 on the £100,000 of current year income.

The £250,000 remittance would consist of:

Pool 2 -- Untaxed income £95,000

Pool 1 -- Taxed income £155,000.

The untaxed income would be taxed on remittance (eg £38K) but the £155,000 from Pool 1 would be free of UK tax.

The £50,000 from account (2) should also be free of UK tax.

This is an example of how the new rules could apply. We'll need to wait for the final provisions though to assess the details.

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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