What is overseas capital and how to remit it free of UK tax
It's a common question both on the forum and in our online Q&A service so we've outlined the key points in this article.
As you will no doubt know, non UK domiciliaries can choose either to claim the arising basis or the remittance basis after 6 April 2008.
For many longstanding UK resident/non UK domiciliaries claiming the remittance basis will not be cost effective as the unremitted overseas income and gains would not make paying a £30,000 remittance tax charge worthwhile.
Remember though that this is an annual charge and should be looked at each year. So if you had a substantial gain or a large level of income in one year which was unlikely to be remitted to the UK it may make sense to claim the remittance basis in that year.
If the arising basis is chosen -- as will be the case for many -- this means that any overseas income and capital gains will be taxed when it 'arises' whether it's retained overseas or not.
If you've got overseas income or capital gains that you've avoided UK tax on in the past due to the remittance basis and transfer of this to the UK would still be taxed though. So essentially being taxed on the arising basis only applies to the current year. For previous years income and gains which are already subject to the remittance basis, the remittance basis will continue to apply.
This doesn't though prevent you from bringing in overseas capital to the UK free of UK tax.
Overseas capital can arise from a number of circumstances. As a guide it can include:
The key element to all of these is that the income or capital gain was not subject to UK tax originally. As such there is no UK tax on the transfer back to the UK.
Therefore you could use remit from savings before you were UK resident without incurring a UK tax charge on the remittance whether you were taxed on the arising or remittance basis.
You do need to be careful though to identify whether the cash held overseas is pure capital or not.
As you would have been subject to overseas income tax on the remittance basis after you became UK resident any interest or income generated from the overseas cash after this point would be subject to UK income tax on the transfer back to the UK.
So any interest on the overseas cash would be taxed if brought back to the UK even though the capital would not.
Mixed funds
Where you have a case of overseas capital that has accumulated income after you were UK resident you'd need to look at the mixed fund rules.
Essentially these apply so that any withdrawals from the overseas account are treated as the income first (ie taxable) before the tax free capital is classed as being remitted.
So if you had an account that had £100,000 from an overseas inheritance which had generated £20,000 interest (total £120,000) any transfers back to the UK would first be classed as income up to £20,000. Once you'd remitted the £20,000 the remaining £100,000 could then be brought back tax free.
If you transferred £20,000 to your children this would have no effect as the first £20,000 you actually brought into the UK would still be classed as the income element.
You could though offset any overseas tax suffered, which would substantially reduce or even eliminate any liability.
Remittances of overseas capital gains
The same rules apply to capital and capital gains. So any remittance is first deemed to be capital gain, until that is utilised with the rest being classed as tax free capital.
For example, if you had sold an overseas property for £300,000 which crystallised a capital gain of £100,000 any remittance of the proceeds would be classed as the £100,000 gain (taxed at 18%) before the £200,000 tax free capital could be remitted.
So the general idea is that remittances are classed as:
1. income
2. capital gain
3. then capital
If in the above example you'd generated £30,000 of interest on the £300,000 proceeds (total fund of £330,000) a remittance of £100,000 would be classed as £30,000 income and £70,000 capital gain.
A further remittance of £100,000 would then be £30,000 capital gain and £70,000 tax free capital. 'Pure' capital though is always exempt from a UK tax charge.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).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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Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.