Entrepreneurs Relief and the remittance basis

Entrepreneurs Relief applies to the disposal of trading businesses and also shares in certain trading companies. It's a valuable tax relief as it can reduce the capital gains tax rate to 10% on gains of up £10,000,000 (after April 2011). Non UK domiciliaries can still claim Entrepreneurs Relief, just as UK domiciliaries can, whether they claim the remittance basis or not. In this post we look at how Entrepreneurs Relief will apply to non UK domiciliaries. Arising basis If non doms claim the arising basis in the tax year that the capital gain arises they'll be fully charged to capital gains tax on the disposal. As such if Entrepreneurs Relief is due (eg they're selling shares in their overseas trading company) it will be offset as usual and they'll then be taxed at 18% on the remaining gain. Remittance basis If they opt for the remittance basis they'll only be taxed on any proceeds that are brought back to the UK. The downside to the remittance basis is the loss of allowances (eg annual CGT exemption & personal allowance) and the potential £30,000 tax charge once they've been here for 8 years (rising to £50,000 after 12 years). If they are subject to the £30,000 tax charge they would only claim the remittance basis if the overseas capital gain that was not remitted to the UK exceeded around £175,000 (assuming no other other overseas unremitted income etc). If it was less than this they'd be better off opting for the arising basis and just paying the £30,000 tax charge. When choosing whether to opt for the remittance basis or not there would need to be a gain of around £300K that would otherwise qualify for Entrepreneurs Relief, retained overseas before the remittance basis would make sense. This assumes of course that the £30K tax charge was payable. If the remittance basis is chosen (eg due to a very high gain or no £30,000 tax charge being due) when calculating the tax due on any remittance you also need to take account of Entrepreneurs Relief. So if overseas shares were sold for £1,000,000 with a gain of £500,000. The seller could opt for the arising basis but instead goes for the remittance basis. No CGT is payable on the disposal as all the proceeds are retained abroad. He then remits £100,000 in the following tax year. The total capital gain is £500,000 qualifying for Entrepreneurs Relief. Under the new remittance rules he'll be charged on the capital gain first as the remittance is deemed to be the capital gain. Therefore the full £100,000 would be taxed as a capital gain. This would be taxed at 10%. Note that whether he claims the arising basis or the remittance basis in the future tax years when he remits the proceeds is irrelevant. In either case he will be taxed on the remittance of the proceeds as above. Gain exceeding the lifetime allowance What about the situation where a non dom realises an overseas gain qualifying for Entrepreneurs Relief which exceeds the £10M lifetime allowance? It's an interesting question. Certainly Entrepreneurs Relief would be available to an individual who claimed the remittance basis. As such on a future remittance the 10% rate of CGT would apply. In terms of what would happen with a gain above the lifetime allowance then its not clear cut. My view is that there would certainly be a mixed fund. The fact that the cash overseas represents both capital gain and capital would make it a mixed fund. In any case a mixed fund is defined as: "... an overseas fund of money ... which contains ...more than one type of income or gains, and/or income or gains from more than one tax year..." The ordering rules from remittances from mixed fund don't provide any detail as to which gain is to be treated as remitted first. As cash held within a mixed fund is treated as losing its identity (hence the requirement for the mixed fund rules) there's a good argument that the remittance would be attributed between the gain qualifying for Entrepreneurs Relief and the gain that doesn't qualify.