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To Pay or Not To Pay – That is the £30,000 Question

Robin Sewell, private client partner at Surrey accountants MGI Midgley Snelling, sheds some light on the tricky issue of the £30,000 charge on non-domiciles to pay tax on a remittance basis, introduced in April.

Assuming Mr Darling doesn’t perform another U-turn (and given his record, that cannot be ruled out) and disregarding that most people who have done the sums believe that penalising the very people we should be encouraging to live in the UK, on the rather sweeping premise that they don’t contribute to the economy, is crazy, the £30,000 “remittance basis minimum charge” (RBMC) as we are now supposed to call it, seems here to stay.

Who is potentially affected?

• If you are domiciled in the UK and/or ordinarily resident in the UK, you are not affected - unfortunately you are already taxable on your worldwide income and gains.
• If you are not domiciled or not ordinarily resident in the UK, it depends on how long you have been resident here. If this has been for longer than seven out of the previous 10 years, you are potentially caught.

Broadly speaking, to be regarded as resident here in a tax year, you must be here for more than 183 days in that year or on average over 90 days per year, taken over a rolling four-year period. The rules on what constitutes spending a day in the UK have changed as well, so be careful!

Who escapes the charge?

If you are not domiciled or not ordinarily resident in the UK, and have been resident here for less than seven out of the previous 10 years or if your total overseas income and gains are less than £2,000, you do not have to pay the RBMC in order to remain on the remittance basis.

If you are caught, at what level of income does it make sense to pay the RBMC?

If you have purely overseas source income, the figure is around £80,000 however it does depend on the mix between your overseas income and gains, as the tax rates are substantially different. You must also factor in that if you elect to pay the RBMC, you will lose your UK personal income tax allowance and annual capital gains tax (CGT) allowance for that year.

The good news is that you can elect annually, so you can choose each year whether to pay or not, depending on what your total overseas income and gains are in that year.

Obviously if you can legally arrange to concentrate all overseas income and gains into one year, you may be able to limit the number of years in which you have to pay the RBMC.

Additionally, the RBMC is only payable at the same time that your normal tax is due, so you only need to decide by 31 January following the end of the tax year concerned. This means that for the current tax year – 2008/09 – which ends on 5 April 2009, the RBMC election and the payment only have to be made by 31 January 2010.

The other relatively good news is that as the RBMC is now confirmed as being a tax and not a penalty, it can be offset against your UK income and capital gains tax due on overseas source income and gains.

However, there is as usual a sting in the tail that you must bear in mind - that to get credit for the RBMC against your UK tax bill, you must remit (and pay UK tax on) all your overseas income and gains for that year.

The bad news (!) is that the RBMC is an individual tax, so it applies to each member of the family – not just one charge per family – so it makes sense (at least from a tax point of view) to concentrate overseas assets and income in the hands of the least number of people.

Finally, bear in mind that even if you pay the RBMC, if you remit the funds in a later year, they will be taxed at that point.

There are fairly complex and, not surprisingly, penal provisions as to how mixed funds are deemed to be remitted to the UK, so the best advice is to keep income, capital gains, capital etc in separate accounts.

There are also new rules covering the deemed remittance of funds to the UK, where instead of bringing in the money yourself, you use it to buy goods that you bring in, pay bills for services “enjoyed“ in the UK (e.g. professional fees, air fares etc) or gift the money to someone else who then brings it in.

I won’t even begin to go through how overseas companies and trusts are affected, as I’m sure you already feel the need for a stiff drink and a lie down in a darkened room. If you don’t, I certainly do!

So, do you pay the RBMC or not?

The answer has to be that you can only decide once you know how much your total overseas income and gains have been for the year gone and how much of that you have remitted to the UK. Clearly, there is no point paying the RBMC if you are going to be paying UK tax on the income and gains anyway.

You will need to keep detailed records in order to keep track of dates of receipt of income, work out gains on assets sold and movements of funds, work out the likely tax on overseas income and gains that you would save by paying the RBMC and how much extra tax you will pay by losing the personal allowance and annual capital gains tax allowance.

All in all, it is probably best to get yourself a good accountant and leave the headache to him or her!

MGI Midgley Snelling is a member of MGI, a global network and association of independent accounting and consulting firms.

For more information visit www.midsnell.co.uk