What happens when gain accrues in one year and is remitted in a later year
When will be the gain chargeable to UK tax?
A chargeable (i.e. taxable) gain is treated as accruing in any tax year in which any of the foreign chargeable gains are remitted to the United Kingdom (TCGA92 Sch1 1(2)).1
Will annual exemption limit available on capital gains remitted in a later year?
The annual exempt amount may not be deducted from chargeable gains to which paragraph 2 of Schedule 1 applies (foreign gains of non-UK domiciled individuals accruing in one year and remitted in later year). 2
Can I go back and change the tax return from arising basis to remittance basis and vice versa?
If a remittance basis claim is made within a return a request to revoke the claim can be made no later than 12 months from the statutory filing date i.e. within the amendment window.3
Alternatively, if you need to make a remittance basis claim it can be done within 4 years.4
A simplified guide to HMRC rules for individual investors.
The tax rules aim to put the investor broadly in the same position as if they had invested in the fund’s assets directly (rather than investing in the fund)2.
Income
Investors may receive dividend distributions and/or interest distributions3:
Dividend distributions are treated in the same manner as any other UK company dividend.
From 6th April 2017 interest distributions are paid gross and taxed in the same way as interest income from a bank4.
In case of an accumulating fund (instead of distributing dividends or interests it re-invests them in the fund) amounts reinvested are taxed as income (dividend or interest) accruing to investors in the same way as if they had been distributed. Remember to deduct these on sale when computing capital gains tax5.
Disposal
A sale will give rise to capital gain6.
Units are treated as shares in a company and capital gains tax is computed in a similar way7.
Bonus
In India tax rates for equity and debt funds differ, its not the case in UK.
An example of how remittance from `mixed funds` are dealt.
Charge is on full amount remitted in the tax year even though client may not be claiming remittance basis in that in the year of remittance1.
Foreign investment income (interest and dividends) is taxed as non-saving income, when remittance basis applies2.
Taxed as non-saving income means no personal saving allowance or dividend allowance is available. Plus, no starting rate for interest3, dividends taxed at normal rates (currently 20%, 40% and 45%) and not at the special rates applicable to dividends (currently 8.75%, 33.75% and 39.35%)4.
Below is a simple example demonstrating the concept of `Mixed funds`, in practice bank accounts will need to be analyzed line by line to be classified as per ITA 2007 section 809 Q (3).
Example: A client who first came to the UK, say on 6th April 2019 has been not being declaring foreign income in their tax returns as it was £2k threshold.
Client had only foreign interest income which was saved in two Bank accounts say Account A and Account B5.
Detail of foreign interest income:
Tax Year
Account A
Account B
Total
2020
£1,500
£400
£1,900
2021
£2,000
£400
£2,400
2022
£1,500
£400
£1,900
2021’s income declared to HMRC as it was over £2k. In tax year 2022-23 client remitted c£20k to UK from Account A.
As interest income is saved in same account as the capital, both Account A and B now have `mixed funds`.
Client’s total income since he has been UK tax resident in Account A = £1,500 + £2,000 + £1,500 = £5,000.
Less income on which tax already paid £2,000.
Taxable income on remittance £5,000 – £2,0006 = £3,000.
Bonus
1. The rate of exchange that should be used when declaring the remittance is the actual rate of exchange on the date of remittance into the UK7.
2. Remember to claim FTCR or DTAA relief like NRE relief as well.
3. Please remember if there are different sources of income eg. Foreign interest, dividends or capital gains, ITA 2007 sec 809Q (3) prescribes the order in which they are treated as remitted to the UK.8
Notes: 1. Tolley Income tax 60.5 2. ICAEW Text book Pg 331 3. RDRM31140 4. HS 264 Point 3.1 5. Remittances distinguished account-wise – LITRG website. 6. Tolley Tax computations 23.1 Notes (e). 7. RDRM31190 8. For mixed funds see RDRM35210et seq
When to make the foreign capital losses election and is it beneficial to make this election.
Foreign capital losses – remittance basis
Remittance basis is basically a deferral of UK tax. If foreign income and gains remain offshore and are never regarded as remitted to the UK, the tax charge is effectively deferred indefinitely.[RDRM31030]
Foreign income or gains not covered by remittance basis
Gains under a policy of life assurance are always taxable on the full amount on the arising basis, irrespective of your domicile or residency status.[RDRM31110]
Foreign capital losses election
Non-domiciled remittance basis users are required to make an election under TCGA1992/s16ZA if they want their overseas losses to be offset against foreign chargeable gains.
The election should be made for the first year for which the remittance basis is claimed, irrespective of whether the individual has any foreign chargeable gains or overseas losses in that year. The election will usually be expected to be made within the white space in the Capital Gains supplementary pages of the same SA Return as the first remittance basis claim is made. The election is irrevocable.
The usual time limits for claims/elections at TMA70/s42 and 43 apply.
If the individual does not make an election, relief cannot be allowed in respect of any foreign losses accruing to them in that year, or any future tax year in which they remain not domiciled in the United Kingdom (whether or not they claim or use the remittance basis in those later years).[RDRM31170]
Capital Gains Manual Rules for foreign capital losses for remittance basis users are given in 5 pages from CG25330 to CG25330D.
CG25330D contains an example, I made an Excel sheet to demonstrate it better.
Effect of the election is that losses (UK and foreign) are first adjusted against foreign gains not remitted (thus not taxable) before UK taxable gains. This will make tax payer pay higher taxes if their UK losses are adjusted against their foreign gains which they do not plan to remit to the UK.
Thus, it is important to make the capital Gains election in the first year of making remittance basis claim and secondly it may not be always beneficial to make this claim.
UK tax resident individual having agriculture income in India.
Agriculture income is exempt in India1 but taxable in the UK. Thus, an individual tax resident in the UK having agriculture income from India will need to pay tax on it in the UK.
Agriculture income can be of two types – trading income or rental income.
Trading income Whether it is a trade or not will be decided using the usual principles of `badges of trade`.2 Agriculture income is generally calculated in the same way as other businesses3. Deduction of expense is allowable. BIM55095 is misleading, please read BIM37625 for more details on the case – Sargent v Eayrs [1972] 48TC573.
Taxes payable – Both Income tax and NIC.
Rental Income Farm lands rented out – rent could be an agreed minimum rent or rent based on the value of produce. In both cases taxed as rental income.4
Taxes payable – Income tax only.
Taxable income The amount of income taxable on the landowner will often be much the same whether he or she is treated as a farmer taxable as a trader or as a landlord in respect of property income. The main advantage of farming treatment for the landowner lies in the reliefs from Capital Gains Tax and Inheritance Tax which are available to farmers but not to landlords. See BIM55085
Notes
Indian Income Tax Text – read section 2 (1A) and section 10 (1)
Roy Accountants 