The New Remittance Rules (Part 2)

 In Tax

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rules for remittance

Much comment has been made on the changes to the remittance rules introduced in Finance Act 2008. The £30,000 remittance basis charge probably grabbed most of the headlines. However the changes to what constitutes a remittance may actually be more important for most clients who are taxed on the remittance basis.

The new concept of ‘relevant person’

The starting point is the concept of ‘relevant person’ introduced in Schedule 7 of FA 2008. A remittance can now occur not only if the taxpayer remits offshore income or gains into the UK, but also if a relevant person remits such income or gains.

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The definition of relevant person covers:

  • The taxpayer
  • His/her spouse or civil partner (or a cohabitee)
  • A minor child or minor grandchild of any of the above
  • A close company of which any of the above are participators
  • A trust of which any of the above are beneficiaries
  • A company held by such a trust.

This means that a tax charge can arise even if the taxpayer hasn’t personally brought the offshore income/gains into the UK. If a ‘relevant person’ brings such offshore income/gains into the UK, the taxpayer will be taxed on that remittance.

This has had a major impact on a lot of traditional remittance tax planning.

Offshore gifts

Before Finance Act 2008, it was common for non-domiciled clients to make gifts overseas of their offshore income/gains. In the hands of the recipient the funds were ‘pure’ capital. As long as it was an outright gift (so that the recipient could do what they wanted with the funds) there was no mechanism to tax the funds if the recipient later brought them into the UK.

With the new remittance rules, this no longer works. If the recipient of the gift is a ‘relevant person’ (e.g. a spouse) then there is a remittance as soon as the recipient brings the funds into the UK.

Take a simple example. A non-domiciled taxpayer receives a large offshore dividend. He cannot bring that dividend into the UK without paying tax on the remittance. If he gives the dividend to his wife, and she brings the funds into the UK, this will be a taxable remittance (taxable on the husband). The mere transfer to the UK is the trigger for the tax liability. It does not matter, in this instance, whether the husband benefits from the funds in any way once they are in the UK.

The main problem with these new rules is that there is no requirement for any tax avoidance motive. Unlike the transfer of assets abroad rules, there is no defence if there is a commercial transaction or non-tax avoidance motive. It doesn’t matter why the relevant person brought the funds into the UK or even whether the donor intended a remittance to occur.

This could cause problems if the donor is unaware that the funds have been brought into the UK. In our example, what if the couple split up after the husband’s gift of his offshore dividend income? He might not know that his ex-wife has remitted the funds to the UK. This could be an interesting way of getting back at your former spouse – deliberately giving him a tax liability and then ensuring HMRC are made aware of it!

Offshore companies & trusts

The definition of relevant person includes offshore companies owned by the taxpayer. This can cause problems for non-domiciled clients who wish to buy property in the UK. Unless they have sufficient ‘clean’ capital (with no element of offshore income or capital gain) then putting funds into a company to buy the UK property will be a taxable remittance, as soon as the funds come into the UK.

It is also likely that the majority of offshore trusts will be ‘relevant persons’ under the new remittance rules. This is because the beneficiaries will include the settlor and other people who are ‘relevant persons’ to the settlor, causing the trust itself to be a ‘relevant person’ too.

There will be some exemptions e.g. where the settlor has died or has not moved to the UK. It may also be possible for a non-domiciled settlor to set up a trust that is not a ‘relevant person’. Instead the trust would be a ‘gift recipient’.

‘Gift recipient’

Even if the trust is not a relevant person, it will be caught by the definition of ‘gift recipient’. A gift recipient is any person, other than a relevant person, who receives a gift of money or property from a taxpayer. The ‘person’ who receives the gift would include any company or trust funded by the taxpayer.

One example of a gift recipient trust is a trust to benefit the settlor’s adult children. Only minor children are relevant persons for the new remittance rules. As long as the settlor, his/her spouse (or civil partner/cohabitee) and minor children or minor grandchildren are all excluded, the trust will not be a relevant person. Instead it will be a gift recipient.

There is one major difference where a gift recipient brings the donor’s offshore income/gains into the UK. As we saw earlier, the donor is taxed as soon as a relevant person remits the funds to the UK, even if the donor does not benefit in any way.

On the other hand, if a gift recipient brings the donor’s offshore income/gains into the UK, the donor is only taxed if s/he has ‘enjoyment’ from the remittance. This distinction allows for new tax planning.

Structuring UK property purchases

It may be possible to use this concept of a gift recipient trust to avoid the new remittance rules. The client puts some of his offshore income/gains (that he cannot remit without a tax charge) into a trust for his adult children. All ‘relevant persons’ are excluded from benefit. This is probably best done by amending the definition of excluded persons in the trust deed.

The trustees then purchase a property in the UK (perhaps via an offshore company). The client is allowed to lease the property, paying full market rent. This is not ‘enjoyment’ of the property, as the new rules specifically state that use of an asset or service can be ignored if full consideration is given in money or money’s worth by the relevant person. There are two other enjoyment exemptions but these are likely to be less useful than the full consideration exemption.

This structure would permit the settlor of the trust to buy a UK property, without paying tax on a remittance. The settlor would however need sufficient UK-taxed funds (or clean capital) to pay the rent. The offshore structure would also have an income tax liability on that rent, although this might be reduced if there is borrowing in the structure.

Other points to note

The new rules set out above apply from 6 April 2008. This means that a tax charge can only arise if the relevant person remits offshore income & gains that arose after 6 April 2008. Any offshore income or gains that arose prior to that date can be remitted solely by the taxpayer him/herself.

Another change was the abolition of the ‘source ceasing’ rule. This allowed non-domiciled taxpayers to stockpile income offshore. Then they closed the source of that income (e.g. a bank account). In the following tax year, the offshore income that came from the closed bank account became capital and could be remitted tax-free. Since 6 April 2008 it is no longer possible to use this rule.

The rules on offshore borrowings have also changed, where the borrowed funds have been brought into the UK. It used to be possible to pay interest (but not the capital) on an offshore borrowing with overseas income/gains, without this being a taxable remittance. Some existing loans will be grandfathered for a limited period, but otherwise any payment of loan interest or capital, where the borrowed funds came into the UK, will have to be from ‘clean capital’ to avoid a tax charge arising.


The new remittance rules are intended to make it very much harder for non-domiciled clients to bring funds into the UK without paying tax. Clients who have ‘clean capital’ (with no income or capital gain element) are unaffected by the new rules. Those clients with substantial offshore income/gains will need to find new ways of financing their lifestyles in the UK. There are however still planning opportunities.

These notes are for general guidance only. You should take advice before acting on any material covered in this article.

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