As the awards season gets into full swing, you have received an invitation to this Sunday’s BAFTAs at London’s Royal Opera House as you are best friends with one of the nominees. But could such a glamorous occasion have nasty tax consequences?
The invitation could not have come at a better time as you have received a very healthy dividend from a Javanese company in which you have a significant holding which was paid into your Jersey bank account. This is the perfect excuse to get a new outfit. You decided to buy a gorgeous dress in Milan and a radiant diamond necklace at auction in Paris and you are now making your way back to London.
You live in the UK but are not UK domiciled (as your heart lies in your native Papua New Guinea) and you have decided to pay tax on the remittance basis. You don’t have to worry about VAT or customs duty as you bought your outfit from within the European Union but do you have to pay UK income or capital gains tax as you’re bringing your new acquisitions into the country?
Remittance basis of taxation
Usually all UK residents are taxed on all of their worldwide income and gains, regardless of whether these are brought into or enjoyed in the UK. However, if you are resident but not domiciled in the UK, you can elect to be taxed on the remittance basis so that you are only taxed on non-UK income and gains to the extent that such income or gains are brought into or enjoyed in the UK.
You have taken advice and have elected to be taxed on the remittance basis for this tax year as most of your income comes from non-UK sources. Even though you have had to pay to access the remittance basis of taxation, this works well for you as your foreign income and gains will not be subject to UK income and capital gains tax.
But this doesn’t mean that you will not pay any income tax or capital gains tax. You will still have to pay tax on UK source income and gains from UK property as well as tax on foreign income or gains that you remit into the UK – potentially even in the form of that diamond necklace.
What is a remittance?
At its simplest, a remittance of your foreign income and gains takes place when you bring cash representing your foreign income or gains into the UK. But there are a number of rules which widen the definition of a remittance. This is to prevent you from structuring your affairs in such a way that means that you can enjoy the foreign income and gains inside the UK without physically bringing the cash here.
These include the rule that a remittance is not just restricted to cash that represents the foreign income or gains but covers property that is derived from said income or gains (eg the necklace). In addition, any such property brought into the UK by your spouse or civil partner, minor children or grandchildren or the trustees of a trust of which you are a beneficiary will also be a remittance by you.
There are some exemptions though. If the property is exempt, bringing it into the UK will not be a remittance which means that you will not have to pay income or capital gains tax on it. The exemptions are:
– property that is brought into the UK for repair;
– property that is brought into the UK for temporary importation;
– property that is culturally important and brought into the UK for public display;
– property that has a value of less that £1,000; and
– property for personal use.
Luckily your outfit falls into one of the exemptions. I would imagine it’s not because your dress or your diamond necklace is worth less than £1,000 (perish the thought!) but because they are for your personal use. So you don’t need to worry about the tax inspectors scrutinising the contents of your luggage to see what tax you need to pay on the clothes and jewellery you bring into the UK. Now you can sparkle on Sunday at the Royal Opera House without worrying the tax inspector is in the row behind you.
Hilesh Chavda is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP: email@example.com