You Now Have a Choice!
Now, all this has changed. From 6 April 2008 non-domiciliaries have a choice of how they would like their foreign losses to be treated. The first alternative is to continue with the existing regime, which will then mean that losses on the disposal of foreign assets will not be allowable losses.
The second alternative is to make an election so that relief can be claimed for foreign losses, but if this is done, all UK and foreign losses have to be put into a pool and there is then a strict pecking order for giving the pool of losses relief against capital gains. This second alternative will be quite complicated to run and will need quite a bit of record-keeping.
In more detail, the first alternative – no relief at all for foreign losses – is the regime which will apply by default. If no election is made, then there will only be relief for UK losses thereafter.
This will remain the case for so long as the taxpayer is not domiciled in the United Kingdom. It will make no difference if in the course of time he or she abandons the remittance basis and decides to pay tax on worldwide income and gains. The foreign losses can still not be claimed for relief.
What is more, there is a time limit for electing into the second regime and once that time limit has passed there is then no choice at all.
Electing into the second regime will mean that all losses, UK and foreign, are pooled and these losses are set against gains in the following order:
1. Against foreign chargeable gains arising in the year which have been remitted to the UK.
2. Against foreign chargeable gains arising in the year which have not been remitted to the UK.
3. Against UK chargeable gains.
So you might say that both regimes are rather similar to my options with the barbecued sausages – neither of them sounds all that appetising!
The election into the second regime will require computations of worldwide income and gains (not something required up to 2007/08 for non-domiciliaries) and losses will then need to be allocated in the order shown above, and a running total maintained in relation to unremitted gains and remitted gains.
Choosing Between the Two
Many wealthy non-domiciliaries have traditionally invested outside the United Kingdom, and not in UK assets, simply in order to gain maximum advantage from the remittance basis. For these, the choice between the two loss regimes is fairly clear; it will be sensible to elect into the second regime in order to have relief for foreign losses.
Those who have both foreign and UK losses will be in a quandary. It may be difficult to decide which regime is best and they will therefore want to wait and see. However, they cannot wait indefinitely.
The time limit for electing into the second regime is five years after the 31 January date following the first fiscal year in which the remittance basis is claimed. For non-domiciliaries already living in the UK, this means that an election in relation to 2008/09 can be made at the latest by 31 January 2015.
Practical Tip
Where it is unclear which will be the best regime, the answer is not to take any action yet, but to review the position in 2014. Although this is the best we can offer, I am not so sure that it is of much help, particularly for younger foreigners who may be planning to stay in the UK for many years to come and over the years their financial circumstances are bound to change.
I should explain that I have just given an outline here of some very complex rules for gains and losses of non-domiciliaries.
Malcolm Gunn
