Unremittable income can become taxable years after it arises

Most UK resident individuals are taxable on their worldwide income and gains, but what happens when those income or gains cannot be brought into the UK; for example, due to foreign exchange controls in the territory in which income arises or assets are held, or the impossibility of obtaining currency due to sanctions?

An escalating issue

This is an issue which could become more commonplace in the future. Following the Russian invasion of Ukraine, we have already seen sanctions imposed on Russian businesses and banks, which may impact ordinary investors who are UK domiciled, deemed domiciled or non-domiciled but not claiming the remittance basis of taxation.

Relief from tax

The law recognises that it is not fair to be taxed on funds that taxpayers cannot access or enjoy and specific legislation is therefore in place to prevent this from happening in most cases. Such income is known as ‘unremittable income’ and individuals, companies or trustees can make a claim that such unremittable foreign income should not be brought into the charge to UK tax when it arises. Similar rules also apply for capital gains where the proceeds cannot be remitted to the UK.

It is important to be aware that the income or gains impacted are still subject to tax and must be reported on the relevant tax return but, following a valid claim, the liability arising will not be due until such time as the funds are again available to be brought to the UK.

Remain vigilant

Care needs to be taken by individuals with assets in territories that could be considered a high risk for the introduction of exchange controls or that may be subject to sanctions. Recently, for example, individuals with assets in Lebanon have been unable to access their funds. HMRC does not publish a list of jurisdictions income from which may be eligible for unremittable income claims, and we understand each claim is reviewed on its own merits. In view of recent events, funds earned in Russia are likely to require such claims.

Retain evidence

Taxpayers should expect HMRC to query any claim for unremittable income relief. It will therefore be necessary to retain documentary evidence to support claims and explain why the funds cannot be brought to the UK.

Review regularly

Where a claim is accepted, the taxpayer is also expected to review the position of the unremittable income or gains in each subsequent tax year. The income or gains will be treated as received on the date it becomes possible to remit the funds to the UK and amounts received in foreign currencies must be recognised for tax purposes at the sterling equivalent at that date. It does not matter if the funds were actually received in the foreign jurisdiction many years ago or even if they are no longer held, because, for example, the income has been spent in the local jurisdiction during the period it was unremittable to the UK. Failure to correctly report the withdrawal of the relief will also likely lead to penalties being charged by HMRC.

In extreme cases, it is possible that income from a foreign investment is mistakenly not declared for UK tax purposes in the year in which it arises, at a time when it could be brought to the UK, but subsequently, due to a change in the situation in the foreign jurisdiction, becomes unremittable. In such cases, HMRC would argue that a claim for unremittable income is not valid as the funds could have been brought to the UK when received. This puts the taxpayer in the unenviable position of being taxable on amounts that they are unable to access, often with a penalty on top for late disclosure.

For more information please get in touch with Justin Stevenson, or your usual RSM contact.