Individuals have started to receive letters from HM Revenue & Customs (“HMRC”) asking them about their foreign income or assets and to confirm that they have declared all taxable income and gains. As part of this they seek confirmation by asking for a formal certificate, which they enclose with their letters, to be signed and returned to them.
If you have offshore income or assets, whether or not you have already received one of these letters, it is best to review your affairs to check everything is in order. We are able to assist you with this. We have great expertise in dealing with a whole range of offshore aspects and, where needed, we can assist with any disclosure to HMRC that may be required to bring your affairs up-to-date quickly to mitigate the position.
Anyone in receipt of this letter should obtain specialist advice to understand how best to respond, but they should avoid signing the certificate until this advice is obtained. It is important that you do not simply ignore this letter.
Why are these letters being issued?
These letters follow on from HMRC, like most other tax authorities, receiving information through Automatic Exchange of Information Agreements, which are in line with the Common Reporting Standard. Since September 2018 over 100 countries have been sharing information annually with the objective to counter tax evasion.
HMRC have therefore received information from jurisdictions all across the world where the beneficial owner of the income or assets is a UK tax resident. It is this information that is driving the letters from HMRC, who will analyse the information it has received against other information it already holds, including any submitted tax returns it may have received, to identify any discrepancies that need to be looked into.
What should I do?
HMRC are checking that all income and capital gains that have been made in each year have been correctly reported and any tax due has been paid.
It is recommended that all individuals review their affairs to check that all their income and gains have been reported, particularly with respect to any offshore accounts or assets. It is much better to make a full and unprompted disclosure to correct the position before HMRC contact you, both for your peace of mind but also to mitigate any penalties and interest charges.
With this in mind, we have summarised the scope of UK income tax and capital gains so that you are aware of what needs to be declared.
Scope of UK taxation
A UK resident individual is, by default, liable to UK income tax and capital gains on their worldwide income and gains as they arise. For example, if you have a bank account abroad which is paying interest or income from shares in a foreign company this is within the scope of UK income tax and will need to be included when determining your tax position under Self-Assessment.
More recently, we have come across many individuals who have mistakenly believed that they have not made any profit on their foreign rental property. However, setting aside any foreign exchange rate issues, the rental income must also be calculated in line with UK rules, which may mean some of the expenditure you have incurred cannot be deducted against the income received for UK tax purposes.
Where a foreign asset is sold or disposed, it will be within the scope of UK capital gains (“CGT”). A key point to note is that just because no gain has arisen in the local currency this does not mean you do not have to do anything more. To calculate the gain arising for UK rules (proceeds less allowable costs) it is necessary to convert the purchase costs and proceeds into Pounds Sterling on each relevant date. A loss in the foreign currency may, depending on the inherent currency fluctuations, give rise to a capital gain for CGT purposes.
It does not matter that this income or capital gains may also be taxable in the country or jurisdiction where the asset was held, as this does not prevent it from being within the scope of UK taxation. Where tax is due in the other country relief is normally provided for the foreign tax paid against the UK tax liability, but care should be taken as the amount of relief may be restricted or in some cases disallowed altogether.
More complex issues
The tax issues can be more complex where a UK resident individual holds assets within their own or their family’s offshore company, particularly as we have seen an increase in the anti-avoidance rules that apply over the years. The foreign income received or foreign gains by the company could be taxable on the UK resident shareholders, even if they have not received any funds from the company.
The tax position will also need careful review where a distribution or benefit has been received from a non-UK resident Trust, where the individual is a beneficiary. If the individual is also the Settlor of the Trust tax charges can arise on them whether or not anything has actually been received.
Given the complexity of the legislation in this area, specialist advice should be obtained if you fall within these circumstances, PEM are happy to assist with this. In many cases we have come across advice has been provided initially but this has become outdated, as it has not kept up with the movement of tax legislation in this area.
In limited cases, special rules may limit the UK tax liability to only UK income and gains, and any foreign income or gains remitted to the UK, where an individual is non-UK domiciled and is on the remittance basis of taxation (either automatically or makes a claim). If you consider yourself to be non-UK domiciled specialist advice should be sought on your tax status and position.