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Non-doms who claimed the remittance basis in 2008-09 have until 5 April 2013 to make a loss election

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Summary: You should read this if you, or any of your clients, are non-UK domiciled, claimed the remittance basis of taxation for 2008/2009 and have not already made a loss election.

30-second summary

A non-UK domiciled individual who claimed the remittance basis of taxation in the 2008/2009 UK tax year only has until the end of this tax year (5 April 2013) to make a loss election.  If he makes an election, he will be able to set losses, which accrue to him on non-UK assets (his 'foreign losses'), off against his gains (foreign & UK). If an election is not made by then he will lose the opportunity to make an election.

If an individual does not make an election, he will not be able to deduct his foreign losses from his gains in calculating his taxable gains (unless he becomes UK domiciled at some point in the future). He will still be able to set his UK losses off against his UK gains, and any foreign gains which are remitted to the UK.

Whether or not it is appropriate for a non-UK domiciled individual to make a loss election will depend on his specific circumstances and advice should be sought.

Loss election

Foreign losses arising to a non-UK domiciled individual before 6 April 2008 were not allowable losses - that is, they could not be deducted from the individual's gains (UK or foreign) in calculating his taxable gains. Finance Act 2008 introduced provisions which allow a non-UK domiciled individual to elect for his foreign losses to be available to set off against his gains (UK & foreign) in calculating his taxable gains for UK tax purposes.

Time limit for making a loss election

The time limit for making the election is four years from the end of the first tax year for which the non-UK domiciled individual claimed the remittance basis. It is irrelevant whether or not the individual was liable to pay the remittance basis charge in that tax year.

This means that a non-UK domiciled individual who claimed the remittance basis of taxation in the UK tax year 2008/2009 only has until the end of this tax year (5 April 2013) to make a loss election

The non-UK domiciled individual has a once in a lifetime opportunity to make the election; if an election is not made within the time limit he will loss the opportunity to make an election.

Effect of making a loss election

If an individual makes an election he can set all his losses (UK & foreign) off against:

  • his UK gains;
  • foreign gains which are remitted to the UK in the tax year in which they are realised; and
  • foreign gains which are taxable as they arise (because the remittance basis is not claimed in the tax year in which they are realised).

If an individual makes a loss election, special rules will apply to determine the order in which his losses (UK & foreign) are set off against his gains.

His losses will be set off against his gains in the following order:

  • first against his foreign gains which are both realised and remitted to the UK in that tax year;
  • then against his foreign gains which are realised in that tax year but not remitted to the UK; and  
  • finally against his UK gains.

This means that if a loss election is made the individual's losses are set off against his foreign gains first, including unremitted foreign gains which are not subject to UK tax. The foreign gains may 'use up' all the losses (including UK losses) leaving nothing to set off against UK gains which are subject to tax.

If no loss election is made UK losses will be available to be set off against UK gains (but foreign losses will not be available to be set off against gains).

An election is irrevocable and has effect for the tax year for which it is made (2008/2009 in this case) and all future years. Even where an election is made, only foreign losses which accrue in the tax year 2008/2009 or a later year can be set off against gains.

Record keeping & disclosure issues

An individual who makes a loss election will need to keep careful records of when foreign losses accrue, when foreign gains are realised and when foreign gains are remitted, in order to apply the rules.

He will also have to provide the UK Revenue (HMRC) with information on the disposal of his foreign assets (which HMRC may previously have been unaware of) in order to apply the rules and gain the benefit of having made an election.

Effect of not making a loss election

If an individual does not make an election, he will not be able to deduct his foreign losses from his gains (UK or foreign) in calculating his taxable gains (unless he becomes UK domiciled at some point in the future).

He will still be able to set his UK losses off against his UK gains, and any foreign gains which are remitted to the UK.

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