Double trouble: the Finance Act 2025 relief for re-remittances
Just over a year ago, on 6 March 2024, the UK’s community of foreign domiciliaries and their advisors were shocked by the announcement, in the former Conservative Government’s final Budget, of the impending demise of the remittance basis. It was disappointing, but not altogether unexpected, that Labour uncritically adopted the policy on coming to power.
What was unexpected was the Labour Government’s decision to change the terms of the remittance basis, in the same legislation that would end the regime. The draft Finance Bill, published in November 2024, included modifications to the definition of remittance, some of which significantly extended the circumstances in which a taxable remittance would occur. To many advisors, these modifications felt unnecessary and vindictive.
One of the changes to the remittance code which was included in the draft Finance Bill was intended to prevent the “cleansing” of foreign income and gains (“FIGs”) by means of a remittance of them in a period of non-UK residence. Under current law, ITA 2007, s 809P(12) has the effect that once FIGs have been remitted to the UK, they cannot be taxably remitted again. Moreover, it is generally accepted amongst advisors that FIGs can be remitted to the UK, within the meaning of the remittance code, not only in a tax year of UK residence, but also in a year in which the taxpayer is non-UK resident.
An individual who had previously used the remittance basis could therefore remit FIGs during a period of non-UK residence, such remittance not being taxable provided that the individual was not caught by the “temporary non-residence” (“TNR”) rules. (Avoiding the application of the TNR rules typically requires a period of at least six years’ non-UK residence before the individual resumes residence in the UK). The remittance in the non-UK resident period would effectively “cleanse” the FIGs, which could then be remitted during a subsequent period of UK residence, without that second remittance resulting in a tax charge.
The Finance Act 2025 will change s 809P(12) so that, with effect from 6 April 2025, the initial remittance of FIGs must have resulted in a tax charge in order for a future remittance of the same FIGs not to trigger tax. So a non-taxable remittance while non-UK resident will not prevent a future re-remittance of those FIGs from giving rise to tax.
The issue with this change, in the form originally proposed, was that although it was not retroactive (it would not change the tax treatment of pre-6 April 2025 remittances when those remittances occurred), it was retrospective. In other words, it would change the post-5 April 2025 tax consequences of steps taken in previous tax years. Although not as egregious as retroactive legal changes, retrospective legal changes are widely regarded as problematic, as they undermine legal certainty and can infringe legitimate expectations. Such changes can create grounds for challenge under the Human Rights Act 1998 (the “HRA”) - for example where they affect the peaceful enjoyment of possessions, by allowing the imposition of taxes which, had the change not occurred, would not have been payable.
Following representations by tax advisors, the Government seems to have accepted that the retrospectivity of the proposed change to s 809P(12) could result in unfairness / human rights infringements. It proposed an addition to the Finance Bill, labelled “Amendment 24”. The provision is titled “Relief for amounts remitted again on becoming UK resident”, and is evidently intended to provide a relief for taxpayers who have previously “cleansed” FIGs and could otherwise be prejudiced by the change to s 809P(12). This relief is at para 6 of Schedule 9 to the Finance Act 2025.
Unfortunately, the drafting of this provision leaves much to be desired. There are several deficiencies, but the key one is that, on its terms, the relief is conditional on (i) there having been a second remittance to the UK of previously “cleansed” FIGs, before 6 April 2025, and (ii) this second remittance having given rise to a tax charge, also before 6 April 2025. Condition (i) is unproblematic; but condition (ii) makes absolutely no sense, and if construed literally, renders the relief useless. Under the current law, a second remittance of FIGs which have been “cleansed” by an earlier remittance cannot, by definition, give rise to a tax charge. It is, of course, absurd to have a relief which is predicated on a state of affairs which cannot possibly have arisen.
However, it would be extraordinary if Parliament had enacted a provision which had absolutely no effect. Moreover, the Government’s intention in promoting “Amendment 24” is clear. On Wednesday 19th March, the night before the Finance Act 2025 was enacted, Lord Livermore, Financial Secretary to the Treasury, made the following statement:
“During the passage of the Bill […] the Government tabled a number of minor technical changes and administrative easements to ensure that the new regime works as intended. As part of this, we have made changes to ensure that no tax will be due in any past or future tax year for taxpayers in circumstances where they were previously UK-resident and taxed on the remittance basis; they remitted foreign income or gains during a period of long-term non-residence before 6 April 2025; and they have enjoyed or continue to enjoy the benefits of the remitted foreign income and gains after resuming their UK residence. These changes provide certainty for taxpayers and ensure that no tax will be due in these circumstances.”
Accordingly, “Amendment 24” is intended to preserve the effect of “cleansing” exercises carried out by taxpayers who were previously remittance basis users, who then remitted FIGs to the UK in a non-UK resident period lasting more than five years, and who re-remitted the FIGs to the UK before 6 April 2025. This is essentially what advisors were asking for, to eliminate the retrospectivity problem with the change to s 809P(12).
The question is whether a legislative provision which has clearly been bungled, and which on a literal view does not achieve its obvious aim, can be read in such a way as to correct the drafting error. Here there is helpful authority in the form of Inco Europe Ltd v First Choice Distribution [2000] 2 All E.R. 109 (“Inco Europe”). This concerned another case where the Parliamentary draftsman “slipped up”. It was held by the House of Lords that the courts can legitimately interpret legislation so as to correct obvious drafting errors. The key principles were expounded by Lord Nicholls:
“Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.”
In the present case there can be little doubt that these three conditions are met. The purpose of “Amendment 24” is evident from Lord Livermore’s statement. Parliament clearly failed to give effect to that purpose - because as drafted, the relief in para 6 is conditional on a tax charge having arisen which, in practice, could never have arisen. The drafting error could be corrected in a number of ways, but Inco Europe makes clear that one should not get too hung up about what para 6 should have said – there is no need to know “the precise words Parliament would have used”, just the general thrust.
The simplest way to make para 6 generate the intended result (we would suggest) is to read condition (ii) above, i.e. the requirement for a pre-6 April 2025 tax charge to have been triggered by the second remittance, as a requirement for a tax charge to have been triggered on or after 6 April 2025, as a result of the change to s 809P(12). Take an individual who remitted £1m of FIGs during a 6 year period of non-UK residence, then resumed UK residence, and re-remitted the “cleansed” FIGs last tax year to fund the purchase of a UK house which he/she still occupies. Arguably, there is a continuing satisfaction of the remittance conditions in s 809L, as the individual is using the house and the house is derived from the FIGs. Absent para 6, newly amended s 809P(12) would trigger an immediate tax charge on the £1m on 6 April 2025, thus meeting condition (ii) above. The relief in para 6 will then kick in, to disapply the tax charge and indeed to prevent any future taxable remittance of the FIGs.
Para 6 of Schedule 9 should therefore protect the position of many former remittance basis users who, in reliance on the current law, have remitted FIGs in a period of non-UK residence, with the objective of “cleansing” them.
However, not all former remittance basis users will be protected by the relief. The relief won’t help an individual who remitted FIGs to the UK in a non-UK resident period lasting five years or less. It won’t help an individual who remitted FIGs to the UK in a non-UK resident period but has not yet re-remitted the FIGs to the UK (unless, possibly, there is a last-minute re-remittance of the FIGs before 6 April 2025). Lastly, it won’t help an individual who is non-UK resident in the current tax year, or is non-UK resident in 2025/26, or where split year relief applies in either of those years. Some of these limitations on the relief are mystifying, but they are not absurd, so must be taken at face value.
Although the Government should be applauded for listening to feedback regarding the changes to the s 809P(12), we are left with a messy situation. The serious shortcomings in the process of fiscal law-making in the UK have, once again, been laid bare. But fortunately, in our view, the rectifying construction principle in Inco Europe has saved the day.
