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Minimising the depletion of ‘clean capital’ by remittance basis users

The concept of clean capital is fundamental to UK resident foreign domiciliaries who wish to maximise the benefits of the remittance basis. In brief, the term ‘clean capital’ means funds that do not represent foreign income and gains that would be subject to a UK tax charge if remitted to the UK.

Generally, a remittance basis user (RBU) will wish to fund all of their UK spending using clean capital because a remittance of foreign income or gains will give rise to a tax liability. There are various planning techniques available to generate and tax-efficiently invest that clean capital, but in this article we will consider possible planning to safeguard an RBU’s existing clean capital reserves.

There are situations when an RBU can avoid using clean capital, on the basis that ‘non-clean capital’ can be used instead without triggering a tax charge. In certain scenarios, an RBU’s foreign income and gains may be brought into the UK, or used to acquire UK situated assets, without this resulting in a taxable remittance. Some of these opportunities arise as a result of express reliefs and exemptions contained in the remittance basis code (ITA 2007 Part 14 Chapter A1). (Note: all legislative references in this article are to ITA 2007 unless otherwise specified.) In addition, the limits of the ‘relevant person’ concept (s 809M) can create planning opportunities where the taxpayer has foreign income or gains that are surplus to their own requirements. In effect, these features of the code allow an RBU to use non-clean capital to purchase
investments or fund expenses that would otherwise necessitate the use of clean capital.

In this article, we examine:

  • the scope to use foreign income and gains to pay remittance basis charges or to pay for certain UK services;
  • the opportunities offered by statutory reliefs for ‘exempt property’;
  • the opportunities offered by business investment relief; and
  • the scope for planning based on the limitations of the ‘relevant person’ concept.

As an aside, references to RBUs encompass both current and former remittance basis users. It should be remembered that foreign income and gains of a tax year in which the taxpayer was an RBU remain taxable on a remittance to the UK, subject to the reliefs and exemptions discussed below, even after the taxpayer has ceased to be an RBU. Minimising the depletion of clean capital reserves can therefore be as important for former RBUs as it is for those who are currently using the remittance basis.

UK-linked payments

Express statutory provisions permit (i) payments of the remittance basis charge and (ii) payments for certain UK services to be funded with foreign income and gains, without giving rise to a tax charge for the RBU.

The general position is that payments to HMRC must be made using clean capital to avoid a taxable remittance. If the RBU uses foreign income or gains to pay a tax liability, that payment will itself trigger a taxable remittance.

However, s 809V provides that an RBU may pay the remittance basis charge using foreign income and gains, without that resulting in a taxable remittance, as long as the payment is made directly from the RBU’s non-UK account to HMRC’s account. HMRC expects taxpayers to keep records showing that the payment of the remittance basis charge was made directly to the department (see the Residence, Domicile and Remittance Basis Manual at RDRM34020).

Note that care should be taken if the RBU makes a payment on account in respect of the following year’s remittance basis charge. If a decision is subsequently taken not to claim the remittance basis charge that year, the relief under s 809V will be lost and the foreign income or gains used to make the payment on account will be treated as remitted.

By default, the use of foreign income or gains to pay for services provided in the UK to the benefit of the RBU or a relevant person results in a taxable remittance. But there is an important exemption for the payment of services that relate wholly or mainly to non-UK situated property. Payment for such services may be made using foreign income or gains, without triggering a taxable remittance, provided that payment is made directly to a non-UK account of the service provider (s 809W). This exemption is commonly used in relation to legal and accounting services provided to RBUs by UK firms with non-UK bank accounts.

Exempt property

The legislation on exempt property (s 809X et seq) is complicated and difficult to navigate. However, in essence, if property meets the definition of ‘exempt property’, the foreign income or gains represented by that property will not be treated as remitted, even if condition A in s 809L is met, i.e. if the property is brought to, received or used in the UK, by the taxpayer or another relevant person.

There are various rules to determine whether property is exempt property. In practice, the personal use rule, the de minimis rule and the temporary importation rule are arguably the rules that are most commonly relevant:

  • The personal use rule is met by clothing, footwear, jewellery and watches belonging to the RBU or another individual relevant person (s 809Z2).
  • The de minimis rule is met by any property where the bringing to, or receipt or use in, the UK of that property would result in the remittance of less than £1,000 of foreign income or gains (s 809X(5)(c)). The value of the property itself may be more or less than £1,000. For the relief to be available, the property in question cannot be ‘money’, which has an artificially extended definition, including promissory notes and debt instruments.
  • The temporary importation rule is met by any property where the number of countable days is no more than 275. In broad terms, a countable day is a day on which the property is present in the UK due to it having been brought into or used in the UK by the RBU or another relevant person. Again, the relief does not apply to property that is ‘money’, per the artificial definition referred to above.
Most RBUs know that generally it is undesirable to remit foreign income or gains to the UK, because tax will be incurred. However, there is perhaps less awareness of the opportunities that exist to bring foreign income or gains into the UK without tax, thereby avoiding depletion of clean capital reserves

Note that to take advantage of the exempt property relief, there is no requirement for the item of property to be acquired outside the UK. The property may already be in the UK when it is acquired. For example, if the RBU were to purchase a watch and have the watch delivered to them in the UK, they could make payment using foreign income or gains without that resulting in a taxable remittance as long as the payment is made to a non-UK account of the vendor. The residence of the vendor does not matter, as long as it has a non-UK account to which payment can be made.

Generally, the amount of clean capital that can be saved by utilisation of the exempt property relief is modest. However, the personal use rule is certainly worth bearing in mind before, say, a valuable item of jewellery or watch is acquired, and a determined RBU could make regular use of the de minimis rule, leading to significant savings over time. The temporary importation rule can save very significant amounts of tax, in a range of circumstances that are beyond the scope of this article.

Business investment relief

In principle, business investment relief (BIR, see s 809VA et seq) is a valuable relief permitting the investment of foreign income and gains in unlisted private limited companies, without this resulting in a taxable remittance of such income and gains. However, the legislation is intricate and demanding. There are many traps for the unwary, and the result of falling into such traps is either a remittance when the investment is made, or a postponed remittance caused by withdrawal of the relief.

Availability of BIR

Various conditions must be met in order for BIR to be available, but some key points are highlighted below.

  • The investment must take the form of a purchase of shares in the company, a loan made to the company or a purchase of debt securities issued by the company (s 809VC(1)).
  • The investee company may be UK or non-UK incorporated and resident. Generally, the company’s activities must substantially comprise carrying on a commercial trade, or the company must be preparing for its activities to substantially comprise carrying on a commercial trade within five years. Generally, BIR can also apply if the investment is made through the holding company of such a trading company. However, BIR does not apply to investments into businesses carried on by sole traders or through partnerships (condition A, s 809VD).
  • The legislation does not preclude personal involvement of the RBU in the management of the investee company. However, no relevant person can receive a ‘related benefit’ in connection with the making of the investment (condition B, s 809VF).
  • Care is required regarding the mechanics of making the investment. This must be structured so that, were it not for the availability of BIR, a remittance would be triggered (s 809VA(1), (2)).
  • BIR must be claimed formally within a prescribed time limit. The claim must be made on or before the first anniversary of the 31 January following the tax year in which the income or gains would otherwise be treated as remitted to the UK (s 809VA(8)).
  • The person making the investment can be the RBU himself or any other relevant person; for example, a closely held company in which they are a shareholder, or a trust of which they are a beneficiary (s 809M(2)).

Loss of BIR

Even if the investment qualifies for BIR initially, relief may subsequently be lost if a ‘potentially chargeable event’ occurs. On such an occurrence, ‘appropriate mitigation steps’ must be taken within set grace periods. Otherwise, BIR is forfeited and the foreign income or gains used to make the investment are treated as taxably remitted (s 809VG).

Potentially chargeable events in s 809VH include:

  • the disposal of the investment, in whole or in part (which could include a gift to another relevant person);
  • a change in status of the investee company, such that it ceases to meet the BIR conditions (for example, if its shares become listed); and
  • a breach of the ‘extraction of value’ rule.

This last potentially chargeable event is particularly difficult. The extraction of value rule is breached, broadly, if value is received by a relevant person and that receipt of value is attributable to the investment (s 809VH(2)), but what is meant by ‘value’ and ‘attributable’ is far from clear. The guidance in HMRC’s Residence, Domicile and Remittance Basis Manual (at RDRM34420) does not express any view on what is meant by ‘value’ being received, but it is arguable that value is received if, and only if, there is a value shift in favour of the recipient.

The appropriate mitigation steps in s 809VI involve the disposal of the investment, unless it has already been disposed of. They also require a ‘taking offshore’ of the disposal proceeds, or reinvestment of such proceeds in another investment qualifying for BIR (which could, in principle, be an investment in a non-UK trading company, as long as the other BIR conditions are met). These steps typically need to be taken
within 45 or 90 days (s 809VJ).

The statutory definition of ‘taken offshore’ in s 809Z9(2) is poorly drafted, and creates uncertainty as to what needs to be done for proceeds to qualify. However, it appears that HMRC interprets ‘taken offshore’ pragmatically (see RDRM34460, example 1).

If the investment is disposed of otherwise than by way of an arm’s length bargain, it is deemed to have been disposed of for market value consideration. Appropriate mitigation steps (in other words, the taking offshore or reinvestment of proceeds) need to be taken in relation to any actual proceeds but also any deemed proceeds. The requirement for deemed proceeds to be taken offshore or reinvested may be satisfied by other money or property, of a value equal to the deemed proceeds, being taken offshore or reinvested. Deemed disposal proceeds create scope for considerable difficulties when seeking to avoid the loss of BIR; for example if there is a disposal for non-monetary consideration (s 809Z8(3)), otherwise than under a bargain at arm’s length (s 809Z8(4)), or to another relevant person or to a person connected with a relevant person (s 809Z8(5)).

Use of BIR in practice

In simple situations, BIR can be used effectively and with relative ease. For example, an RBU may acquire shares in an unlisted UK trading company, by making a payment directly from their non-UK account to the UK account of the vendor, using their foreign income and gains. Assuming the company remains trading and unlisted, the RBU may then dispose of the shares a few years later, and transfer the proceeds to a non-UK account within the relevant grace period. No remittance will have occurred by virtue of BIR.

However, in reality, arrangements are often considerably more complex than this and the intricacies of the BIR legislation can mean that attempting to use the relief becomes more trouble than it is worth. The rules on potentially chargeable events can result in BIR being forfeited in scenarios where, logically, it ought to be retained. The rules require a high degree of vigilance for events or actions that have the potential to constitute potentially chargeable events. These include events that may be outside the RBU’s personal control (such as a listing of the investee company). In many cases, it may be concluded that the much simpler and safer approach is simply to fund the investment with clean capital.

Finally, it is worth noting that BIR does not extend further than protecting the foreign income or gains used to make the qualifying investment from tax. For example, if the investee company is UK resident and the RBU has acquired shares personally, they will be subject to arising basis tax in respect of any dividends paid by the company.

Limitations of the relevant person concept

The discussion above focuses on express reliefs and exemptions offered by the remittance basis code. However, the concept of a relevant person also creates possible scope for planning using the RBU’s foreign income and gains.

Gifts: general

Some of the opportunities relate to gifts to descendants. As explained below, there is scope for gifts of foreign income or gains to be made without tax for the RBU donor, and for descendants to remit the gifted property, again without tax for the RBU donor, although in some cases only after a delay.

It should be stressed that any gift made using cash that is, or is derived from, the RBU’s foreign income or gains must be made outside the UK if a taxable remittance is to be avoided. In other words, the transfer must normally be made from a non-UK account of the RBU to a non-UK account of the donee. An alternative is for the RBU to declare a bare trust, in favour of the donee, over a non-UK account and its contents. In any event, a transfer to a UK account must be avoided because that will give rise to a taxable remittance. It is generally thought that this is so regardless of whether the donee is a relevant person, and this is HMRC’s view (RDRM33050).

Gifts to minor children and grandchildren

Minor children and grandchildren of the RBU or their spouse are relevant persons in relation to them (s 809M(d)). However, such children and grandchildren cease to be relevant persons as soon as they reach the age of 18. The following steps can therefore be taken.

  1. The RBU can give property that is, or is derived from, their foreign income or gains to a minor child or grandchild. This gift must be effected in such a way as to avoid a taxable remittance (see above).
  2. The gifted property must be kept outside the UK, and care must be taken to avoid any action that could result in a taxable remittance of the foreign income or gains, while the child or grandchild is a minor.
  3. Once the child or grandchild has attained majority, the property can be brought into the UK. This will not result in a taxable remittance, by virtue of the child or grandchild’s status as a non-relevant person at that time. This assumes, of course, that there is no benefit to the RBU from the property (see below).

This is very simple planning but it has widespread application. It may be particularly useful if the RBU is about to become deemed UK domiciled, and wishes to make a gift of excluded property while they are still able.

Gifts to adult children and grandchildren

Should the RBU wish to use foreign income or gains to make a gift to an adult child or grandchild, there is no requirement for a delay between the gift and the bringing of the gifted property into the UK by the donee. The donee can bring the property into the UK immediately, without this resulting in a taxable remittance for the RBU. There is, of course, still the need to avoid a transfer to a UK account (see above).

However, the gifted funds will remain derived from the RBU’s foreign income or gains, so care must be taken to ensure that the funds (or anything derived from them) are not used in such a way as to engage conditions A and B in s 809L. These conditions are typically only engaged if a relevant person holds UK property derived from the RBU’s foreign income or gains, or gives consideration so derived for UK services, so the gifted funds typically need to pass to a relevant person for there to be a taxable remittance. The risk is thus most pertinent in relation to adult children with their own minor children, who are minor grandchildren of the RBU and thus relevant persons.

For example, if an adult child were to use funds given to them by their parent RBU to pay into a UK savings account for a minor grandchild, that would result in a remittance for the RBU. As a result of the payment, a relevant person (the minor grandchild) would hold property in the UK derived from the foreign income or gains (the UK account), engaging conditions A and B. In principle, the same would apply if the adult child were to buy tangible property in the UK for the minor grandchild, using funds derived from the gift from the RBU. But there the relief offered by the exempt property rules discussed above may assist. The adult child could buy the minor grandchild clothing, footwear, jewellery and watches of any value, and any other non-monetary property meeting the de minimis rule, without risk of a taxable remittance.

The scope for possible remittances under conditions C and D in s 809L also needs to be watched, because the anti-avoidance provisions can be extremely difficult to apply in practice. However, condition C, which is the more straightforward of the two, is engaged, broadly, if property of someone other than a relevant person, to whom the RBU has made a gift of foreign income or gains (or something derived from such income or gains) is brought to, received or used in the UK, and is enjoyed by a relevant person.

In very broad terms, this means that condition C will be engaged if the gifted funds held by the adult child in the UK are enjoyed by the RBU or another relevant person. It follows that if minor grandchildren enjoy the gifted funds (or something derived from them), that will result in a taxable remittance for the RBU. However, de minimis enjoyment by a relevant person, including enjoyment that is merely incidental to the enjoyment of a non-relevant person, is disregarded for these purposes.

HMRC accepts that if a minor child is living in a UK property with their parents, the child’s enjoyment of that property is merely incidental to the parents’ enjoyment of it, and so condition C is not engaged (RDRM33270). Similarly, if the adult child used the gifted funds to pay for household groceries or goods, there is a good argument that any benefit enjoyed by minor grandchildren as a result would be no more than incidental to the benefit enjoyed by the adult child, and would not give rise to a taxable remittance.

In contrast, if the adult child uses the gifted funds to pay UK school fees of the minor grandchildren, the better view is that this will result in the remittance of the foreign income or gains so used.

Charitable gifts

A philanthropic RBU can also use foreign income or gains to make tax-efficient charitable gifts. To avoid an immediate taxable remittance, any such gift should be made to a non-UK account of the charity.

Care should be taken to ensure that the charity is not a relevant person in relation to the RBU. This is so that a subsequent transfer of the gifted money by the charity to a UK account will not trigger a remittance. A charitable company or charitable incorporated organisation is, on one view, capable of being a relevant person, whereas there is no risk of this if the charity is a trust.

A gift of money by an RBU to a registered UK charity is in principle capable of qualifying for tax relief under the gift aid scheme. If the conditions of this scheme are met, income tax relief is available to both the individual donor and the recipient charity. The availability of relief under this scheme is unaffected by the issue of whether the gift has been made from clean capital or from foreign income and gains, and in the latter case it is irrelevant whether such income or gains have been remitted.

Payments on divorce

Spouses cease to be relevant persons in relation to each other on decree absolute. This creates scope for an RBU to use foreign income or gains to make payments to their former spouse under the divorce settlement. As long as the payment is made to a non-UK account of the former spouse, and the former spouse does not transfer the funds to the UK until after decree absolute, in principle, no taxable remittance should occur.

However, this is subject to the same concerns regarding minor children as discussed above in relation to minor grandchildren. The former spouse needs to take care not to use the settlement funds in such a way as to result in a taxable remittance for the RBU as a result of conditions A and B in s 809L being engaged. Unless the payment is made by the RBU to the spouse before decree absolute, while they are still relevant persons in relation to each other, there is a risk that condition C will also need to be considered.


Given that partnerships are transparent for income tax and capital gains tax purposes, it might be expected that a remittance of funds by a partnership would be treated as a remittance by the individual partners in it. In fact, this is not how HMRC views the matter (see RDRM33530). This creates theoretical scope for an RBU to use a foreign partnership as a vehicle for investment into the UK, without a taxable remittance of any foreign income or gains contributed to the partnership.

HMRC’s view seems legally correct, but the outcome might be considered anomalous in view of the treatment of companies investing into the UK, as they may often be relevant persons in relation to the RBU. Perhaps for this reason, many advisers are nervous about recommending the use of foreign partnerships to make UK investments.

HMRC’s view creates theoretical scope for an RBU to use a foreign partnership as a vehicle for investment into the UK, without a taxable remittance of any foreign income or gains contributed to the partnership

Care is in any event required, where monies representing an RBU’s foreign income or gains are being invested into a partnership, to make sure that the partnership actually is foreign. HMRC’s position is that if foreign income or gains are invested into a UK partnership, there is a receipt of property in the UK (in the form of the partner’s interest in the partnership) which is derived from the invested income or gains, resulting in a taxable remittance (RDRM33530). It is not clear what HMRC means by a UK partnership, but it is suggested that the issue ought to turn not on the law governing the partnership, but instead on where the partnership business is carried on. Even if the partnership business is carried on outside the UK, such that the RBU’s interest in the partnership is non-UK situated, a remittance will be triggered if the investment into the partnership takes the form of a transfer to a UK account.


Most RBUs know that generally it is undesirable to remit foreign income or gains to the UK, because tax will be incurred. However, there is perhaps less awareness of the opportunities that exist to bring foreign income or gains into the UK without tax, thereby avoiding depletion of clean capital reserves. These opportunities are in principle very valuable. However, the complexities of some of these rules mean that RBUs need expert advice to take advantage of them, and to avoid the many bear traps set by the legislation. 

The authors of this article are also the authors of the foreign domiciliaries volume of Clarke’s Offshore Tax Planning, from which this commentary is adapted. The new edition of that title will be published in December.

This article was first published by Tax Journal and can be found here.

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