Foreign Capital losses

A foreign domiciliary who from 2008/09 onwards has not made a remittance basis claim will be entitled to relief for foreign losses and this treatment will continue unless and until the tax year for which the individual claims to be taxed on the remittance basis. Individuals who have unremitted foreign income and gains of less than £2,000 and are therefore automatically entitled to the remittance basis will also be entitled to relief for foreign losses, as long as they do not subsequently have increased income or gains, such that they choose to be full remittance basis claimants.
 
This automatic entitlement to foreign capital loss relief will terminate in the first tax year after 5 April 2008 that a remittance basis claim is made. Once a remittance basis claim has been made, if the individual wishes to continue to receive relief for foreign capital losses, a one-off irrevocable election has to be made (irrespective of whether the individual has any foreign chargeable gains or overseas losses in that year). 
 
By making the election the individual irrevocably opts, whilst they continue to be a foreign domiciliary, to receive a modified form of loss relief (with respect to both UK and foreign capital losses). Where the election is made the loss relief available is complex and varies depending on whether the individual is taxed on the arising or remittance basis in the year and whether remittances of foreign chargeable gains are made. 
 
Accordingly, all individuals who claim the remittance basis in 2008/09 (as opposed to being automatically entitled to be a remittance basis user because their unremitted foreign income and gains are less than £2,000) should consider their position on this issue. 
 
Once the election has been made, the benefit of loss relief in general (that is UK losses as well as foreign losses) is restricted significantly in years during which the individual is a remittance basis user. 
 
This is because ALL losses are set off against gains as follows:

• Firstly, against remitted foreign chargeable gains arising in the tax year;
• Secondly, against foreign chargeable gains arising but not remitted in the tax year; and
• Thirdly, against UK chargeable gains arising in the tax year.

Note that losses CANNOT be set off against foreign chargeable gains arising in earlier tax years which are remitted in the current tax year.
 
Where the individual is likely to make foreign chargeable gains in excess of foreign losses and the gains will not be remitted, making the election would probably not make sense. This is because no benefit will arise and it is possible that UK losses will be wasted by being set against the unremitted foreign gains rather than UK gains. 
 
However, considering solely the chargeable gains position, making the election would make sense if the individual’s foreign losses are likely to be in excess of foreign gains or sufficient foreign gains will be remitted. This is because in these circumstances benefit would be obtained from the foreign losses and there would be no wastage of UK losses. 
 
Even where the need to make the election is triggered and it is thought that current and future gains and losses will be such that making the election will improve the chargeable gains position, it may not be felt desirable to actually make the election. This is because disclosure with respect to unremitted foreign losses may be required by HMRC in the course of an enquiry so they can confirm that the loss relief set off has been carried out correctly. HMRC state in their guidance that a “taxpayer will need to keep records to allow the correct operation of these provisions to be verified.” 
 
The deadline is the standard claims period set down in the legislation which (taking into account the new amending legislation which will be effective from 1 April 2010) will be four years from the end of the tax year in which the first remittance basis claim is made. Where a remittance basis claim is made in 2008/09 the deadline will, therefore, be 5 April 2013.
 
The normal way of making the election will be a claim on the self-assessment tax return for the year in which the first remittance basis claim is made. This means that if the remittance basis claim is made in 2008/09 the claim will be on that tax return. Where the taxpayer has to complete capital gains tax supplementary pages the claim would be in the white space supplementary information box on these pages. Where capital gains tax supplementary pages are not required the claim should be made in the white space additional information box of the main return. 
 
Given the magnitude of the decision, where there are any doubts as to whether making the election is beneficial it may make sense to hold off until closer to the deadline to assess future actual information and changes in the asset portfolio and intentions of the individual. Where it is decided to hold off until closer to the deadline any tax returns submitted before the decision has been made would need to be on the basis that foreign loss relief is not available. Appropriate revisions will need to be made if it is decided that the election should be made.
 
The election decision is highly complex as:

• once made the election is irrevocable and indefinitely changes the loss relief that the individual can claim (the only way the impact of the decision will fall away is if the individual becomes UK domiciled);
• it is impossible to be certain as to whether making the election will in the long run be favourable or unfavourable as this depends on future events; 
• The revised loss relief provisions can in certain circumstances be highly unfavourable to the taxpayer; and
• Making the election may mean that significant disclosure (which otherwise would not have been required) has to be made with respect to unremitted chargeable gains during the course of any HMRC enquiry.

 
Accordingly, the decision as to whether or not the election should be made should not be taken lightly. 
 
If a remittance basis claim is made for a tax year commencing on or after 5 April 2008 and an election is not made the foreign domiciliary will not be entitled to relief on foreign losses whilst he or she remains foreign domiciled, whether or not they claim to use the remittance basis in those later years. The relief they can claim on UK losses is unchanged. Should the individual acquire a UK domicile of choice (meaning they can no longer access the remittance basis with respect to foreign income or foreign chargeable gains), then relief for foreign losses will be available in exactly the same way as any other UK domiciliary. 
 
For further information or advice please contact your usual Ensors contact or speak to Anne Wright on 01473 220092 or email anne.wright@ensors.co.uk

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