Generally, an individual who claims the remittance basis will forfeit her personal allowances for the relevant tax year.
This rule does not apply where the remittance basis applies “automatically”, i.e. where the taxpayer may use the remittance basis without first having to make a claim for it. This automatic treatment applies in specific narrow circumstances which we won’t discuss here. The point is that, where automatic treatment applies, the taxpayer may also keep her personal allowances.
Here are the (generally) forfeited allowances:
- all personal income tax allowances;
- the tax reducers for married couples and civil partners; and
- the blind person’s allowance.
There is also no entitlement to the capital gains tax annual exempt amount, nor to certain life assurance-related reliefs.
That’s not the end of the story, though.
Even though our taxpayer would have forfeited the allowances under domestic law, she may nevertheless be able to claim them under a relevant tax treaty.
So how does that work?
The United Kingdom has a handful of tax treaties that could restore personal allowances to a remittance-basis user. If our taxpayer were to be dually resident in both the UK and one of those treaty countries, she may be able to claim the “forfeited” UK allowances.
Those treaties contain a “personal allowances” article, generally with text along these lines:
1. Subject to the provisions of paragraph 3 of this Article, individuals who are residents of [X] shall be entitled to the same personal allowances, reliefs and reductions for the purpose of United Kingdom tax as British subjects not resident in the United Kingdom.
2. Subject to the provisions of paragraph 3 of this Article, individuals who are resident of the United Kingdom shall be entitled to the same personal allowances, reliefs and reductions for the purposes of [X] tax as [X] citizens not resident in [X].
3. Nothing in this Agreement shall entitle as individual who is a resident of a Contracting State and whose income from the other Contracting State consists solely of dividends, interest or royalties (or solely of a combination thereof) to the personal allowances, reliefs and reductions of the kind referred to in this Article for the purpose of taxation in that other Contracting State.
This provision could restore the forfeited allowances in the following scenario:
- our taxpayer is dually resident in the United Kingdom and the other contracting state, and
- due to the operation of the treaty tie-breaker rule, she is treated as resident in that other state.
As she would therefore be deemed to be “treaty non-resident” in the United Kingdom, she would then be able to claim relevant UK allowances under clause 1. above. (It’s worth noting that she would be eligible only for such UK allowances as are available for non-UK resident British subjects.)
This treaty provision is actually quite rare. It appears in only a handful of the United Kingdom’s treaties. These include the treaties with Kenya (1973), Namibia (1962), Ireland (1976), Greece (1953), and Belgium (1987). More recent UK treaties do not contain this provision, although the treaty with the Netherlands (2008) is an interesting exception.
Some older UK treaties contained the “personal allowances” provision, but it was scrapped when those treaties were later renegotiated. For example, there was a “personal allowances” provision in the 1964 treaty with Germany, but it did not make it into the current (2010) treaty. Same as for Austria: the 1969 treaty contained such a provision, but it was not included in the current (2018) treaty.
The general rule remains that a claim for the remittance basis will cause a forfeiture of personal allowances. However, one should note the existence of those (few) treaties that could restore these reliefs.