Overseas Capital Loss Election
Non-domiciled taxpayers who claim the remittance basis of taxation on their UK tax returns for the first time must decide whether they wish to make an election to treat foreign capital losses as allowable losses. If the election is not made, then foreign losses arising in a remittance or arising basis year are not recognized for UK tax purposes until the taxpayer becomes domiciled for tax purposes in the UK (either by choice or where they have been resident in the UK for more than 15 out of the last 20 tax years).
Once made, this election is irrevocable and applies for the year the election is made and all future tax years until the taxpayer becomes UK domiciled or deemed domiciled. The election must be made within four years of the end of the tax year in question.
Whether the election is beneficial or not will depend largely on the composition of the taxpayer’s UK and overseas assets, and the extent to which any overseas gains are remitted.
When the election is made, all losses claimed (including UK losses) are allocated first against remitted foreign gains, then against unremitted foreign gains, before finally being set against UK gains. If the election is not made, then foreign losses are not allowable, but UK losses are available to offset both UK source gains and remitted foreign gains.
As a result, it can be difficult to determine whether the election should be made - it is not a "no-brainer". Although it would seem generally more useful to be able to claim foreign losses than not, this is not always the case. For example, in the situation where a taxpayer who has made the election has UK losses and both unremitted foreign and UK gains in a particular year, the UK losses would be utilized first against the unremitted foreign gains before any remaining losses were set against UK gains. This could lead to a larger UK capital gains tax liability than would arise if they had not made the election, because in that scenario the UK losses would not be available to offset the UK gains.
Generally, it may be beneficial to make the election if the taxpayer:
It may not be beneficial to make the election if the taxpayer:
Furthermore, once the election has been made, the capital gains Annual Exempt Amount (AEA) is not available to offset capital gains later remitted in an arising basis tax year.
From a compliance perspective, it should also be noted that if the election is made there may then be the need to track foreign capital gains and losses which would not ordinarily be within the scope of UK taxation were the election not made. These additional time costs should be factored in when determining whether making the election will likely be beneficial overall.
The election must be made within four years of first making a claim for the remittance basis on a tax return.
If you think that you may wish to make the election for foreign losses to be allowable, or you would like to discuss any of the above in further detail, please contact us.
Once made, this election is irrevocable and applies for the year the election is made and all future tax years until the taxpayer becomes UK domiciled or deemed domiciled. The election must be made within four years of the end of the tax year in question.
Whether the election is beneficial or not will depend largely on the composition of the taxpayer’s UK and overseas assets, and the extent to which any overseas gains are remitted.
When the election is made, all losses claimed (including UK losses) are allocated first against remitted foreign gains, then against unremitted foreign gains, before finally being set against UK gains. If the election is not made, then foreign losses are not allowable, but UK losses are available to offset both UK source gains and remitted foreign gains.
As a result, it can be difficult to determine whether the election should be made - it is not a "no-brainer". Although it would seem generally more useful to be able to claim foreign losses than not, this is not always the case. For example, in the situation where a taxpayer who has made the election has UK losses and both unremitted foreign and UK gains in a particular year, the UK losses would be utilized first against the unremitted foreign gains before any remaining losses were set against UK gains. This could lead to a larger UK capital gains tax liability than would arise if they had not made the election, because in that scenario the UK losses would not be available to offset the UK gains.
Generally, it may be beneficial to make the election if the taxpayer:
- does not expect to realize UK capital losses; and
- expects to realize overseas capital losses and/or expects to remit overseas gains
It may not be beneficial to make the election if the taxpayer:
- expects to realize UK capital gains and losses; and
- does not expect to realize overseas capital losses and/or does not expect to remit overseas gains
Furthermore, once the election has been made, the capital gains Annual Exempt Amount (AEA) is not available to offset capital gains later remitted in an arising basis tax year.
From a compliance perspective, it should also be noted that if the election is made there may then be the need to track foreign capital gains and losses which would not ordinarily be within the scope of UK taxation were the election not made. These additional time costs should be factored in when determining whether making the election will likely be beneficial overall.
The election must be made within four years of first making a claim for the remittance basis on a tax return.
If you think that you may wish to make the election for foreign losses to be allowable, or you would like to discuss any of the above in further detail, please contact us.
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