US citizens resident in the UK

On 6 September the Internal Revenue Service (IRS), the US taxing Authorities issued a Bulletin number 2011-36. Such Bulletins are equivalent to HMRC's Statements of Practice, and detail the IRS's ruling on various tax issues. Normally an IRS Bulletin would be of little interest to us in the UK, however, this bulletin relates specifically to the Remittance Basis Charge (RBC).

The IRS have confirmed that they consider the RBC to be a payment of tax and therefore allowable for Foreign Tax Credit (FTC) deduction where a US Citizen or Green Card Holder  files a US Income Tax Return. The RBC has been recognised as a bona fide UK tax liability. This is good news for all US citizens resident in the UK and claiming the remittance basis. The first claims for this deduction would have been made when filing the 2010 US Tax Returns earlier this year.

Whilst the IRS Bulletin has made the principal quite clear the actual mechanism for claiming the tax credit is not. Normally the IRS require FTC's to be credited on a territorial basis, which means that the FTC can only be claimed against the US tax liability on the income giving rise to the Foreign Tax. However, the RBC is a charge attributed to non-UK source income through the Nominated Income or Gains mechanism. This income or gain is always unremitted income or gains and therefore is sourced outside the UK. The RBC, however, is paid to the UK Government so is technically UK tax. The Bulletin gives no guidance on how the FTC for the RBC is to be claimed, whether against UK sources or the relevant offshore source represented by the Nominated Income or Gains.

In addition to this problem, whilst the Bulletin acknowledges that the Nomination of income or gains may give rise to deemed income or gains it does not detail if this will restrict the availability of the RBC as a FTC.

This announcement is extremely welcome but further clarification will be needed before practitioners are clear on its actual operation.

For more information please contact Paul Bramall on 020 7182 4741 or via email on