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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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Remittance Basis: Introduction to the Remittance Basis: Foreign Income and Gains: Employment - Related Securities - specific employment income

Note: This section provides an overview of the position after 6 April 2008 only; please see the Employment Related Securities Manual (ERSM) for full details about the taxation of employment related securities, particularly for options etc. granted prior to 5 April 2008.

As ERSM161120 explains, where employment-related shares are acquired as shares in a UK company, the shares are UK assets and therefore they are ‘used in the United Kingdom by and for the benefit of the employee’.

Where those shares, share options and such, or any cash derived from them, is either the foreign securities income, or derives (whether wholly or in part, directly or indirectly) from the foreign securities income, the shares are wholly remitted to the UK when acquired, because the shares are UK assets. Thus there will be an immediate UK tax charge on this ‘remittance’ of foreign employment income.

If the UK shares are later sold, the sale proceeds consist or derive from the shares which are property that is regarded as consisting of or deriving from employment income, so the proceeds themselves consist of/contain that employment income, up to the amount of the original income. Refer to RDRM35290 Remittances from mixed funds - example 2 - sales proceeds.

There may also be a capital gain on the sale; this will be a UK gain rather than a foreign chargeable gain because the shares are UK-situs assets.

If the sale proceeds are sent offshore and later brought back to the UK there will be no further charge on these monies, to the extent that they have already been subject to tax in the UK.

Foreign specific employment income

Foreign specific employment income (FSI) is any part of an individual’s employment income of a tax year that is foreign securities income (ITA07/s809Z7(4A)).

Foreign securities income is the amount of employment-related securities income that is foreign. In determining the amount of FSI, there are differences between Not Ordinarily Resident and non-domiciled remittance basis users.

Broadly speaking, an employee who is not ordinarily resident in the UK will have employment-related securities income that is foreign in a tax year if all the following conditions in ITEPA03/S41C(6) are met:

  • they are using the remittance basis in the tax year (under ITA07/s809B, 809D or 809E), and
  • some or all of the duties of the employment are performed outside the UK.

Likewise, an employee who is ordinarily UK resident, but who is non-domiciled in the UK will have FSI in a tax year if all the following conditions (in ITEPA03/S41C(4)) are met:

  • they are using the remittance basis in the tax year (under ITA07/s809B, 809D or 809E), and
  • the employment is with a foreign employer, and
  • the duties of the employment are performed wholly outside the UK.

If an amount of employment-related securities income counts as employment income under Chapters 2, 3 or 3C to 5 (excluding section 446UA) of Part 7 ITEPA, and the remittance basis applies during any part of the relevant period then ITEPA03/S41A will apply to determine the amount of that income which is regarded as ‘foreign securities income’. If an employee has FSI it will only be taxed when it is remitted to the UK.

Broadly, the rules in ITEPA03 provide that, instead of the whole amount which counts as employment income being taxable in the UK on the arising basis, only that part which relates to the UK is taxable as it arises.

It achieves this by use of a formula:

taxable specific income = SI - FSI

where

SI is the amount of the securities income, and

FSI is the amount of the securities income that is ‘foreign’.

The Employment-Related Securities Manual (ERSM) has been re-written to take account of the new rules introduced by Schedule 7, Finance Act 2008. Refer to ERSM16060+.

See RDRM31125 for more information about Employment Income provided through third parties (sometimes referred to as ‘disguised remuneration’)