A UK taxpayer who is a non-UK domiciled individual can choose to benefit from the remittance basis of taxation. The regime is beneficial, as although UK source income and UK capital gains give rise to tax in the same way as for UK domiciled individuals, income from non-UK sources and gains arising on the disposal of non-UK assets are not immediately taxable in the UK.
The UK tax liability is deferred on the income or capital gains until such time as the assets representing or deriving from them are brought into the UK. These are called remitted income or gains. The definition of a remittance, for tax purposes, is wide ranging and often requires detailed consideration of how it applies to any particular circumstances.
It is important to note that if you are non-domiciled and have small amounts of unremitted foreign income and gains, less than £2,000 per UK tax year, then the remittance basis applies automatically.
Your unremitted foreign income and gains will automatically be outside the UK tax regime without the need to make a claim. You will not lose your tax-free personal allowance or capital gains tax annual exempt amount, nor will you be liable for a Remittance Basis Charge.
Claiming the remittance basis
The remittance basis is generally optional and there is a requirement for the individual to make a claim to be taxed on the remittance basis, otherwise a UK resident individual will be taxed on their worldwide income on the arising basis.
This claim is usually made on the individual’s tax return and can be made on a year-by-year basis. By claiming the remittance basis of taxation an individual loses their entitlement to Income Tax and Capital Gains Tax tax-free allowances and therefore the position should be reviewed on an annual basis.
Once a remittance basis user has been resident in the UK for 7 or more of the 9 preceding tax years, a fee becomes payable for the benefit of using the remittance basis if the individual claims it. This fee is an additional amount of tax, known as the remittance basis charge (RBC).
The RBC is £30,000 per annum but increases to £60,000 per annum once 12 or more of the 14 preceding tax years are considered tax years of UK residence.
When determining whether the RBC is payable, and its amount, an individual needs to take care when counting the relevant years as UK tax years run from 6 April to 5 April. If an individual comes to the UK partway through a UK tax year, and under the UK’s Statutory Residence Test is deemed to be UK resident in that tax year, that tax year will be treated as a resident year for the purposes of the RBC.
Rates of tax on remitted income
When an individual remits income and gains to the UK whilst claiming the remittance basis they will be liable to UK tax. Foreign income remitted to the UK will be taxed at non-savings income rates, currently 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for those with taxable income which exceeds £150,000).
These higher rates of tax are also applicable on any foreign dividends remitted to the UK. Foreign capital gains which are remitted to the UK will be taxed at their relevant rates.
Assets, known as clean capital, which are not derived from foreign income or gains can be brought into the UK by a non-UK domiciled individual without triggering an income tax or capital gains tax charge. Clean capital includes the following:
- income and gains received before the commencement of the individual’s UK residence.
- income and gains which were taxable on the arising basis (e.g., because the income was UK source, or the gains were in respect of UK assets); and
- outright gifts and inheritances from other individuals.
Non-UK domiciled individuals are recommended to take advice before coming to the UK to ensure that their clean capital is segregated from other sources of foreign income and gains, so that the clean capital can be used for UK spending, without a UK tax liability arising.
It is easy for an individual to segregate funds when there is just cash, however this can be more complicated when an individual owns an investment portfolio.
Mixed funds and bank account management
If bank accounts have not been properly segregated before a non-UK domiciled individual comes to the UK, then this could result in a mixed fund arising. A mixed fund happens when a bank account containing clean capital subsequently receives income or capital gains arising overseas whilst the individual is a UK resident. Merely receiving interest on clean capital into the same account would make it a mixed fund.
Where a remittance is made from a mixed fund, the tax legislation stipulates specific ordering rules for the purpose of matching the remittance with monies comprised within the account and calculating the tax arising. These rules can be complicated to apply and so advice should be sought here.
How Shorts can help
The remittance basis of taxation can be complex and there are a number of terms to be considered before you become a UK tax resident to ensure that you maximise your opportunity not to pay UK tax on funds that you remit to the UK. We recommend that an individual seeks appropriate professional advice before remitting any funds to the UK.
If you have any questions regarding your situation, we recommend that you get in touch and find out how we can help you.
Tags: International Taxes