Remittance Basis of Taxation for UK Non-Doms

The Remittance Basis of Taxation is specific basis of taxation which is applicable to UK based non-doms who have income arising from outside the UK where the foreign earned income is not subject to UK tax, providing it is not brought into the UK.

Under normal UK tax rules, anybody who is considered a UK tax resident will have their UK and worldwide subject to income tax in the UK and therefore the Remittance Basis of Taxation is of particular interest to non-doms who specifically have significant overseas income and do not require the use of those funds in the UK.

Arising basis vs Remittance basis of taxation

A non-dom living in the UK will either be subject to tax on an arising basis by default or they can elect to be subject to tax on the remittance basis of taxation. If an individual does not elect to claim tax on the remittance basis, they will be taxed on the arising basis by default.

The arising basis of taxation

The arising basis of taxation means that a non-dom who is classed as a tax resident of the UK will be subject to UK tax on their worldwide income, not just that in the UK, and will include all foreign earned income and gains in their UK tax return

They will also be able to benefit from maintaining your personal allowance of £12,570 per year (subject to normal income-based restrictions) and the capital gains tax exemptions.

In addition, if your foreign earned income or gains is below £2,000 and is not remitted into the UK, this amount will also be relieved from UK tax by default, i.e. without needing to make a claim.

The key complication of being taxed on the arising basis is that foreign earned income may also be subject to tax at source and therefore you will need to consider double tax agreements and/or make a double tax relief claim to avoid being taxed twice on the same income.

The remittance basis of taxation

Non-doms who are considered a tax resident of the UK can also elect to be taxed on the remittance basis of taxation which will ensure that any foreign earned income and gains will not be subject to UK tax unless it is remitted into the UK.

There are two major implications for electing to use the remittance basis of taxation.

The first is the removal of UK personal allowance (currently £12,570) and also any capital gains tax annual exemption. The impact of this will be that all UK earned income and/or gains will be taxed in the UK, even if below the usual tax free allowance or annual exemption.   

The second major impact is that electing to use the remittance basis may come with a charge in addition to any tax on foreign income. The charges applied are set at the following rates:

• In the first 7 tax years that you are UK resident the only “cost” of claiming the remittance basis is the loss of your tax free personal allowance as outline above.
• £30,000 remittance basis charge if you have been a UK tax resident for 7 out of the previous 9 tax years, effectively tax years 8-12 of UK residence.
• £60,000 if you have been a UK tax resident for 12 of the previous 14 years, effectively tax years 13-15 of UK residence.

Once you have been resident in 15 of the previous 20 tax years you are deemed domiciled and can no longer claim the remittance basis of taxation.

When is the remittance basis of taxation a preferable option?

Given the loss of the personal allowance and capital gains tax exemptions, the benchmark for considering to elect to use the remittance basis would be when the tax on your foreign earned income or gains would be significantly over the personal allowance threshold.

You may also wish to consider electing to use the remittance basis if you are a non-dom with total annual earnings over £125,000  due to the fact that for people earning over £100,000 per year, every additional £2 earned results in your personal allowance being reduced by £1, until it is ultimately removed once you reach £125,000.

After 7 years of UK tax residence, you would need to have sufficient overseas income or gains to justify paying the £30,000 or £60,000 remittance basis charge for electing to use the remittance basis. As a basic guide, you would need to earn an additional £66,667 over £125,000 in foreign, unremitted earnings to incur tax charges of £30,000 or an additional £133,333 to incur tax charges of £60,000.

While this is not the only reason you should be deciding whether to elect to use the remittance basis (for example it may also be beneficial if you have substantial foreign earned gains, such as a property sale), it is a useful guide as to when it becomes particularly tax beneficial to a non-dom.

Importantly, it’s worth bearing in mind that you don’t have to use the remittance basis of taxation every year, often non-doms will claim it ion their first 7 years of UK tax residence and then revert to being taxed on the arising basis from their 8^th year onwards.

How is foreign income or gains tax when remitted into the UK?

The remittance basis only defers UK taxation while the income or gains are kept outside of the UK.  If the income/gains is remitted into the UK at a later date it will be taxed according to UK tax rates for that type of income or gains. Typically this will be made from salary, dividends or capital gains, although there may be other exemptions.

Your UK tax band will determine who this income is taxed.

Tax rates and thresholds

The major complexity for remitting foreign earned income is that it will often consist of mixed funds rather than being from a single source, such as foreign employment. For mixed funds there complicated ordering rules which must be applied, these are designed to ensure that the maximum amount of tax is collected in the UK on a later remittance.  However, it is recommended to seek advice from a trusted UK tax specialist to ensure that correct procedures are applied to mixed funds to minimise any UK tax which may be due.

The simplest way to ensure your remitted income is taxed in the most efficient way is to avoid having mixed funds in any single account. This is achieved by having bank accounts and credit cards which receive income from a single, provable source.

This may take time and effort, and it’s advisable to seek advice on the best way to manage funds and accounts ideally before you arrive in the UK.

What would be classed as remitted income?

Income which is brought into the UK, i.e. remitted, could take many forms and advice should always be sought before making a payment from a foreign bank.

Typical examples of remitting foreign earned income could include:

• Making a UK bank transfer or paying a UK bill with money from outside the UK
• Paying for a service in the UK using a credit or debit card from outside the UK
• Buying an item outside the UK using foreign earnings and then bringing that item into the UK, for example a luxury car or jewellery
• If you gift money to someone in the UK from a foreign source, but the reason was for them to buy something which would ultimately be used by you

This is not an exhaustive list and you should always err on the side of caution before making a payment of transfer – and seek advice wherever possible.

Overseas workday relief

For non-doms claiming the remittance basis there may be an additional tax relief if you are employed and  work abroad during the tax year, known as overseas workday relief.

This will entitle you to avoid paying UK tax on any work that you conducted outside of the UK and have not remitted into the UK at the end of the tax year.

This relief can only be claimed in the first 3 tax years that you are UK tax resident, but this is a very valuable relief.

Overseas workday relief can also be complex and requires careful planning, so we have written a detailed overview which will explain it in more depth.

When you should seek professional advice

You should never make a decision on whether to elect to use the remittance basis of taxation without seeking advice first.

If you believe you are considered a non-dom and you have significant foreign earned income or gains, either now or anticipated in the future, but intend to live in the UK it is recommended to speak to a UK tax specialist to understand all your options.

Ideally, understanding your UK tax situation should be part of your process of moving to the UK, but would also make sense if you are anticipating spending a significant time in the UK during the tax and you have significant earnings from elsewhere in the world.

We can help you understand how you can best make use of your non-dom status by offering a free introduction to a UK tax specialist who will provide you with an initial consultation as part of the introduction.

This free consultation, while limited to 15 minutes, will offer guidance and general explanations around your non-dom status and the remittance basis of taxation and could help you begin a more tax efficient life in the UK.

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