Remittance basis of taxation – 13 key facts to know

06/07/2020

By David Snelling

If you’re a non-UK domicile and resident (or will be soon), then the UK’s remittance basis of taxation is definitely something you need to be aware of. You need to understand it to avoid some significant negative tax consequences and, equally, making use of it can offer some generous advantages.

If you’re an individual in this situation, here’s a brief list of key facts about the remittance basis.

  1. The remittance basis allows UK resident individuals who are non-UK domiciled (‘non-doms’), to mitigate UK tax on any foreign income and gains which are not remitted into the UK. Any income or gains remitted into the UK will be subject to UK taxes. Income or gains arising in the UK will be taxed in the UK, even if the remittance basis is applied for. For more information about ‘domicile’, read our article which will provide you with more detail.
  2. The definition of remittance is broader than you may think. It includes not only ‘remitting’ (bringing) foreign income and gains into the UK, but whether the income and gains have been ‘enjoyed’ in the UK. This could therefore extend to valuable personal possessions such as artwork.
  3. If you do not elect to be taxed on the remittance basis, you will usually be taxed on the arising basis on worldwide income and gains. The arising basis effectively means you will be taxed in the UK on all your worldwide income and gains.
  4. If you apply for the remittance basis, you will lose your tax-free allowances. You will lose your income tax-free annual Personal Allowance. However, this does not matter to anyone with adjusted net income above £125,000 per tax year. You will also lose your annual exemption in relation to Capital Gains Tax.
  5. There are two instances in which the remittance basis automatically applies. Firstly, it applies if you have unremitted foreign income and gains of less than £2,000 in a tax year. In these circumstances, there will be no loss of your Personal Allowance or Capital Gains Tax exemption. This rule also applies if you have been deemed domicile for tax purposes (see below) for being a long-term UK resident – allowing you to still have up to £2,000 per tax in unremitted foreign income and gains as per the remittance basis. The remittance basis also applies automatically (with no claim needed) where the following apply:
    • If you have not been a UK resident for more than six of the previous nine years
    • You have no UK income or gains in the tax year (except less than £100 in taxed UK income)
    • You have not remitted any foreign income or gains into the UK in the tax year
    • You are not required to complete a self-assessment tax return for any reason in the tax year.
  6. You can choose whether to apply for the remittance basis on an annual tax year basis. However, you should be aware of an issue if you change your remittance basis to the arising basis. Any foreign income and gains made in a previous tax year (in which you claimed the remittance basis) but remitted into the UK in a tax year when you are claiming the arising basis, will still be subject to the remittance basis of taxation.
  7. Long-term non-UK domiciled UK residents must pay an annual remittance basis charge to claim the remittance basis. Non-UK domiciled individuals who are resident in the UK for seven of the previous nine tax years are subject to an annual charge of £30,000 if they wish to claim the remittance basis. This charge increases to £60,000 for non-doms resident in the UK for 12 of the previous 14 tax years. Once these thresholds are met, it is important to ensure you wisely choose the most tax-efficient option available to you each tax year.
  8. Income Tax rates are higher for dividends on the remittance basis than on the arising basis. The tax rates on the arising basis are the standard UK tax rates. However, on the remittance basis all foreign income is taxed as non-savings income (currently 20%, 40% and 45%, depending on the tax band the income falls in to). This means any foreign dividends are subject to the higher non-savings Income Tax rates rather than the lower dividend tax rates.
  9. Clean capital (not income or gains) is not subject to the remittance basis. Clean capital is foreign capital which has not been mixed with income (for example, dividends or interest) or gains since the owner started using the remittance basis. Clean capital can be brought into the UK without any tax issues. However, working out what is clean capital, income and gains is difficult and therefore…
  10. You should clearly segregate between clean capital, income, and gains. You should ensure that your offshore savings and investments have income and gains segregated from capital, where possible, as they accrue. This typically means setting up separate accounts to manage each type of investment separately.If you invest or hold money in a ‘mixed’ fund – where income and gains accrue with capital, this could negatively affect your future tax situation. This is because remittances made from mixed funds are taxed in a specified order. This taxation order will likely be tax-inefficient for you.
  11. Gifts can be made to your adult children while abroad and no remittance will take place when those assets are brought into the UK for their own benefit. It is important that they ensure the original donor and any other ‘relevant persons’ (e.g. the donor’s spouse/partner, minor children, grandchildren, company etc.) do not benefit from the gifted asset.
  12. Some assets, proceeds (such as if they are invested in a Business Investment Relief qualifying investment within 45 days of being remitted into the UK) and gains are exempt. There are several important rules to understand if you’re interested in using remittance proceeds to invest into a Business Investment Relief qualifying investment. You should always speak to a financial adviser when considering and undertaking such an investment. Interestingly, gains made from a disposal of a foreign currency bank account are not subject to a chargeable gain. However, currency gains made from the disposal of an investment fund are classed as chargeable gains. For practical reasons, clothing, footwear, jewellery or watches which are for your own (or your spouse, cohabitee, minor children or grandchildren’s) use are not classed as a remittance. Neither is property that derives from income or gains of less than £1,000.Other instances where an asset is exempt are as follows:
    • Artworks, collectors’ items or antiques for public access / exhibit can be temporarily brought into the UK
    • Assets brought into, used or received in the UK for 275 days or fewer, such as a yacht or a car
    • Property brought into the UK solely for repair or restoration.
  13. A non-domiciled individual can be deemed domiciled in the UK for tax purposes. HMRC will deem everyone as domiciled in the UK if they have lived in the UK for 15 years out of the previous 20 tax years. However, the rules are different if you’re a ‘formally domiciled resident’. In these circumstances, you’ll automatically be deemed domiciled if:
    • You were born in the UK and the UK is your domicile of origin (but you have since acquired a domicile of choice elsewhere), and;
    • You are now a UK resident and were also a UK resident in at least one of the previous two tax years.

Formally domiciled residents are effectively not able to claim the remittance basis.

For more information regarding the Remittance Basis, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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