When considering the UK taxation of foreign individuals, there are two main concepts to be aware of; residence and domicile.
Residence – can be defined as the country where a person is currently living. In the UK, residence is determined by the statutory residence test and is loosely based on the number of days a person has spent in the UK in the current tax year.
Domicile – is where you would call your permanent home, somewhere you intend to return to if you are away. Under UK law, a person’s domicile will follow that of the person on whom they are legally dependent until the age of 16, at which point they could acquire a new domicile by settling in another country.
What is the remittance basis?
A UK-domicile, who is resident in the UK, will be taxed on their worldwide income and gains. A non-UK domicile, who is resident in the UK, has the option of claiming the Remittance Basis of Taxation, whereby they are not required to report their foreign income and gains on their UK tax return on the basis that this has remained outside of the UK. Alternatively, they can report their worldwide income on the Arising Basis.
Does this mean claiming the Remittance Basis is better?
Not necessarily: UK residents and European Economic Area (EEA) citizens are entitled to a personal allowance of tax-free UK income each year. Similarly there is an annual exemption that is a tax-free allowance for any potential capital gains. The respective amounts for the current 2018/19 tax year are £11,850 and £11,700.
The consequence of claiming the remittance basis is the personal allowance and annual exemption available for that tax year will be forfeited.
It is important to note that the Personal allowance is reduced by £1 for every £2 that you earn over £100,000. This means that the allowance is reduced to zero if you earn over £123,700 (for 2018/19).
Furthermore, depending on how long the individual has been UK resident means they may have to pay a fee to enable them to claim the remittance basis. This is known as a Remittance Basis Charge (RBC) and is an additional payment on top of the current tax liability for the year. The relevant RBC charge must be paid each year the remittance basis is claimed. Once an individual has been UK resident for at least –
– 7 out of the previous 9 tax years they must pay a £30,000 RBC.
– 12 out the previous 14 tax years they must pay a £60,000 RBC.
Up until recently, there was another bracket for individuals who had been resident in the UK for 17 of the previous 20 tax years and the RBC was £90,000. This has now been abolished and instead you will be deemed as a UK domicile if you have been resident for 15 of the previous 20 tax years. Deemed domiciles no longer have the option of claiming the remittance basis and must report their worldwide income and gains.
The remittance basis claim must be made each year via the Self-Assessment tax return. The option to claim the remittance basis or report your worldwide income is available each year and a previous claim does not affect your options in the following year. However, where an individual’s unremitted foreign income is less than £2,000, the automatic remittance basis can apply without the need to make a claim. In this case the remittance basis is claimed without sacrificing the personal allowance (subject to tapering) and annual exemption.
It is not always obvious whether claiming the remittance basis is better which means there are situations where tax computations for both the arising and remittance basis will need to be carried out to establish which is the most tax efficient.
What if I want to remit foreign income to the UK?
Claiming the remittance basis restricts individuals from transferring income to the UK. Income that has not previously been reported will be taxable on remittance to the UK and can be subject to a higher tax rate. For example, an unreported dividend from an earlier year that is remitted to the UK will be subject to income tax rates (20%, 40% & 45%) rather than the favourable dividend tax rates (7.5%, 32.5% & 38.1%).
For high-earners with some foreign investment income it seems obvious that claiming the remittance basis would be the optimal position due to the loss of the personal allowance. However, there is currently a £2,000 dividend allowance, a £1,000 savings allowance (this is reduced for individuals who are higher rate taxpayers) and a generous £11,700 capital gains allowance. There may also be foreign tax paid on some of this income and a credit may be available under the terms of the relevant tax treaty, further reducing the UK tax liability. For individuals who have a modest amount of investment income the UK tax liability may not be worthwhile. They should consider reporting their worldwide income which would allow them to freely transfer their money to the UK.
Please note that this article should not be taken as tax advice. The information provided about may not be relevant due to unknown facts and circumstances. If you have any questions on the above, please do not hesitate to contact us directly.
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