Remittance basis for foreign nationals living in the UK
The remittance basis offers a favourable tax treatment for foreign nationals living in the UK.
The key points that non-UK citizens coming to live in the UK need to understand are:
- The remittance basis of taxation
- Whether the remittance basis of taxation would be advantageous to them
- Whether they are tax resident in the UK
- Whether they are a non-domiciled person, known as “non-dom”
- What is a remittance
- What is meant by “clean capital”
- What is meant by “mixed funds”
What is the remittance basis of taxation?
This guide provides an overview of the remittance basis of taxation that is available to individuals who are domiciled outside the UK but tax resident in the UK.
These guidance notes are intended to provide an introduction and overview.
If you think this might apply to you, please contact us well in advance of becoming a UK tax resident. There are important steps that you need to take before you move to the UK.
Who can benefit from the remittance basis of taxation?
The remittance basis is a tax treatment that is only available to individuals who are tax resident in the UK but not domiciled in the UK (known as non-dom) and who are not deemed domiciled in the UK.
More details about who is tax resident in the UK and what a non-dom is below.
How does Remittance Basis work?
How does a taxpayer normally pay tax in the UK?
A UK taxpayer, who is both resident and domiciled in the UK, pays tax in the UK on a worldwide basis. Income and capital gains are taxable in the year in which they arise, regardless of whether the income or capital gains are from the UK or from foreign receipts. This is known as the arising basis.
How is the remittance basis different?
Under the remittance basis, UK sourced income and capital gains are taxed in the same way as for any other UK taxpayer. The difference is that income and capital gains from non-UK sources are only taxed in the UK if they are remitted to the UK.
“Clean Capital” can be remitted to the UK without incurring tax. You will find more about Clean Capital below.
So, the remittance basis enables an individual to only pay UK tax on income or gains remitted to the UK rather than paying UK tax on worldwide income.
A “non-dom” can choose between being taxed on worldwide income or on a remittance basis
Even if an individual is eligible to use the remittance basis, they do not have to. They can instead use the arising basis and pay UK tax on worldwide income and gains.
You can use one basis in one tax year and the other basis in another year. It is a choice on a tax year by tax year basis.
Who is tax resident in the UK?
It is important to note that even if you are officially a resident of another country that you may also be tax resident in the UK.
The UK has a Statutory Residence Test to determine if an individual is tax resident in the UK. If you are a UK resident under the terms of the Statutory Residence Test, but non-domiciled, then you can claim the remittance basis of taxation.
The analysis to determine residence status can be complex. It considers both time spent in the UK and a number of “ties” that the individual has to the UK.
If you need advice about your residency status in the UK, please contact us.
What does non-domiciled in the UK mean?
Domicile has a particular meaning in English common law. It means much more than “where I live” or “where my home is”. It is the sense of where a person belongs. It is also different to the tax concept of residency.
A non-UK domiciliary is an individual who is domiciled outside the UK for the purposes of English common law. Typically, a non-dom is a foreign national living in the UK.
There are four types of domicile:
- Domicile of origin;
- Domicile of dependence;
- Domicile of choice; and
- Deemed Domicile
What is domicile of origin in the UK?
The domicile of origin is acquired at birth and is usually inherited from your father (or mother if your parents are not married). The domicile of origin is usually the country that your father (or mother) considered to be his permanent home at the date of your birth.
It is very difficult to displace the domicile of origin. It is retained permanently unless it is superseded by a domicile of dependence or a domicile of choice.
What is domicile of dependence in the UK?
Minors (<16 years of age) follow the current domicile of the person they are dependent on. If that person changes their domicile through choice, then the domicile of the minor will also change.
What is domicile of choice in the UK?
After the age of 16 an individual can choose to acquire a new domicile by abandoning their domicile of origin.
It is difficult to lose the domicile of origin. An individual will have to prove that they have chosen to live in a new country on a permanent basis and be able to provide strong evidence of the intention to stay there permanently. A person would need to sever all ties with the domicile of origin and be able to demonstrate this.
What is deemed domicile in the UK?
Some individuals who are not UK domiciled are treated as if they are domiciled in the UK. This applies to the following individuals:
- Individuals domiciled outside the UK but who were born in the UK with a UK domicile of origin. These individuals are deemed to be domiciled in the UK as soon as they come to live in the UK.
- Individuals who have been resident for tax purposes in the UK for at least 15 out of the previous 20 tax years.
Consequences of claiming the Remittance Basis
The decision whether to use the remittance basis will depend on the personal circumstances of the individual.
The following factors need to be taken into account:
Annual remittance basis charge
There is no charge for using the remittance basis for the first 7 years of residency. Split years count towards the 7 year total.
After 7 years there is a charge for using the remittance basis, summarised in the table below:
Loss of personal allowance tax free allowance
The standard tax free personal allowance is £12,500 in the tax year ending 5 April 2020.
Individuals claiming the remittance basis are not entitled to the personal allowance.
Loss of the capital gains tax annual exemption
The annual exemption of £12,000 for the tax year ending 5 April 2020 against capital gains is not available to individuals claiming the remittance basis.
The loss of these personal allowances is often relatively minor in the context of being able to benefit from the remittance basis.
Pre-Arrival planning “Clean Capital”
Clean capital means income or gains realised before an individual becomes UK tax resident under the statutory residence test.
A non-dom can live off their clean capital without incurring tax in the UK.
Clean capital can be brought into the UK without triggering income tax or capital gains tax.
Maintaining clean capital
Clean capital can become tainted if the bank in the overseas jurisdiction does not correctly administer the bank account.
No income, interest, dividends or gains of any kind can be paid into the account holding clean capital. Interest cannot be first paid into the account and then transferred on to another account. The interest must not be paid into the account in the first instance.
Interest (or any other type of income or gain) must not be paid into the account holding clean capital.
Actual segregation of money
The clean capital must actually be segregated into a separate offshore bank account.
Account segregation should aim to separate where clean capital is deposited, where income is deposited and where gains are deposited.
As a general guide, the following is a suggestion of the six offshore accounts that should be maintained:
Clean capital account
This account holds cash balances arising before the account holder becomes UK resident.
Only UK-sourced income that has been taxed, inheritances or gifts should be added to this account.
Foreign interest account
Interest arising on the clean capital account after arrival in the UK should be paid directly into this account.
Foreign capital gains account
Proceeds from foreign investments or assets that produce a capital gain should be paid directly into this account.
Foreign capital loss account
Proceeds from foreign investments or assets that produce a capital loss should be paid directly into this account.
Foreign income account
Any other overseas income should be paid into this account. It may be advisable or necessary to split this income account into several different accounts, for example for receiving dividends separate from interest.
Employment income account
For individuals entitled to overseas workday relief, a bank account into which only employment income is paid should be maintained. A new bank account for employment income should be opened each year. There are special rules specifically for this scenario. If you think it applies to you, please ask us for advice.
Please be aware that these are all offshore bank accounts.
Remittances can be made tax-free from the clean capital account and generally from the capital loss account.
Tax will arise on remittances from the foreign interest, capital gains or foreign income accounts.
Individuals who are actively trading or investing will need more detailed structures, especially where trusts are involved.
As noted below under the heading “Mixed Funds”, there are 9 categories of funds that need to be identified in a mixed funds account. Therefore, some individuals may need to take advice on whether they need to maintain 9 separate accounts, potentially with fresh accounts opened each year.
We recommend that you avoid having mixed fund accounts. If you do have mixed fund accounts, we strongly recommend that you avoid making a remittance from such an account.
Mixing clean capital with post-arrival foreign income or gains will create a “mixed fund”.
Remittances from mixed funds are subject to the statutory ordering rules.
Each mixed funds bank account has to be analysed separately and year by year. There are 9 categories of funds that have to be identified. Any remittances are deemed to be made from one of these 9 categories in a strict hierarchy, basically sourced from the least favourable component of the fund first.
The mixed fund rules are complex. It is advisable to avoid remitting any income or gains to the UK without a full understanding of these complex rules.
What is a remittance?
A remittance is widely defined. It is more than money brought into the UK. Individuals need to be careful to avoid accidental remittances.
A remittance is any money or property which derives from offshore income or gains and it is brought into /received or used in the UK directly or indirectly for the benefit of an individual or any other relevant person.
A relevant person is a spouse, civil partner, cohabitant, child and grandchild aged under 18.
Examples of remittances
Anything that is brought into the UK for personal use such as clothing, jewellery etc is exempt and items costing less than £1,000 or brought into the UK temporarily can also be exempt.
Exemptions for small amounts of foreign income
Individuals who have less than £2,000 of non-UK income and gains can use the Remittance Basis without losing allowances or paying the Remittance Basis charge. If certain conditions are met, basic rate taxpayers can escape paying UK tax on non-UK income.