Written by Ray Coman
Remittance basis allows non-domiciled UK residents to keep foreign income outside the scope of UK tax liability. It aims to prevent wealthy individuals being dissuaded from visiting the UK for fear of being handed a large tax bill. However, it is not a simple case that non-UK nationals arriving in the UK should claim the remittance basis as there are a number of drawbacks. The Q&A below helps to explore the instances in which a remittance basis claim would be suitable.
The remittance basis means that the UK resident is only taxed on foreign income and gains to the extent that these are brought into the UK.
Non-residents do not need to claim the remittance basis, since their foreign income is not taxable in the UK. Arising income - such as rent from property situated in the UK, or pay from a UK employer is - taxable on the recipient regardless of residency.
Individuals staying for short periods, let’s say of up to three months, will rarely be UK resident in any case, and need not be concerned with remittance basis regardless of what money they transfer to the UK.
For the first seven years of UK residency, a taxpayer can claim the remittance basis as a ‘non-dom.’ Domicile is practically the same as nationality, however a more complete explanation can be read in the guidance on domicile.
It is rare for a claim to remittance basis to be worthwhile after the taxpayer has been UK resident for seven consecutive years (or seven out of the preceding nine years.) This is because the remittance basis charge (of £30,000 at the time of writing) applies. The charge is higher than tax saved using the remittance basis unless overseas income and gains exceed about £80,000.
The benefit of claiming the remittance basis is that foreign income and gains that are not brought into the UK are not assessed to UK tax.
The arising basis. On this basis the taxpayer is liable to UK tax on worldwide income and gains. Foreign tax deducted at source is likely to reduce that UK tax liability on worldwide income and gain.
A claim to the remittance basis will result in loss of personal allowance (for income tax) and annual exemption (for capital gains tax.) Once total income reaches £100,000 plus 2x personal allowance, i.e. £125,140 for 2023/24, the personal allowance would have been lost in any case.
A remittance basis will delay tax- until the year that the funds are entered into the UK-. However, it does not necessarily avoid tax.
On the contrary, any spike in income which is caused by the remittance itself could result in more tax payable than had the income been taxed in the year in which it arose.
It is only income and gains since becoming UK resident that will be subject to tax. This means that unremitted income and gains start to accrue from the date that the taxpayer becomes UK resident.
Days of physical presence is the main determinant of UK tax residency. However, if an individual was not UK resident in the preceding year it is possible to split the year, so that UK tax residency starts from the date of arrival. The split year treatment means the claimant is treated as non-resident between 6 April (prior to arriving in the UK) and the date of arrival.
A taxpayer can choose each tax year to use the remittance basis. A claim for a preceding year does not oblige the taxpayer to make a claim for any other tax year.
Tax is not likely to be avoided. Previously unremitted income is treated as remitted in priority to funds taxed on the arising basis. If the remittance basis has been claimed since arriving in the UK, any unremitted income and gains are subject to UK tax when brought into the UK. The taxpayer cannot choose to treat the remittance as being of funds taxed on the arising basis in that tax year.
Claiming the arising basis in the year of remittance would entitle the taxpayer to annual exemption and to that extent has the potential to reduce UK tax liability.
A gain occurs for tax purposes when the asset is disposed of. Increases in value of an asset which has not been realised do not give rise to taxable gain. Even if the assets were purchased prior to arrival in the UK, the whole gain is subject to UK tax. Therefore, any appreciation in value prior to becoming UK resident would be subject to tax. Where practical, tax can be saved by disposing of assets prior to arrival in the UK or by not disposing of assets until after leaving the UK. That strategy would avoid liability to UK tax without the drawbacks of claiming the remittance basis.
Dividends can be automatically reinvested into a fund which leads to its appreciation in value. Such dividends are treated as income even if not paid out in cash.
A remittance is treated firstly as being of untaxed income and gain, next of income and gain taxed at source and eventually as capital. In effect, a remittance basis user will only be treated as making a remittance of capital once all of the unremitted income and gain has been used up.
The above rules on the order of remittance applies separately to each fund. Therefore, a remittance basis user gains a tax advantage (at least in cash flow terms) by first remitting from funds with less accumulated income and gains.
In the majority of cases, tax withheld at source would be deducted from UK tax liability on that income. According to the double tax agreement between the UK and countries with most major economies, a taxpayer obtains a credit for any foreign tax suffered at source. There are some restrictions which can be viewed in the HMRC manual entitled Digest of Double Taxation Treaties.
The greater the foreign tax paid, the lower the probability of saving tax via a claim for remittance basis. Income or any gain from a low tax jurisdiction is likely to result in greater exposure to UK tax and has the potential to benefit the most from a remittance basis claim.
The dividend allowance (of £1,000 for 2023/24) and savings allowance (of £1,000 for basic rate taxpayers in 2023/24) will exempt dividends and interest below those thresholds. There is no reason to claim the remittance basis if funds are covered by UK allowances. Gains below the annual exemption (of £6,000 for 2023/24) are also exempt from capital gains tax.
Besides, if foreign income and gains are less than £2,000, the remittance basis can be used without making any formal claim. This means that foreign income of below £2,000 in total which is not brought into the UK does not need to be reported on the UK Tax Return.
Only monies that arrive in the UK will be treated as a remittance for tax purposes. The movement of monies between two non-UK sources will not affect the tax position of a remittance basis user. For instance, a remittance has not been made by a person funding their overseas holiday or business trip with a foreign bank account.
Given that a remittance basis user is taxed on previously unremitted gains in the tax year of remittance, the remittance basis is usually only a benefit where:
- The taxpayer does not plan to withdraw the funds until after leaving the UK; or
- Where the taxpayer expects his or her marginal rate of tax to be lower in the tax year of remittance (than in the year that the income or gains arise.)
The remittance basis is reported in the residency supplement of the self-assessment Tax Return. It is not necessary to report unremitted foreign income, gains or foreign tax deducted at source.
If, having read the above, you would like a more detailed analysis of which basis would be preferable, Coman&Co can provide a fee estimate for carrying out that analysis. We also provide the necessary tax preparation and reporting as part of an annual fixed fee service.