Remittance basis of taxation
If the remittance basis of taxation applies for a year, then unremitted foreign income and gains for that year are not taxable in the UK.
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Under the remittance basis of taxation, you pay UK tax on UK income and gains for the tax year in which they arise, but you only pay UK tax on foreign income and foreign gains if and when they are brought (or ‘remitted’) to the UK. In practice, the remittance basis can help to prevent double taxation.
The remittance basis is only available if you are resident but not domiciled in the UK. With effect from 6 April 2017, if you meet certain conditions, even if you are resident and not domiciled in the UK, you may be ‘deemed domiciled’ meaning you the remittance basis of taxation cannot apply.
If you are resident and non-domiciled in the UK (and not deemed domiciled in the UK), then the remittance basis may apply either:
- automatically, in certain cases, or
- upon making a claim.
Therefore, the first step is to understand whether your circumstances mean that the remittance basis applies automatically. If not, then you should decide whether you wish to claim the remittance basis – this can carry a financial cost. See below for more information on when the remittance basis applies automatically, and the effect of making a claim.
Note that if you are employed in the UK with a small amount of foreign earnings or income which is taxed at source, the foreign workers’ exemption can apply. This would mean your foreign earnings are exempt from UK tax, without needing to claim the remittance basis.
Automatic remittance basis
The remittance basis can apply automatically (that is, without a claim) in the following situations:
- Unremitted foreign and gains less than £2,000
If you are not domiciled in the UK, the remittance basis applies automatically to those who have unremitted foreign income or gains of less than £2,000 in a tax year.
In this instance:
- the remittance basis applies without making a claim – this means you pay UK tax on your UK income and gains, and on any foreign income and gains that you remit (that is bring) to the UK;
- you will not have to pay the remittance basis charge (see below);
- you will continue to be entitled to UK tax allowances, including the personal allowance for income tax and the annual exempt amount for capital gains tax.
Even though the remittance basis applies automatically in this situation, if possible you should still complete the SA109 ‘Residence, remittance basis, etc.’ pages of your tax return to declare your non-domicile status and state that the remittance basis applies automatically. You should ensure boxes 28 and 29 of page RR2 on the paper return are ticked (even though box 28 refers to making a ‘claim’ to the remittance basis).
However, if you are filing your tax return online through HMRC’s online portal, you will be unable to complete these pages of your tax return. In this case, we suggest adding the following note to your return:
“I am non-domiciled in the UK for [tax year] and I first came to the UK on [date]. My unremitted foreign income and gains for [tax year] are less than £2,000. Please note that, owing to a limitation in HMRC’s software, I am unable to complete the SA109 pages to show that the remittance basis applies automatically under section 809D of Income Tax Act 2007.”
Note that, if the remittance basis applies automatically because your unremitted foreign income and gains are less than £2,000, you will still need to pay UK tax on foreign income and gains which have been remitted to the UK. A foreign tax credit may be applicable in this situation.
There may be limited circumstances where it would be beneficial for the arising basis to apply instead. In this instance, it is possible to elect to disapply the remittance basis.
If split-year treatment applies for a year, then you should ignore foreign income and gains in the overseas part of the year when working out if the £2,000 threshold is exceeded.
- No UK income
The remittance basis can also apply automatically if you have very limited UK income. If you satisfy all the following conditions for a particular tax year you can use the remittance basis without making a claim, without losing your allowances and without paying the remittance basis charge (see the relevant heading below):
- you are UK resident;
- you are not UK domiciled;
- you have no UK income or gains for that year, other than UK investment income of £100 or less, all of which has been taxed at source;
- you have remitted no foreign income or gains in that year; and
- you have been UK resident in fewer than seven of the immediately preceding nine tax years or you are under 18 for the entire tax year.
This exemption is aimed at individuals who accompany migrant workers to the UK, but who do not work in the UK themselves. It can be useful where unremitted foreign income and gains are more than £2,000 (or if it is difficult to determine the level of unremitted foreign income and gains) because it allows the remittance basis to apply without needing to file a tax return.
Since April 2016, bank interest in the UK is normally paid without deduction of income tax at source and the personal savings allowance has been available. This means that, strictly speaking, an individual would not be able to access the above exemption if they have just £1 of UK bank interest, as it would be paid gross and not be considered ‘investment income which has been taxed at source’. This would be the case even if such bank interest falls within the individual’s personal savings allowance for the year and they do not have to pay tax on it.
However, HMRC have confirmed that if an individual does not have savings income exceeding their personal savings allowance for the year and does not have dividend income exceeding the dividend allowance, they will still be able to access this exemption if they meet the remaining conditions.
Claiming the remittance basis
If you are non-domiciled (and not deemed to be UK domiciled) and have more than £2,000 of unremitted foreign income and gains in a year, and your circumstances do not fall into the cases described above, you will be taxed on the arising basis unless you claim (or ‘elect’) the remittance basis.
If you have been resident in the UK for at least seven out of the previous nine tax years, you can only elect to use the remittance basis if you pay a charge (see the heading below).
If you elect to use the remittance basis, you must:
- complete a self assessment tax return and make a claim to use the remittance basis on form SA109 ‘Residence, remittance basis, etc.’ of your tax return;
- lose your entitlement to the income tax personal allowance and the annual exempt amount for capital gains tax for that year (there are some double taxation agreements that override UK tax law on this point, but the number of countries concerned are very limited);
- pay UK tax on your UK income and gains in the tax year in which they arise;
- pay UK tax on the foreign income and gains that you remit (that is, bring directly or indirectly) to the UK, which must be identified.
If you do not claim the remittance basis and it does not apply automatically, you will be taxable on the arising basis. If you have foreign income or gains, you must complete a self assessment tax return and include them. These will be subject to UK tax, but you will keep your UK allowances.
This could mean that you suffer double taxation. However, relief should be available, meaning that overall you are unlikely to end up paying tax twice on the same income or gains. For example, in circumstances where foreign taxes have been paid on the foreign income or gains, a foreign tax credit may be available to reduce or extinguish the UK liability – another consideration when working out whether to claim the remittance basis or not.
If you find yourself in this position you should take advice from HMRC or a professional adviser.
The remittance basis charge
If you are non-domiciled and have been resident in the UK for at least seven out of the previous nine tax years you will have to pay a minimum £30,000 annual charge (the remittance basis charge) if you claim the remittance basis.
If you are non-domiciled and claiming the remittance basis and have been resident in the UK for at least twelve of the previous fourteen tax years, the remittance basis charge is £60,000.
There used to be a charge of £90,000 for non-domiciled individuals who claimed the remittance basis and had been resident in the UK for seventeen of the past twenty years. From 6 April 2017, this highest remittance basis charge no longer applies, as the remittance basis is not available to individuals who have been UK resident for at least 15 of the previous 20 tax years. This is because HMRC treat such individuals as being domiciled in the UK (deemed domiciled) and as such the remittance basis would not be available.
The remittance basis charge (of £30,000 or £60,000) must be paid in addition to any UK tax due on remittances to the UK, as well as any UK tax due on UK income and gains.
Only those with very large foreign incomes or gains that they do not wish to pay UK tax on will find it worthwhile claiming the remittance basis in any given year where the remittance basis charge applies.