How are foreign income and gains taxed?
The UK tax system is relatively straightforward if you only have income and gains from UK sources for the duration of your stay here. However, things can get complicated if you are resident in the UK and have foreign income and gains. Here we explain how foreign income and gains are taxed in the UK.
What are foreign income and gains?
If you come to the UK, become tax resident and have foreign income or gains (that is, income and gains from outside the UK) during your stay in the UK, you have to consider more complex tax rules. This is because the UK tax system tries to tax anyone who is resident in the UK on their worldwide income and gains.
Examples of foreign income and foreign gains include:
- Earnings relating to work duties performed in another country;
- Profits from running a business in another country;
- Income from renting out a property in another country;
- Gains from selling or giving away overseas assets, for example, a house or shares;
- Interest on savings in overseas bank accounts;
- Other overseas investment income, for example, dividends on shares in overseas shares.
If you are a resident, but non-domiciled, the amount of UK tax you have to pay on foreign income and gains may sometimes depend on whether or not you bring money or goods into the UK.
With effect from 6 April 2017, HMRC treat some individuals who are not UK domiciled as if they are domiciled (‘deemed domiciled’)| in the UK for income tax and capital gains tax purposes. There is more information on our page, ‘Where am I domiciled?’
What is overseas workday relief?
If you are non-UK domiciled and coming to work in the UK and have not been resident in the UK for at least the three previous consecutive UK tax years, you may be able to claim tax relief for earnings relating to your overseas workdays in your first three tax years of UK residence. This relief is available for taxpayers who claim the remittance basis of taxation and where the earnings relating to their overseas workdays are paid and retained overseas. Such earnings are taxable in the UK to the extent they are remitted to the UK.
There are specific conditions that must be met in order for the relief to apply and we would strongly advise you to read HMRC’s guidance on GOV.UK if you wish to claim this relief. In particular, you should be aware that the rules regarding what is deemed to be remitted to the UK from a bank account containing more than one type of income are complex. There are simplified rules available if you set up a ‘qualifying account’ in advance of receiving your first salary payment.
What is the arising basis of taxation?
If you are resident and domiciled (or deemed domiciled) in the UK you will pay UK tax on the ‘arising basis’. This means that you pay UK tax on your worldwide income and gains for the tax year in which they arise. It does not matter whether or not you bring the foreign income or gains to the UK.
If you are resident and not domiciled in the UK you pay UK tax on your UK income and gains on the arising basis. You can choose to pay UK tax on your foreign income and foreign gains on either the arising basis or the 'remittance basis' of taxation (more on this below).
If you have foreign income or foreign gains, the arising basis can be complex as you will have to declare your worldwide income and gains to HM Revenue & Customs using a self assessment tax return, and may have to deal with matters of double taxation. However, paying tax on the arising basis does mean that you may benefit from the personal allowance for income tax and the annual exempt amount for capital gains tax.
If you are resident, but not domiciled in the UK, you may be able to choose the ‘remittance basis’ of taxation if you have foreign income or foreign gains. (Please note that with effect from 6 April 2017, if you meet certain conditions, even if you are resident and not domiciled in the UK, HMRC treat you as resident and domiciled in the UK or ‘deemed domiciled’ meaning you cannot choose the remittance basis of taxation. There is more information on our page, ‘Where am I domiciled?’)
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 (‘remitted’) to the UK. In practice, the remittance basis can help to prevent double taxation.
For migrants with foreign income or foreign gains it can be difficult to decide between the arising basis and the remittance basis. This is because choosing the remittance basis often has a ‘cost’ attached to it - although you only pay UK tax on UK income and gains and on foreign income and gains that you bring into the UK, you lose your personal allowance for income tax and the annual exempt amount for capital gains tax (there are some double taxation agreements that override UK tax law on this point, however the number of countries concerned are very limited).
The loss of these allowances means that you pay UK tax on all your other taxable income, without the benefit of any tax free amounts. For example, you cannot have £11,850 of UK employment income before having to pay income tax in 2018/19.
You may also have to file a self assessment tax return to make the claim for the remittance basis to apply.
In addition to losing your tax allowances, if you are a long-term resident in the UK you may have to pay a Remittance Basis Charge each year to access the remittance basis of taxation.
However you may be able to claim the benefit of some limited exemptions (detailed below) meaning that you may not have to pay UK tax on foreign income and gains but will not lose your personal allowance for income tax and the annual exempt amount for capital gains tax and will not have to pay a Remittance Basis Charge.
What is the £2,000 exemption for the remittance basis?
If you are not domiciled in the UK, you may be able to benefit from a special exemption, available to those who have unremitted foreign income or gains that are less than £2,000 in a tax year.
The result if this exemption applies is that:
- you can use the remittance basis without making a claim – this means you pay UK tax on your UK income and gains, and only any foreign income and gains that you remit (bring to the UK);
- you will not have to pay the Remittance Basis Charge;
- 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.
Are there any other exemptions
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:
- 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;
- 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 spouses who accompany migrant workers to the UK, but who do not work in the UK themselves.
What is the overseas work exemption?
If you have overseas earnings you might be able to claim the overseas work exemption – whether or not you remit the overseas earnings. This is available to non-domiciled ‘foreign workers’ if all of the following conditions apply:
- you are resident in the UK;
- you are not domiciled in the UK;
- you are employed in the UK;
- your foreign employment income does not exceed £10,000 and it has been subject to tax in the country it arose (even if no tax was paid, for example because it was covered by a tax allowance in that country);
- your foreign investment income does not exceed £100, and is subject to tax in the country it arose;
- you have no other foreign capital gains and or income;
- your worldwide income and gains are less than the higher rate threshold for the tax year (£34,500 in 2018/19 after deducting personal allowances). In other words, you are a basic rate taxpayer;
- you are not required to complete a self assessment tax return for any other reason, for example, self-employment.
If all of the above conditions apply, you will be treated as being taxed in the UK on the arising basis, but because of the exemption you will not actually be liable to UK tax on your employment income from abroad, either when it arises or when it is brought to the UK. You will still be liable to UK tax on your UK income and gains.
This exemption is aimed at lower earning individuals who might inadvertently be non-compliant with the complex remittance basis rules.
What happens if none of the exemptions apply?
If you are non-domiciled (and not deemed UK domiciled) and have been resident in the UK for fewer than seven of the previous nine years then you can choose (referred to as "elect" by HMRC) to use the remittance basis instead of the arising 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.
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 a range of UK personal allowances and the annual exempt amount for capital gains tax;
- 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.
If you do not claim the remittance basis, 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 will need to take advice directly from HMRC (or a professional adviser) in order to understand what is necessary and to decide which regime is advantageous. You can find out more in our 'getting help section'.
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 £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).
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 and paying the Remittance Basis Charge.