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 continue to 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 here 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 (even if this is for a UK employment, or the earnings are paid in or from the UK);
- 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;
- Overseas pension income (see our separate guidance on this);
- Other overseas investment income, for example, dividends on shares in overseas companies.
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 assets 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 this 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 then taxable in the UK only 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 proceeds from foreign 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 usually 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 (or ‘remitted’) to the UK. In practice, the remittance basis can help to prevent double taxation.
It is important to note that if you are non-domiciled and have small amounts of unremitted foreign income and gains (that is, less than £2,000 per UK tax year), then the remittance basis applies automatically. In this instance, your unremitted foreign income and gains will automatically be out of scope of UK tax without the need to make any choice or claim. You will not lose your tax-free personal allowance or capital gains tax annual exempt amount, nor will you be liable for a Remittance Basis Charge (see below).
There are also two other special cases relevant to low-income migrants. Firstly, if you have no (or very little) UK income, the remittance basis can apply automatically even if your unremitted foreign income and gains exceed £2,000. Secondly, 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 which means the foreign earnings are exempt from UK tax. Each of these is described in more detail below.
For migrants with more than £2,000 of unremitted foreign income or gains in a year, it can be difficult to decide between the arising basis and the remittance basis. This is because choosing the remittance basis in this case 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 taxable income, without the benefit of these tax-free amounts. This means, for example, that the first £12,500 of UK employment income in 2019/20 will be taxable rather than tax free.
You may also have to file a Self Assessment tax return to make the claim for the remittance basis to apply, if it does not apply automatically.
In addition to losing your tax allowances, if you are a long-term resident in the UK (that is, you have been resident for at least seven of the previous nine tax years) you may have to pay a Remittance Basis Charge each year to access the remittance basis of taxation. The charge is a minimum of £30,000. Therefore, in these circumstances, unless you have very high levels of foreign income and gains, it is very unlikely that claiming the remittance basis will be worthwhile.
When does the remittance basis apply automatically?
If you are not domiciled in the UK, the remittance basis applies automatically to those who have unremitted foreign income or gains 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 only any foreign income and gains that you remit (that is 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.
If the remittance basis applies automatically there may be limited circumstances where it would be beneficial for the arising basis to apply instead. In this instance it is possible to disapply the remittance basis.
What if I do not have any 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:
- 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 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 in the event that 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 was introduced. Please see our pages on savings and tax for more detail. 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.
LITRG have approached HMRC about the above anomaly in the law. HMRC have confirmed that if an individual has savings income within their personal savings allowance for the year, this will not prevent them from accessing this exemption if they have no other UK income or gains and they meet the remaining conditions relating to residence, domicile and non-remittance of foreign income and gains. HMRC have confirmed they will update their guidance accordingly on this point.
What if I work in the UK and I am also employed overseas?
If you work in the UK and have a small amount of foreign earnings you might be able to avoiding filing a tax return and paying UK tax on your foreign income if the ‘foreign workers’ exemption’ applies. It does not matter if the foreign income is remitted to the UK. The exemption is available 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 (£37,500 in 2019/20 after deducting personal allowances, though different thresholds apply in Scotland). 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, the foreign income is exempt from UK tax. 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 I have more than £2,000 of unremitted foreign income and gains?
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.
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, which must be identified.
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 should take advice directly from HMRC or a professional adviser. You can find out more on our getting help page.
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) 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 and paying the remittance basis charge.
What should I do if HMRC have written to me about my foreign income and gains?
You may have recently received a letter saying that HMRC’s information indicates you currently have or previously had offshore income or gains, and if you have additional tax to pay, to tell HMRC using the Worldwide Disclosure Facility. If this applies to you – read our news article What to do if HMRC ask you about money held overseas.