If you come to live in the UK but your permanent ‘homeland’ is elsewhere you may elect to have your overseas income and gains taxed on the favourable “remittance basis”.
This means that you will only be taxed on foreign income and gains which are brought into or used in (i.e. remitted to) the UK. In contrast, individuals who are both resident and domiciled in the UK are liable to pay UK income tax and capital gains tax on their worldwide income and gains arising each tax year (which runs from 6 April to the following 5 April).
Residence and domicile status
The remittance basis is available to you if you are resident but not domiciled in the UK. A full discussion of the rules which determine ‘residence’ and ‘domicile’ is outside the scope of this note, but it is possible - and quite common - for someone from overseas to come and live in the UK for a significant period, becoming resident here but remaining domiciled abroad for UK tax purposes.
Very broadly, from 6 April 2013 onwards, residence is determined by reference to a statutory residence test, which takes into account factors such as the country in which you work and/or have homes and the number of days you spend in the UK in any tax year. In contrast, a UK domicile is either acquired at birth or by coming to the UK with the intention to remain here permanently or indefinitely. This is a simplification and the rules can be complex. The first step before any tax planning is undertaken is to properly investigate your residence and domicile status. If you are planning to come to the UK, this should ideally be done well in advance.
Requirement for a claim
In most circumstances the remittance basis must be claimed each year on your UK tax return. If a claim is not made, all your worldwide income and gains will be taxed in the UK as they arise (“the arising basis”).
You will need to consider the following:
- You may not need to make a claim if you have little or no foreign income and gains; or little or no UK income and gains and you don’t intend to remit any foreign income or gains; or if you are under 18. The remittance basis might apply automatically.
- You can opt in and out of the remittance basis from one year to the next. This may be very useful. For instance you may prefer to be taxed on the rising basis for most of the time but in a year in which you expect to realise a substantial gain abroad (e.g. on the sale of a property or a business) you could consider claiming the remittance basis.
- Whenever the remittance basis is claimed, personal income tax allowances and the capital gains tax (CGT) annual exemption are forfeited, the lower UK dividend rates are not available and the 28% CGT rate applies to all gains.
Long-term UK residence charge
The favourable tax treatment available under the remittance basis does, however, come at a price for longer-term residents:
- If you are aged 18 or over, once you have been resident in the UK for at least seven years you must pay a £30,000 annual charge in order to claim the remittance basis.
- An increased charge of £50,000 will apply once you have been UK resident for at least 12 years.
You will need to consider and obtain advice upon the following:
- The way in which the charge is returned on your self assessment tax return. This is a very complex process, as the charge has to be paid (at least in part) with reference to nominated foreign income and gains.
- The availability of a credit for the charge against foreign tax paid, if appropriate.
- The actual payment of the charge. This must be carefully handled so that it does not in itself constitute a remittance.
What is a remittance?
The definition of remittance is wider than you may think. A remittance may arise directly or indirectly. A taxable remittance may occur whenever you (or someone closely connected to you) receives, uses or benefits from foreign income and gains in the UK, subject to some exemptions.
The following are examples of circumstances in which funds may be remitted to the UK:
- Cash or an asset purchased from foreign income or gains is brought into the UK.
- Goods are purchased in the UK using a UK credit card, which is paid off using foreign income or gains.
- Foreign income or gains are used to pay for services provided in the UK, regardless of whether paid in the UK or to an offshore account of the service provider. There is however a limited exemption where the services provided relate to property situated outside the UK.
- Foreign income or gains are used to service a debt relating to UK property or services (whether secured directly on the property or by guarantee), regardless of whether payments are made to the UK or offshore. There is a limited exemption where foreign income is used to pay the interest on an offshore mortgage which existed before 12 March 2008.
- Gifts of foreign income and gains made by you which are brought to, received, used in the UK, or used to pay for services provided in the UK, by your spouse, co-habitee, civil partner; minor child or grandchild or certain holding companies or trusts to which you are connected.
The following items are specifically exempt so that no tax charge will arise even if they are remitted to the UK:
- Assets worth less than £1,000.
- Clothing, footwear, jewellery and watches brought into the UK for your personal use or that of your spouse, co-habitee, minor child or grandchild.
- Assets imported to the UK temporarily, i.e. for 275 days per year or less.
- Assets brought to the UK for repair or restoration.
- Assets which are available for public access at a museum or gallery either for a single period of no more than 2 years or for a longer period agreed with HMRC.
- Assets already owned at 11 March 2008 (even if brought to the UK afterwards) purchased out of untaxed foreign income.
- Assets already in the UK at 5 April 2008 purchased out of untaxed foreign income.
Care must be taken when items are sold in the UK as a remittance of the original purchase funds may occur at this point unless certain conditions are met.
Investing in the UK
From 6 April 2012, foreign income and gains brought into the UK for the purpose of investment in certain commercial trading, property letting or development businesses will escape UK tax liability. To qualify for business investment relief, you must invest in a company (as opposed to a partnership or unincorporated business) that is either unlisted or quoted on exchange-regulated markets such as AIM or PLUS.
The investment can be made either by way of shares or loan stock and HMRC have confirmed that loans taken out after 6 April 2012 to invest in a qualifying business in the UK, which are subsequently repaid from foreign income or gains, will qualify for the relief.
Once you dispose of an investment you have 45 days to either export the proceeds or reinvest them in another qualifying business. If you do not do this, a remittance of the untaxed income or gains used to fund the original purchase will be triggered and so a tax charge may arise at that point.
This is a complex relief with many potential traps and pitfalls and if you are interested in making use of it, you will need to take professional advice from the outset.
There are a couple of other problematic areas to watch out for:
- Often income and gains and other types of fund are not held separately but are mixed in a single bank account. Where this happens, there are statutory rules to determine the order in which different types of income and gains are remitted, which rarely work in favour of the taxpayer. Where possible you should keep separate accounts for different types of funds so that you can choose the order of remittance.
- Foreign losses are an area of particular difficulty. If you are taxed on the arising basis (and have not previously claimed the remittance basis) you may use foreign losses to offset any gains, UK or foreign. However, once you have claimed the remittance basis whether or not foreign losses can be used, and if so how they can be used, becomes much more complicated. Advice is required.
The remittance basis is a complex but very important relief which will be available to you if you are resident but not domiciled in the UK. It is useful to have an idea of how the rules work so that you can take advantage of the opportunities they offer. However, due to the complexity of the rules, it is not always easy to determine whether the remittance basis will be worth claiming or when a remittance has been made, and expert professional advice will undoubtedly be needed.