TAX ON REMITTANCE BASIS
Double Tax Treaty
If you are a non-domiciled taxpayer and need advice and compliance to pay tax on a remittance basis, call our team of specialist for information.
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FOR NON DOMS
In simple terms, it is an alternative method of taxation available to those who are resident, but not domiciled, in the United Kingdom. UK residents are normally subject to tax on all of their income and capital gains, but the rules for non-domiciled residents (also known as ‘non-doms’) are different. They can opt to pay tax based on their income from foreign sources and capital gains by using the figures remitted to the UK as an alternative to being taxed on the totals arising. All UK income is subject to normal taxation. A person is usually domiciled in the country where their permanent residence is. The ‘domicile of origin’ is acquired at birth, taken traditionally from the father. The ‘domicile of choice can usurp this’; however, it is possible to reside in the UK for a long period of time, dependent on individual circumstances, without acquiring a domicile of choice in the United Kingdom.
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In the first seven tax years, non-UK domiciled individuals may use the remittance basis system for free. The only negative of claiming remittance basis is losing certain income tax and CGT allowances. Once seven or more of the nine prior tax years were UK tax years (i.e. from the 8th tax year of uninterrupted UK residency), a charge is usually due as extra tax and is termed as a “remittance basis charge”. The initial RBC is £30,000. It would rise to £60,000 per year if 12 of the 14 prior tax years were spent in the UK (i.e. from the 13th tax year of continuous UK residence).
Comparing the tax situation of a remittance basis user with that of an ordinary UK taxpayer is the best approach to understand benefits of remittance basis’. An ordinary UK taxpayer, i.e. a resident and domiciled UK citizen, pays UK income tax and CGT worldwide. In the UK or abroad, a person’s income is taxed in the year it’s earned. Similarly, a person’s capital gains are taxable in the year they accrue, whether for the UK or non-UK assets on an arising basis. The tax system doesn’t distinguish between the UK and international income and doesn’t care whether foreign income is brought into or left outside the UK. A taxpayer who uses a remittance basis defers tax on foreign income. However, income and gains derived in the UK are taxed; income derived from outside the UK and gains from non-UK assets are not. UK tax is deferred on such income and gains until cash or other assets representing or derived from them are brought into the UK (“remitted”).
“Remittance” involves a far more extensive range of activities than most people realise; be careful while sending money home. In addition to the taxpayers’ actions, “relevant people” (as defined by the legislation) may cause a remittance. Payouts outside the UK may trigger a remittance if they have a UK connection. Examples include repaying a UK debt or paying for UK services. “Remittance” is a complex concept. Anyone utilising or trying to apply the remittance basis should get advice on the multiple ways a remittance might occur because of a “relevant person”.
Despite the concept of “remittance,” the remittance basis may postpone tax indefinitely. If the person utilising the remittance basis avoids sending anything to the UK that reflects or originates from their overseas income and gains, they will not be obligated to pay tax on their international income and gains. Assets that don’t reflect or arise from such income or gains (called “clean capital”) may be transferred to the UK without income tax or CGT. “Clean capital” includes:
- Income and gains earned before moving to the United Kingdom;
- Income and gains that were taxable on the basis that they arose (i.e., because the income was derived from the United Kingdom or the gains were realised for assets located in the United Kingdom);
- Gifts in kind and inheritances received from other people.
Notably, even for a non-dom who claimed the remittance basis, some “foreign” revenues and deemed receipts do not qualify for remittance basis and may thus give rise to instant UK tax obligations, regardless of whether a remittance is made to the UK. These include:
- Withdrawals made from single-premium life insurance plans, which, according to the laws governing taxes in the UK, might result in recognition of taxable income;
- Deemed yearly gains in respect of some single-premium life insurance plans that are not intended for UK resident taxpayers and which are subject to a punitive tax system; and
- Profits of individuals who reside in the UK through their trading activities. This may include income earned under a consultant arrangement. It may also include earnings from investments if they are maintained for brief durations only and obtained to create short-term gains. A person is not deemed to be trading in securities if their earnings are believed to be derived from such transactions, even if all of their investments are located outside of the United Kingdom.
A UK resident who is not domiciled in the UK may opt-in or out of this arrangement under current law. In one tax year, he may choose between remittance and arising basis. Switching between the two might create a complex tax situation. Changing from the remittance basis to the arising basis won’t put a non-dom in the same tax situation as a UK domicile. His current year income and gains will be taxable (regardless of where they occur or whether they are transferred to the UK), but if (as is likely) he possesses money or other assets outside the UK that reflect unremitted foreign income or gains (which accrued while he was a remittance basis user), those income or gains will continue to be taxable if they are remitted to the UK. This individual must split assets to avoid tax surprises.
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