UK Arising vs. Remittance Basis of Taxation
Arising versus Remittance Basis of Taxation
The UK tax system can get very complicated if you are UK non-domiciled but tax resident in the UK and have foreign income and gains. In this situation, an individual can choose to be taxed either on the 'arising basis' or the 'remittance basis'. (Note that it is possible to change between the arising and remittance basis of taxation each tax year as one sees fit).
Arising Basis
An individual who is resident and domiciled (or deemed domiciled) in the UK will be automatically taxed on the arising basis. This means they will pay UK tax on their worldwide income and gains regardless of whether they bring the income or gains to the UK.
An individual who is resident and non-domiciled in the UK will have the choice of being taxed on the arising basis or remittance basis of taxation.
If you have foreign income and gains, choosing the arising basis of taxation can be complicated as you report your worldwide income and gains in the UK but may need to claim a double tax relief for taxes paid outside of the UK (e.g. to the US). However, by paying tax on the arising basis you may be entitled to benefit from the personal allowance and capital gains annual exempt amount.
A US citizen who is taxed on the arising basis in the UK is subject to tax in two jurisdictions on their worldwide income and gains. It is therefore very important for a US citizen to ensure that the correct steps are taken to manage their available foreign tax credits in both the US and the UK to prevent double taxation.
Remittance Basis
An individual who is resident but not domiciled in the UK (nor deemed domiciled) may be able to choose to file on the remittance basis of taxation to exclude their foreign income and gains from the scope of UK taxation.
By filing on the remittance basis of taxation, you pay UK tax on UK sourced income and gains but only pay UK tax on foreign income and gains if they are brought into (remitted) to the UK. There may, however, be a cost to claiming the remittance basis of taxation; notably, you may lose the use of the personal allowance and capital gains annual exempt amount, which may create a higher UK tax liability than filing on the arising basis. There is also the possibility that a remittance basis charge (RBC) may need to be paid to enjoy the remittance basis of taxation.
The use of the remittance basis therefore needs to be reviewed carefully year-on-year, as it may not always be the most tax-efficient method of UK taxation (especially if you are a US citizen, since income or gains not taxable in the UK will likely be taxed in the US anyway).
The RBC (of £30,000 or £60,000) is payable in addition to any UK tax that is due on remittances actually made to the UK. Unless you have very high foreign income and gains, then the remittance basis may not be worthwhile if the RBC is payable.
It is not possible to continue paying the RBC once you have been resident in the UK for 15 out of the 20 years prior to the relevant year. For more information, refer to the UK residency and domicile FAQs.
The UK tax system can get very complicated if you are UK non-domiciled but tax resident in the UK and have foreign income and gains. In this situation, an individual can choose to be taxed either on the 'arising basis' or the 'remittance basis'. (Note that it is possible to change between the arising and remittance basis of taxation each tax year as one sees fit).
Arising Basis
An individual who is resident and domiciled (or deemed domiciled) in the UK will be automatically taxed on the arising basis. This means they will pay UK tax on their worldwide income and gains regardless of whether they bring the income or gains to the UK.
An individual who is resident and non-domiciled in the UK will have the choice of being taxed on the arising basis or remittance basis of taxation.
If you have foreign income and gains, choosing the arising basis of taxation can be complicated as you report your worldwide income and gains in the UK but may need to claim a double tax relief for taxes paid outside of the UK (e.g. to the US). However, by paying tax on the arising basis you may be entitled to benefit from the personal allowance and capital gains annual exempt amount.
A US citizen who is taxed on the arising basis in the UK is subject to tax in two jurisdictions on their worldwide income and gains. It is therefore very important for a US citizen to ensure that the correct steps are taken to manage their available foreign tax credits in both the US and the UK to prevent double taxation.
Remittance Basis
An individual who is resident but not domiciled in the UK (nor deemed domiciled) may be able to choose to file on the remittance basis of taxation to exclude their foreign income and gains from the scope of UK taxation.
By filing on the remittance basis of taxation, you pay UK tax on UK sourced income and gains but only pay UK tax on foreign income and gains if they are brought into (remitted) to the UK. There may, however, be a cost to claiming the remittance basis of taxation; notably, you may lose the use of the personal allowance and capital gains annual exempt amount, which may create a higher UK tax liability than filing on the arising basis. There is also the possibility that a remittance basis charge (RBC) may need to be paid to enjoy the remittance basis of taxation.
The use of the remittance basis therefore needs to be reviewed carefully year-on-year, as it may not always be the most tax-efficient method of UK taxation (especially if you are a US citizen, since income or gains not taxable in the UK will likely be taxed in the US anyway).
- £2,000 exemption for remittance basis: If you are a non-domicile individual whose foreign income and gains are less than £2,000 in a tax year, the following applies:
- You can use the remittance basis without making a claim;
- You do not have to pay a remittance basis charge; and
- You are entitled to the use of the personal allowance and capital gains exemption.
- Remittance Basis Charge (RBC): If you are a non-domiciled individual whose foreign gains are more than £2,000 in a tax year, then the following RBC may need to be paid to enjoy the remittance basis of taxation:
- If you have been resident for 7 out of the previous 9 tax years: £30,000 RBC
- If you have been resident for 12 out of the previous 14 tax years: £60,000 RBC
The RBC (of £30,000 or £60,000) is payable in addition to any UK tax that is due on remittances actually made to the UK. Unless you have very high foreign income and gains, then the remittance basis may not be worthwhile if the RBC is payable.
It is not possible to continue paying the RBC once you have been resident in the UK for 15 out of the 20 years prior to the relevant year. For more information, refer to the UK residency and domicile FAQs.
What is a remittance?
A non-UK domiciled individual who uses the remittance basis of taxation should take care to fully understand what constitutes a remittance.
A remittance is any movement of foreign income or gains into the UK, directly or indirectly, so that you or a relevant person can enjoy the benefit of those income or gains in the UK.
A remittance of foreign income or gains can be considered to take place whenever cash or funds that resulted from the income or gains are used in the following circumstances:
If you claim the remittance basis of taxation then it is important to ensure your offshore bank and financial accounts are set up correctly to ensure you do not have any 'mixed fund' accounts. Should you wish to make a remittance to the UK then a 'mixed fund' account can have harsh tax consequences. You should ensure accounts are separated so that you are confident in terms of what is being remitted to the UK e.g. by setting up a clean capital account, a capital gains account, an income account. Once an account is 'mixed' then it can be a very complicated to unravel from a tax compliance perspective.
A non-UK domiciled individual who uses the remittance basis of taxation should take care to fully understand what constitutes a remittance.
A remittance is any movement of foreign income or gains into the UK, directly or indirectly, so that you or a relevant person can enjoy the benefit of those income or gains in the UK.
A remittance of foreign income or gains can be considered to take place whenever cash or funds that resulted from the income or gains are used in the following circumstances:
- Receiving a service in the UK and paying for that service using foreign funds (e.g. using your US debit card);
- Buying an asset in the UK (e.g. a house) and using funds derived from foreign income or gains to pay for it;
- Purchasing an asset outside of the UK using foreign income or gains then bringing that asset to the UK (e.g. a car or luxury goods);
- Paying off a debt created in the UK using foreign income or gains (e.g. a mortgage, or credit card that has been used for UK purchases);
- Giving money to someone who then uses that money to buy goods and services in the UK for use by you or a relevant person.
If you claim the remittance basis of taxation then it is important to ensure your offshore bank and financial accounts are set up correctly to ensure you do not have any 'mixed fund' accounts. Should you wish to make a remittance to the UK then a 'mixed fund' account can have harsh tax consequences. You should ensure accounts are separated so that you are confident in terms of what is being remitted to the UK e.g. by setting up a clean capital account, a capital gains account, an income account. Once an account is 'mixed' then it can be a very complicated to unravel from a tax compliance perspective.
Claiming Overseas Workday Relief
A non-UK domiciled individual who comes to work in the UK but has not been resident in the UK for the three previous tax years may be able to claim Overseas Workday Relief (OWR) on earnings relating to non-UK workdays, whereby the resulting earnings are effectively taxed on the remittance basis. This relief is available for the first three tax years of UK tax residence, but only to non-UK domiciled individuals whose earnings relating to non-UK workdays are paid and kept outside of the UK (i.e. in a non-UK bank account).
There are specific conditions that need to be met in order to claim OWR and matters can get extremely complicated if remitting to the UK from a foreign bank account that contains more than one source of income and/ or gains. If you intend to claim OWR then it is advisable to set up a 'qualifying' account prior to arriving in the UK and receiving your first salary payment.
If you are a US citizen and your non-UK workdays are not taxable in the UK then they may be taxed in the US instead (state taxes may also be due if the non-UK workdays are worked in the US).
UK tax services are provided by Jaffe UK Services Ltd, a Jaffe & Co group company, company number 11588450.
A non-UK domiciled individual who comes to work in the UK but has not been resident in the UK for the three previous tax years may be able to claim Overseas Workday Relief (OWR) on earnings relating to non-UK workdays, whereby the resulting earnings are effectively taxed on the remittance basis. This relief is available for the first three tax years of UK tax residence, but only to non-UK domiciled individuals whose earnings relating to non-UK workdays are paid and kept outside of the UK (i.e. in a non-UK bank account).
There are specific conditions that need to be met in order to claim OWR and matters can get extremely complicated if remitting to the UK from a foreign bank account that contains more than one source of income and/ or gains. If you intend to claim OWR then it is advisable to set up a 'qualifying' account prior to arriving in the UK and receiving your first salary payment.
If you are a US citizen and your non-UK workdays are not taxable in the UK then they may be taxed in the US instead (state taxes may also be due if the non-UK workdays are worked in the US).
UK tax services are provided by Jaffe UK Services Ltd, a Jaffe & Co group company, company number 11588450.
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