UK Arising vs. Remittance Basis of Taxation |
Arising versus Remittance Basis of Taxation
The UK tax system can get very complicated if you are non-UK domicile but tax resident in the UK and have foreign income and gains. In this situation an individual is 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).
Arising Basis
An individual who is resident and domiciled (or deemed domiciled) in the UK will pay UK tax 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 not 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, 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 credit for taxes paid outside of the UK. However, by paying tax on the arising basis you may be entitled to benefit from the personal allowance and capital gains exemption.
A US citizen on the arising basis is subject to tax in two jurisdictions on their worldwide income and gains. It is therefore very important for a US citizen to ensure they are not being taxed twice on the same income or gains.
Remittance Basis
An individual who is resident but not domiciled in the UK (nor deemed domiciled) may be able to choose the remittance basis of taxation to exclude their foreign income and gains from the scope of UK taxation.
By using 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 (remitted) to the UK. There may, however, be a cost to claiming the remittance basis of taxation including the loss of use of the personal allowance and capital gains exemption. 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 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).
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.
What is a remittance?
A non-UK domiciled individual who uses the remittance basis of taxation needs to ensure that they fully understand what a remittance is.
A remittance is any foreign income or gains that you bring directly or indirectly into the UK so that you or a relevant person can enjoy the benefit of such income or gains in the UK.
The following are some examples of potential remittances:
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 relief on earnings relating to non- UK workdays. This relief is available for the first three tax years of residence but only to non- UK domiciled individuals whose earnings relating to non- UK workdays, are paid and retained outside of the UK.
There are specific conditions that need to be met in order to obtain overseas workday relief 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. It is advisable to set up a “qualifying” account prior to arriving in the UK and receiving the first salary payment.
If you are a US citizen and your non-UK workdays are not taxable in the UK then they may be taxable in the US (plus 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.
The UK tax system can get very complicated if you are non-UK domicile but tax resident in the UK and have foreign income and gains. In this situation an individual is 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).
Arising Basis
An individual who is resident and domiciled (or deemed domiciled) in the UK will pay UK tax 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 not 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, 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 credit for taxes paid outside of the UK. However, by paying tax on the arising basis you may be entitled to benefit from the personal allowance and capital gains exemption.
A US citizen on the arising basis is subject to tax in two jurisdictions on their worldwide income and gains. It is therefore very important for a US citizen to ensure they are not being taxed twice on the same income or gains.
Remittance Basis
An individual who is resident but not domiciled in the UK (nor deemed domiciled) may be able to choose the remittance basis of taxation to exclude their foreign income and gains from the scope of UK taxation.
By using 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 (remitted) to the UK. There may, however, be a cost to claiming the remittance basis of taxation including the loss of use of the personal allowance and capital gains exemption. 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 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).
- £2,000 exemption for remittance basis: if you are a non-domicile 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
- You are entitled to the personal allowance and capital gains exemption
- Remittance Basis Charge (RBC): if you are a non- domicile 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.
What is a remittance?
A non-UK domiciled individual who uses the remittance basis of taxation needs to ensure that they fully understand what a remittance is.
A remittance is any foreign income or gains that you bring directly or indirectly into the UK so that you or a relevant person can enjoy the benefit of such income or gains in the UK.
The following are some examples of potential remittances:
- If you receive a service in the UK and pay for that service using foreign income or gains.
- If you buy an asset in the UK and use foreign income or gains to pay for it.
- If you purchase an asset outside of the UK using foreign income or gains then bring that asset to the UK e.g. a car or luxury goods.
- If you create a debt in the UK and then pay off that debt using foreign income or gains e.g. a mortgage, use of a credit card in the UK
- If you give 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 relief on earnings relating to non- UK workdays. This relief is available for the first three tax years of residence but only to non- UK domiciled individuals whose earnings relating to non- UK workdays, are paid and retained outside of the UK.
There are specific conditions that need to be met in order to obtain overseas workday relief 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. It is advisable to set up a “qualifying” account prior to arriving in the UK and receiving the first salary payment.
If you are a US citizen and your non-UK workdays are not taxable in the UK then they may be taxable in the US (plus 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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