UK residents are usually taxed on the arising basis. If you are not domiciled in the UK, however, you can use an alternative tax treatment known as the remittance basis.
What Is It Exactly?
The remittance basis is a tax treatment where non-UK income and gains are taxed if and only if they are brought in and enjoyed in the UK. Once income and gains are considered ‘remitted’ in the UK, they become taxable.
Who Can Use It?
If you are a resident in the UK but are neither domiciled nor ordinarily resident, you can use the remittance basis. What is taxed, however, depends on your residency status. If you are not a UK domiciliary, for example, the remittance basis of taxation applies on both your foreign income and capital gains. But if you are not-ordinarily resident in the UK, you can only use the remittance basis on your income, but not for capital gains.
A resident in the UK can also use the remittance basis if they have foreign income or capital gains during a tax year.
When is a foreign income or gains considered ‘remitted to the UK’?
For better understanding, we must first establish who are considered “relevant person”.
- Spouse, civil partner or partner
- Children or grand-children under 18 years of age
- Children or grand-children of a spouse/civil partner, also under 18 years of age
- Trustee of a settlement
- Participator or subsidiaries of closed companies
- Non-resident companies and their subsidiaries
So what is remitted foreign income or gains?
- Brought to, received in, or used in the UK by you or another relevant person
- Brought to, received in, or used in the UK for your benefit or that of another relevant person
- Used to pay for services provided in the UK to your or another relevant person
- Used to pay for services provided in the UK for your benefit or that of another relevant person
- Used outside of the UK to pay for a debt in the UK
There are exemptions, however. Anything brought in the UK for personal use, for example, including clothes, shoes, watches or jewellery, are exempt from UK tax. The same is true for items that cost less than £1,000, property temporarily brought to the UK, and paintings or other works of art that are for restoration, repair or public display.
Which circumstances do the remittance basis of taxation applies?
If, at the end of a tax year, the foreign income that is still unremitted is less than £2,000, the remittance basis is automatically applied. You would not even have to make a formal claim or incur tax cost.
If the foreign income is over £2,000, you can still use the remittance basis but at a price. Apart from the need to complete a tax return, so you can make a claim, you will also lose a couple of benefits:
- UK Personal Allowance
- Annual Exempt Amount for Capital Gains Tax
If you have lived in the UK for the 7 out of the 9 tax years, you also need to pay a £30,000 Remittance Basis Charge, so you can use the alternative tax treatment.
Although the remittance basis itself is straightforward enough, the factors surrounding it makes the entire process complicated. Since you need to meet certain criteria to qualify for its use, it is highly recommended to consult with tax experts regarding the remittance basis.