Overseas Income & Remittance Basis
Global & UK Income, how resident and domicile status impacts your tax position
Remittance Basis is the basis of taxation that is an addition to the standard tax rules, which is applicable to residents of the UK who aren’t domiciled in the UK. Such taxation requires the resident to be taxed on foreign income and gains remitted to the UK. Remittance basis taxpayers also must pay taxes on the income they have earned in the UK. The ‘remitted to the UK’ term is not just confined to the bringing of foreign income to the UK, if the individual is availing services in the UK for their benefit or remits something that has been bought through foreign income and gains, then the individual is also making a remittance. Accounting firms aim to guide such individuals to remain compliant to the entire tax structure and with the help of tax accountants resolve issues facing remittance accounting.
What role does residence and domicile play in personal tax?
Residence and domicile have a very important role in determining the type of taxation an individual in the UK might have to pay. Residence status in the UK will determine the individual’s tax liability and claim to personal tax allowances and other privileges, whereas the UK domiciled individual gets taxed on worldwide income. Always be sure about your tax circumstances, speak to a business accountant who can design bespoke solutions to all your tax problems.
An individual has the choice to adopt taxation on either the arising basis or the remittance basis, this option is only available to an individual resident but not domiciled in the UK. If an individual is a domiciled in the UK, then they are subject to taxation on arising basis unless selected otherwise
A person is regarded as UK domiciled if he or she is born in the UK, born to someone with a UK domicile, or if they have been residing in the UK for 15 out of a total of 20 consecutive tax years. Individuals must pay UK taxes on any income that has emanated in the UK, and on any foreign income which has been remitted from the country where the income originates to the United Kingdom, and if the remittance basis has been chosen. However, individuals are liable to pay a remittance basis charge if they have been residing in the UK for 7 out of 9 consecutive years and have chosen the remittance basis form of taxation, even if foreign income is not being remitted to the UK.
How do you determine UK residence?
Resident status in the UK is dependent on several factors ranging from the number of days (183 or more) you have spent in the UK during the tax year to fulfilling the conditions under the (SRT). Statutory Residence Test (SRT) was incorporated in the finance act by HMRC and has been in effect from tax year 2013/14 onwards. The tax year 19/20 falls between 6th April 2019 and 5th April 2020.
UK residence is determined by either applying the Automatic Overseas test or the Automatic UK test. Sufficient ties test will determine the residence position if one does not meet any of the prior tests mentioned. If you have tried using the SRT, AOT and TT but are unable to determine your residence test, we recommend speaking to a Business Accountant.
How do you determine UK domicile?
According to new regulations, that were agreed after April 2017, a person will be considered as domiciled in the UK, even though if the individual was not considered domiciled in the UK under the English common law before, only if either one of the two conditions is fulfilled:
- First condition:
The first condition states that the individual should be UK-born and should be born to a father with a UK domicile
- Second condition:
The second condition states that an individual automatically qualifies for a domicile if he or she has been a resident in the UK for 15 out of 20 tax years immediately before the current tax year.
How does Domicile and Resident status impact UK taxes?
UK tax application on individuals is greatly affected by an individual’s domicile and their resident status. An individual who is a UK resident and a UK domicile holder is liable to pay taxes on the income that is being generated in the UK and on his global worldwide income as well. Resident or non-resident status for tax purposes can be determined by applying the Statutory Residence Test (SRT)
Residents of the UK that are foreign domicile holders have an option to adopt either the remittance basis or the arising basis of taxation. They are not liable to pay taxes on income from foreign sources as long as the income is not remitted to the UK and is less than £2000, this is only applicable until the 7 out of 9-year rule becomes applicable.
Non-UK residents, who are domiciled in the UK will have to pay taxes on their worldwide income in the UK (if you are paying taxes in two places look at the double taxation treaty applicable to you). A UK-resident can become a non-UK resident if they spend no more than 91 days out of 365 days in the UK with days of arrival and departure not included. If an individual owns a property in the UK but is non-resident, he or she has to pay property tax on the property income in the UK. The same rule applies to those who remit income through foreign sources to the UK. However, non-residents of the UK are not liable to pay tax on interests from specific UK government securities and interests from banks situated in the UK.
Tip: As a Non-Resident UK Landlord estate agents will withhold tax at source from your property income. If you want to prevent the withholding of tax apply for NLR (Non-Resident Landlord Application) with HMRC.
What is the remittance basis charge?
The Remittance basis charge was introduced in April 2015 and is currently in effect. It is a charge imposed on individuals who selected the remittance basis over the arising basis and have been in the UK for 7 out of the last 9 consecutive years. This remittance basis charge was upgraded to two levels of charges after April 2017. Foreign domiciled individuals, who have been residing in the UK for at least 7 of the 9 tax years immediately before the current year, will have to pay £30,000 as the remittance basis charge. Whilst if the individual prolongs his stay by residing in the UK, to at least 12 of the 14 taxes paying years immediately before the current year, has to pay a remittance basis charge up to £60,000. If remittance basis charge has already been paid, no further tax will be imposed on the unremitted income, even if the income is remitted to the UK later. The individual should have no problem in claiming tax credit relief for the payment which has been made in relation to the remittance basis charge in their home territory. The remittance basis charge is not applicable to children under the age of 18 and to individuals who earn an unremitted income less than £2000 for the current year.
What do I need to do if Remittance Basis Charge is applicable to me?
In case, remittance basis charge is applicable to you, you might want to check if you really have to pay this. If you have not been a resident in the UK in the current tax year, then you are not applicable to pay the remittance basis charge. If you are a resident that is domiciled in the UK, you are not entitled to pay RBC, it is irrelevant to you. However, if you are a resident and have been residing in the UK for the last 7 out of 9 years, then you are liable to pay the remittance basis charge. You are not liable to pay RBC, when you don’t want to use the remittance basis in the current tax year and when you don’t have more than £2000 of unremitted income or gains in the current tax year. In case, if you hold more than £2000 of unremitted foreign income or gains, you will lose your claim to personal allowances and the annual exempt amount for capital gains. Remittance basis charge will not be applicable if you are under 18. If you are above 18 and have been living in the UK for 7 of the 9 tax years you are liable to pay the Remittance basis charge. It is advised that you hire a tax accountant to avoid any inconvenience in the future.
What is the residence, remittance basis?
Residence rules were changed during 2013-2014. HM Revenue & customs introduced new rules which assisted in identifying resident or non-resident status for an individual. This is due to the fact that many people tried to evade taxes by travelling to different countries. Under the new regulations, a person is required to fill the residence remittance basis section online in their tax return. According to the conditions, the residence, remittance basis section has to be filled by non-residents and residents. Residents in the UK filling the responses in the section could be eligible for overseas workday relief, might possess a foreign domicile, could be expecting a split year treatment for income or might want to adopt the remittance basis for another reason.
Key tips for Individuals with Foreign Income:
- Declare foreign sources of income worldwide:
Individuals must make sure that they declare all of their worldwide income for tax purposes based on their domicile and residence status, the income could be derived from foreign bank interests, overseas investments in properties and other sources.
- Declare capital gains from foreign assets
If you make a gain on investments abroad, check the rules around remittance, domicile and residence status. Speak to an accountant, find an accounting firm nearby or appoint a competitive tax accountant but make sure your gains are reported properly for tax purposes.
- Be responsible, file tax returns carefully
Expert Tax accountants will carry out all relevant checks to ensure you pay tax on the correct income in the most tax-efficient way, be sure to ask your accountants a lot of questions and make sure you understand what is being filed for you as the liability of your tax return remains with you.
- Check the legal obligations if an individual is domiciled in the UK
An individual must be aware of all the obligations that come with their UK domicile.
- Keep track of all the major transactions involving remittances and purchases
It is financially and legally very important to keep track of all the major transactions you incur in a tax year, this record will be helpful if the tax authorities investigate your tax matters relating to your tax returns or regarding income or gains that have been remitted.
- Avoid double taxation:
An individual might have paid taxes on his or her foreign income in a foreign country where it originates from, however, the domestic country may demand the individual to declare all sources of income. In order to avoid getting double-taxed individuals to need to make sure they utilising all possible double taxation treaty reliefs available to them. Ask your Tax Accountant to claim all possible reliefs under the relevant double tax treaty.
- Consult professional tax accountants
An individual might be unaware of the potential tax reliefs that are present in the tax system. Accounting firms aim to help out their clients by providing valuable tips and advice which can be very useful for the taxpayer who is unaware of the tax system and its complications.
Clear House Accountants are a professional firm of Accountants in London. Our aim is to assist our clients by providing them with smart and innovative tax solutions. Our professional personal tax accountants provide business advice, assist in filing tax returns while achieving maximum tax efficiency, provide guidance on how to claim tax reliefs, provide solutions to problems related to income remittances in order to avoid extra taxation and assist in determining resident & domicile status. Our accountants have been trained to make our clients experience a simple and easy process from start to finish. Speak to us to learn more.
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes