Remittance basis in a nutshell
Normally, income and gains accruing to a UK resident individual are chargeable to, respectively, income tax and capital gains tax (CGT) on an ‘arising basis’. This means that such individuals are liable to UK tax on the whole of their worldwide income and chargeable gains arising in a tax year. However, individuals who are resident in the UK but not UK domiciled may claim for any tax year to be taxed instead on the remittance basis, which means that for that year they are taxed on foreign source income and gains only if and when these are remitted (whether they are remitted in that year or a later year). For example, say an individual has foreign source income of £100,000 in 2017/18 and is taxable on the remittance basis for that year. They remit £30,000 of that income to the UK in 2017/18 and £50,000 in 2020/21. They will be taxed on overseas income of £30,000 for 2017/18 and £50,000 for 2020/21. The remaining £20,000 will not be charged to UK tax if never remitted.
What is meant by domicile?
Domicile is a common law concept rather than one of tax law. An individual acquires a domicile of origin at birth—it will follow the domicile of a parent, most commonly the father. A domicile of origin can be superseded, at least temporarily, by a domicile of choice, which is where an individual takes up residence in a different country with the intention of residing there indefinitely.
An individual not domiciled in the UK under common law is nevertheless deemed to be domiciled in the UK for income tax and CGT purposes in a tax year if either of two conditions are met. The first condition is that the individual was born in the UK, has a UK domicile of origin, and is UK resident for the tax year. The second is that the individual has been UK resident for at least 15 of the 20 tax years immediately preceding the tax year in question.
What are the costs of claiming the remittance basis?
An individual who claims the remittance basis for any tax year is not entitled to any personal reliefs, eg the personal allowance, for that year and is not entitled to the CGT annual exempt amount.
Individuals who claim the remittance basis for any tax year also incur an additional tax charge for that year if they are over 18 and meet either the 7-year residence test (in which case the charge is £30,000) or the 12-year residence test (in which case the charge is £60,000). The 7-year residence test is met if the individual does not meet the 12-year residence test but has been UK resident in at least 7 of the 9 tax years immediately preceding the tax year. The 12-year residence test is met if the individual has been UK resident in at least 12 of the 14 immediately preceding tax years.
The additional charge is made on income and gains not remitted to the UK and is thus in addition to the tax charge on remitted income and gains. The individual can nominate the income and/or gains on which this charge is to be levied. For example, a higher rate taxpayer meeting the 7-year test could nominate £75,000 of interest on an overseas bank deposit on which tax is chargeable at 40%, giving a liability of £30,000. The nominated income and/or gains are not then charged to tax again if they are subsequently remitted.
Are there circumstances in which the remittance basis applies without a claim?
No claim is required, and the remittance basis applies automatically, if the total of an individual’s unremitted foreign income and gains for the tax year amounts to less than £2,000. For this purpose only, unremitted foreign income and gains are the total foreign income and gains less the amount (if any) remitted to the UK in the tax year. The costs of claiming the remittance basis do not apply where no claim is required. If the individual does not wish the remittance basis to apply automatically, they may give notice of this in a self-assessment tax return.
A similar rule applies if an individual has no UK income or gains for the tax year (other than taxed investment income of no more than £100 gross), does not make any remittances to the UK in the year, and is either under 18 or has been UK resident in no more than 6 of the 9 immediately preceding tax years.
What is meant by ‘remitted to the UK’?
The definition of ‘remitted to the UK’ is very wide. A remittance occurs when the individual (P), or a person linked to P (itself widely defined) brings into the UK money or property that is, or represents, P’s foreign income or gains or property that was acquired using (or which otherwise derives from) those foreign income or gains.
A taxable remittance also occurs where a service is provided in the UK for the benefit of P or any linked person and the consideration for that service is met using P’s foreign income or gains. The use of money outside the UK to pay off a debt, or pay the interest on a debt, will also be a remittance if the debt relates in some way to money, property or a service that would (in the absence of the debt) be a remittance of P’s foreign income and gains.
There are specific rules to determine the amount remitted. These include rules on transfers from ‘mixed funds', broadly a source that consists partly of amounts of taxable income or gains and partly of amounts that have already been taxed or are not taxable.
There are cases in which money and other property brought into the UK are treated for tax purposes as not remitted to the UK. These include, for example, works of art meeting certain public access conditions; clothing and jewellery for personal use; and funds used to make qualifying investments in private trading companies (known as ‘business investment relief’). Business investment relief is complex, requires a claim to be made, and can be clawed back in certain circumstances. Where funds are brought to the UK to make a qualifying investment, the investment must be made within 45 days.