U.K. Tax – Arising vs Remittance Basis
For foreigners moving to the U.K., the U.K. tax system is relatively straightforward if you only have income and gains from U.K. sources for the duration of your stay here. However, things can get complicated if you are resident in the U.K. and have foreign income and gains. Here we explain how foreign income and gains are taxed in the U.K.
It may be helpful to read this first -
What are foreign income and gains?
If you come to the U.K., become a tax resident and have foreign income or gains (that is income and gains from outside the U.K.) during your stay in the U.K., you have to consider more complex tax rules. This is because the U.K. tax system tries to tax anyone who is resident in the U.K. on their worldwide income and gains.
Examples of foreign income and foreign gains include:
If you are a resident, but non-domiciled, the amount of U.K. tax you have to pay on foreign income and gains may sometimes depend on whether or not you bring money or goods into the U.K.
Note that from 6 April 2017, HMRC will treat some individuals who are not the U.K. domiciled as if they are domiciled (‘deemed domiciled’)| in the U.K. for income tax and capital gains tax purposes.
What is the arising basis of taxation?
If you are resident and domiciled (or deemed domiciled) in the U.K .you will pay U.K. tax on the ‘arising basis’. This means that you pay U.K. tax on your worldwide income and gains for the tax year in which they arise. It does not matter whether or not you bring the foreign income or gains to the U.K.
If you are resident and not domiciled in the U.K. you pay U.K. tax on your U.K. income and gains on the arising basis. You can choose to pay U.K. tax on your foreign income and foreign gains on either the arising basis or the 'remittance basis' of taxation (more on this below).
If you have foreign income or foreign gains, the arising basis can be complex as you will have to declare your worldwide income and gains to HM Revenue & Customs using a self-assessment tax return, and may have to deal with matters of double taxation. However, paying tax on the arising basis does mean that you may benefit from the personal allowance for income tax and the annual exempt amount for capital gains tax.
What is the remittance basis of taxation?
If you are resident, but not domiciled in the U.K., you may be able to choose the ‘remittance basis’ of taxation, if you have foreign income or foreign gains.
Under the remittance basis of taxation, you pay U.K. tax on U.K. income and gains for the tax year in which they arise, but you only pay U.K. tax on foreign income and foreign gains if and when they are brought (‘remitted’) to the U.K. In practice, the remittance basis can help to prevent double taxation.
For migrants with foreign income or foreign gains, it can be difficult to decide between the arising basis and the remittance basis. This is because choosing the remittance basis often has a ‘cost’ attached to it – although you will only pay U.K. tax on U.K. income and gains and on foreign income and gains that you bring into the U.K., you will lose your personal allowance for income tax and the annual exempt amount for capital gains tax (there are some double taxation agreements that override U.K. tax law on this point, however, the number of countries concerned are very limited).
The loss of these allowances means that you pay U.K. tax on all your other taxable income, without the benefit of any tax-free amounts. For example, you cannot have £11,500 of U.K. employment income before having to pay income tax in 2017/18.
You may also have to file a self-assessment tax return to make the claim.
In addition to losing your tax allowances, if you are a long-term resident in the U.K. you may have to pay a Remittance Basis Charge each year to access the remittance basis of taxation.
However, you may be able to claim the benefit of some limited exemptions meaning that you may not have to pay U.K. tax on foreign income and gains but will not lose your personal allowance for income tax and the annual exempt amount for capital gains tax and will not have to pay a Remittance Basis Charge.
My note - In general, one can switch back and forth between remittance and arising bases. But there can be complications;
1 If you shield income or gains using an S809B election, such income or gains will be taxable when remitted even if you are taxable on an arising basis in any subsequent year.
2 To avoid the mixed funds' rules (S809Q) and to distinguish between income and capital you need to keep very detailed records