What is the remittance basis of taxation?
The remittance basis are the alternative tax rules in place for those people who are UK resident with overseas income and gains but are not classed as UK domiciled. This article will be of interest to those studying for any of the CII R03, R06, AF1 or AF5 exams.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2018/19.
What is the arising basis of taxation?
First let’s make clear what the arising basis of taxation is; this is used for UK residents and means that their worldwide income and gains are taxed in the UK. If that money is also taxed in the other country, it still needs to be declared and taxed in the UK; although in most cases, there will be a double taxation agreement meaning that relief is given in the UK for the tax paid overseas. (HMRC may require evidence of paid foreign tax).
If you are UK resident but not UK domiciled, then you have a choice: to use the arising basis or the remittance basis.
What is the remittance basis of taxation?
The remittance basis means that UK tax is only paid on overseas income and gains that are remitted (or brought) into the UK. (Tax will be charged in the normal way on investment income from UK sources). If the remittance basis is chosen and the individual is a long-term UK resident, then the Remittance Basis Charge (RBC) will apply if the person has more than £2,000 unremitted income/gains, and they are over 18.The remittance basis of taxation means that UK tax is only paid on overseas income and gains that are remitted (or brought) into the UK. #CII #R03 Click To Tweet
What is considered ‘long-term residence’?
The definition of long-term residence is more than 7 out of the previous 9 tax years, and since 2017 there have been two levels of charge:
- £30,000 for those people UK resident in at least 7 of the previous 9 tax years
- £60,000 for those people UK resident in at least 12 out of the previous 14 tax years
Since April 2017, worldwide income and gains have been taxed on the arising basis when someone is UK resident for at least 15 out of the previous 20 tax years. Before then, we had a £90,000 charge for those UK resident in at least 17 out of the previous 20 tax years, but in 2017 the deemed domicile rule changes to 15 out of 20 years meant the £90,000 charge no longer applied as those affected will be treated as UK domiciled from the beginning of the 16th year and can’t therefore use the remittance basis.
The RBC is basically a tax charge on the overseas income/gains that is left outside of the UK and has to be paid on top of any UK tax paid on UK income/gains, as well as any overseas income/gains that are remitted to the UK.
If someone chooses the remittance basis, they would not normally get a personal allowance or the CGT annual exempt amount – the exception being where unremitted income/gains is less than £2,000, in which case, the remittance basis automatically applies and they keep both the personal allowance and the annual CGT exempt amount. They also won’t have to pay the RBC if they are a long-term resident.
Should I elect for the remittance basis?
Whether to elect for the remittance basis is a decision that is made each tax year, so someone can move between remittance basis and arising basis depending on their circumstances.
Where someone becomes deemed domicile and therefore will be liable to UK tax on overseas income and gains, they should then be able to claim the dividend allowance and the personal savings allowance.
Interestingly (and not something we think will ever be tested!) is that a remittance doesn’t just occur with actual income/gains; it will also occur if something is remitted that was derived from overseas income/gains. For example, if someone buys a work of art overseas using their foreign income and then brings that piece of art to the UK, this is a remittance because it derived from foreign income. Another example is where money is received in the UK from another UK resident, which is in return for overseas money transferred to them overseas!
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