As a UK tax resident, the default position is that you are subject to tax on your worldwide income and gains. This can range from employment, self-employed, dividends, interest, rental, unit trust and all other incomes as well as gains from the sale of shares or assets, wherever in the world.
Although you may pay tax overseas on your foreign income, this income may still be subject to tax in the UK and potentially taxed twice. There may be scope to relieve part or all of the overseas tax paid dependent on the amount of tax payable and whether there a tax treaties in place.
Only pay tax on foreign income if you’ve brought it into the UK?
Where the UK tax system can get further complicated is if you are non-UK domiciled and have foreign income. You may have a choice to be taxed on the remittance basis (RB) instead of the arising basis. This would essentially mean you are only subject to tax on the basis you bring (remit) those funds to the UK.
- Only pay tax on foreign income when remitted to the UK
- If foreign income is less than £2,000, ability to use RB without making an election and can still be entitled to personal allowance and capital gains allowance
- Potentially avoid double taxation
- Loss of personal allowance and capital gains exemption allowance
- Potential Remittance Basis Charge of at least £30,000 if resident in the UK for at least 7 of prior 9 years
- Harsher tax rules if remitting overseas funds from a mixed fund account
If you claim the remittance basis of taxation then it is vital to ensure your offshore bank and financial accounts are set up in a manner to ensure you do not have any “mixed fund” accounts. Should you wish to make a remittance to the UK from a “mixed fund” account, this can have harsh tax consequences unlike segregated accounts.
What counts as a remittance?
A remittance is any foreign income or gains that you bring directly or indirectly into the UK so that you or a relevant person can enjoy the benefit of such income or gains in the UK. The following are some examples of potential remittances:
- If you receive a service in the UK and pay for that service using
foreign income or gains
- If you buy an asset in the UK and use foreign income or gains to
pay for it
- If you purchase an asset outside of the UK using foreign income
or gains then bring that asset to the UK e.g. a car or luxury goods
- If you create a debt in the UK and then pay off that debt using
foreign income or gains e.g. a mortgage, use of a credit card in
Planning to move to the UK
If you are planning to move to the UK and you have non-UK capital, income or gains which shall continue to generate income outside the UK, it would be advisable to have a consultation prior to moving to the UK.
This is because you are regarded as UK tax resident based on a set number of tests which are based on the number of days you spend in the UK and your reason for moving. Once you become tax resident, you are automatically subject to tax on your worldwide income unless you make a claim for the remittance basis and there may be no time to segregate your accounts.
In your year of arrival, your tax year may be split into two parts where you are treated as non-UK resident for part of the tax year, hence only subject to tax on your UK income for that non-UK resident period.
Hence prior to moving, you should consider the number of days you will spend in the UK and when you wish to become UK tax resident from. You may also wish to consider whether bank accounts are segregated so that you are confident in terms of what is being remitted to the UK e.g. by setting up a clean capital account, a capital gains account and an income account. This can prevent the complicated tax compliance and additional taxes which can unravel from a mixed-fund account remittances.
Your country of domicile will usually be the country of your permanent home or where you may consider your ‘roots’ are. This is different to residence, nationality and, citizenship. There can be three types of domicile: domicile of origin, domicile of choice, domicile of dependence and you can only have one domicile at a time.
Since 6 April 2017, if you have been resident in the UK for at least 15 of the 20 previous tax years, you will be deemed UK domiciled.
If you would like to know more, please get in touch and let our experts help.