In the UK, calculating the tax on your income involves two primary methods: the arising basis and the remittance basis. The arising basis is straightforward. You pay UK tax on your worldwide income and gains for the tax year (April 6th to the following April 6th). However, the remittance basis is more complex and requires deeper understanding.
The HM Revenue & Customs (HMRC) department in the UK is responsible for tax collection, serving as the UK equivalent of the IRS. While there are some similarities between US and UK tax laws, it’s crucial to note that significant differences also exist. In this article, we delve into a strategic aspect of UK tax that US expats should be familiar with – the UK remittance basis.
What is the remittance basis of taxation?
Under the remittance basis of taxation, you will pay tax on UK sources of income and gains, plus any foreign incomes and gains that you remit to (bring into) the UK. In effect, you can exclude foreign incomes and gains from UK taxation – providing that those incomes and gains are kept offshore.
Bringing your income and gains to the UK doesn’t mean carrying a suitcase full of cash. Remitting your foreign income and gains can include using it for the following:
- Paying for services provided in the UK
- Buying assets that you then bring to the UK
- Giving a gift to a relevant person
- Buying real estate in the UK
- Outside the UK for a relevant UK debt
How to qualify
Qualifying for the remittance basis of taxation requires fulfilling three conditions. In order to claim the remittance basis of taxation and keep your foreign unremitted income tax-free in the UK, you must:
- Be a resident of the UK for tax purposes
- Classify as non-domiciled
- Have foreign income or gains1
Am I a UK resident for tax purposes?
Simply put, you are considered a UK tax resident if you spend sufficient time in the UK to meet its residency criteria. You will likely fulfill these criteria if you spend 183 days or more in the UK during the tax year. Although, you may fulfill the criteria if you have enough ties and connections to the UK.
Am I non-domiciled?
Broadly, if you are born outside the UK and consider your long-term home overseas, you are non-domiciled.
It’s not surprising, then, most US expat are considered non-domiciled. Therefore, you may use the remittance basis of taxation.
Since the remittance basis of taxation deals with how foreign incomes and gains are taxed, you need to have foreign income to qualify for the remittance basis of taxation.
So, you don’t need to worry about the remittance basis if you have no foreign income or gains.
Drawbacks of the remittance basis of taxation
First, the drawbacks to this basis of taxation you’ll want to consider: (3,4)
- Loss of your allowances for income tax
- Loss of annual capital gains exemption
- May be required to pay the remittance basis charge (£30,000 or £60,000)
- Complex record keeping required
- Loss of foreign tax credits
Applying for the remittance basis option
Satisfied that you meet the eligibility requirements to use the remittance basis of taxation? Then, read on to understand how to apply and let the HMRC know you’re claiming it.
If your unremitted foreign incomes and gains (in aggregate) are more than £2,000, you must officially claim the remittance basis through a UK tax return submission. You claim the remittance basis by completing the relevant Form SA109 on a UK tax return.
Note: provided that the foreign incomes and gains are kept offshore, you do not need to disclose the foreign incomes and gains on a tax return.
If your unremitted foreign incomes and gains (in aggregate) are less than £2,000, you are not required to file a claim through a UK tax return submission. In this scenario, the remittance basis automatically applies. Again, if your foreign incomes and gains are kept offshore, you do not need to disclose the foreign incomes and gains on a tax return.
⚡ Pro tip:
Use of the remittance basis is opt-in opt-out i.e., you can use the remittance basis one year, should this be more beneficial to you and the arising basis the following year. (2)
The remittance basis is free for your first seven tax years of residence. However, starting on your eighth year of tax residence, a charge applies should you wish to use the remittance basis.
You’ll need to weigh the pros and cons carefully; the remittance basis is a give-and-take and comes with gains and losses you’ll need to evaluate.
Who should opt for the remittance basis of taxation?
In short, the remittance basis is a great option for US expats with significant non-UK sources of income that you don’t need to bring to the UK.