Individuals using the remittance basis are taxed on their foreign income and gains only when they are remitted to the UK. In other words, if there is no remittance, then normally there would be no tax.
This basis of taxation is only available to certain non-domiciled individuals (see here).
While the basic principle of the remittance is straightforward, sometimes remittance basis users make taxable remittances to the UK without realising it. This guide will help individuals to understand what may constitute a taxable remittance.
A remittance occurs when foreign income or gains is brought into the UK, either directly or indirectly. Examples of indirect remittances include:
- Purchasing an item in the UK with a credit card, and then paying the credit card bill using foreign income or gains.
- Receiving a service in the UK, which are then paid for using foreign income or gains.
- Purchasing an item abroad using foreign income or gains, and then bringing the item into the UK.
- Giving the proceeds of foreign income or gains to someone who is a relevant person (e.g. a spouse), who then brings it to the UK for use by ther giver, or themselves, or any other relevant person.
It’s important to understand that foreign income and gains are only taxable remittances where the foreign income and gains have been generated after the individual became UK resident. Foreign income and gains prior to an individual becoming resident will not be a taxable remittance (unless the individuals is a temporary non-resident).
Henrik moved to the UK in tax year 2015/16. Since that point he has claimed the remittance basis. Prior to his arrival in the UK he purchased a painting after selling some shares. In 2020/21 he bought the painting to the UK.
Since he purchased the painting before becoming UK resident, there will not be a taxable remittance.
Assume the same scenario as above, but the painting was purchased after becoming resident.
Since the painting was purchased after becoming resident, it is necessary to examine what funds were used to purchase it. If it came from shares that were sold prior to becoming resident then it would be ‘clean’. However, if the shares were sold after becoming resident then there may be a taxable remittance, and it would be necessary to calculate if there was a taxable gain on the sale of the shares.
These examples demonstrate the importance of pre-arrival planning.
How to Avoid Making a Taxable Remittance
A good way to conceptually think about the money and other assets that a remittance basis user has is as follows:
- Foreign income and foreign gains that were generated in the period after becoming UK resident. These would be taxable if remitted to the UK.
- Foreign income and foreign gains that were generated before becoming UK resident. This is referred to as ‘Clean Capital’ and wwould not be taxable when remitted. This is the case even if many years elapse between an individual’s arrival in the UK, and the point at which they bring money to the UK.
As Clean Capital can be brought to the UK tax-free, it is usually recommended that remittance basis users ‘ringfence’ their Clean Capital (for example, segregating it in its own investment account), so as to ensure that it is not tainted by foreign income and gains that are generated after becoming resident. This makes it relatively straightforward to bring money and be able to identify it as Clean Capital.
If a remittance basis user has foreign income or gains subsequent to becoming resident, and they believe that they would like to bring it to the UK at some point, then it would be advisable to create separate accounts for income and for gains (this is sometimes referred to as ‘segregation’).
The reason for ringfencing Clean Capital, and performing account segregation, is because of the Mixed Fund rules. The Mixed Fund rules are a set of rules designed to identify what types of income and/or gains constitute a remittance to the UK. They can often result in a tax disadvantage, and are discussed later in this page.
Note that outright gifts, as well as assets that an individual inherits, are also clean capital for remittance basis users, just as they are for arising basis users.
How to ‘ringfence’ clean capital and ‘segregate’ accounts
Tax advisors often recommend at least three separate bank accounts be maintained:
‘Clean Capital Account’: this will contain cash and shares held before the individual became UK resident. Since it was generated prior to the individual becoming resident it will be Clean Capital. No further foreign income or gains should be paid into the account after the individual becomes UK resident.
‘Income Account’: since no foreign income should be paid into the Clean Capital account after the individual becomes resident, any foreign income should be paid into an income account. If it is envisaged that money will be brought to the UK in future, it may be useful to have separate income accounts for separate types of income. For example, one account for foreign interest income, another account for foreign dividends, another for foreign rental income, etc. Although remittances from all of these sources will be taxed at the same rates, there may be foreign withholding tax to consider, or rental expenses to consider. By having separate accounts it makes it straightforward to identify the source of any remittance.
Capital Gains Account: an account to receive proceeds of asset (such as shares) disposals which have resulted in a gain. If the sale is in a foreign currency it is necessary to calculate the gain by converting the cost basis to £GBP using the foreign exchange rate on the date of purchase, and converting the sale proceeds using the exchange rate on the date of sale.
A Mixed Fund is often thought of as being a bank account or investment account, but it can also be an asset (such as a painting), where the money used to buy it came from different types of income or capital. The Mixed Fund rules are complicated and the below.
Example of a Mixed Fund
A foreign bank account for a remittance basis user might contain Clean Capital (money held before they became resident), as well as bank interest generated in the account after they became resident. –> This would be a mixed fund.
Example of a Mixed Fund
A painting owned by a remittance basis user might have been purchased from the sale of a foreign property after they became UK resident, as well as from foreign dividend income. –> This would also be a mixed fund.
If a mixed fund, or part of a mixed fund, is brought to the UK, it can be time-consuming process to determine what amounts constituted the remittance. This is because the fund must be analysed in accordance with strict ordering rules, in order to match the remittance to specific monies.
In general, where there is a remittance to the UK from a mixed account, it is often regarded as coming from taxable income and gains first, and from ‘clean capital’ second. Details of the ordering rules can be found on the HMRC website here.
Ashok became UK resident in the 2018/19 tax year. At that point he had an investment account in Singapore containing cash of £50,000, as well as some shares in a company.
In tax year 20/21 he brings £25,000 from the account to the UK.
The income in the account between the date he became resident totalled £10,000, made up of foreign interest income, and foreign dividends. –> Therefore this account is a mixed account.
In accordance with the ordering rules that apply when remitting to the UK, Ashok is deemed to have remitted £10,000 investment income (which will be taxable), and £15,000 of clean capital.
Tax Rates on Remitted Income
Foreign income that is remitted to the UK is taxed as non-savings income, and therefore follow the standard income tax rates. These are currently:
- 20% on income within the basic rate band
- 40% on income within the higher rate band
- 45% on income within the additional rate band
Under the arising basis, dividends would be subject to lower tax rates. This is not the case for remittance basis users, whose foreign income (including foreign dividends) are taxable as non-savings income, with the same rates as above.
Separate tax rates apply for capital gains. See the Capital Gains page for information on tax rates as the same rates mentioned there are applicable.
Where unremitted foreign income gains are used as collateral for a loan, and the loan is then brought to the UK, it will constitute a remittance. There is an exception to any loans that were brought into the UK, or used in the UK, before 4 August 2014.
Stephen is a remittance basis user. He had an investment portfolio in the US, which contains foreign income and gains generated while using the remittance basis. He would like to use some of his investments as security for a loan. He intends to use this loan to buy a UK property.
In this case, as the foreign income and gains are being used as collateral for a loan, there is likely to be a taxable remittance of the foreign income and gains.
Sanjay has a residential property in Malaysia. After he moved to the UK he rented out the property. He claims the remittance basis and ensures that he does not bring the rental income to the UK.
The property has a mortgage, and some of the rental income is used to pay the mortgage (both the interest and the capital). Sanjay would now like to obtain a new mortgage and bring some of the money from the new mortgage to the UK.
Doing this is likely to result in a taxable remittance. This is because the rental income for the period Sanjay was claiming the remittance basis was being used to pay off the mortgage capital. Therefore, the Malaysia property contains a ‘tainted’ element. This tainted element will be the net rental income that was generated in the period Sanjay was claiming the remittance basis, and which was used to pay off the capital element of the mortgage.
Therefore the loan would be partially secured on unremitted income, which would trigger a taxable remittance (i.e. of the previously untaxed rental income).
An individual will be regarded as making a remittance if they, or a relevant person, brings their taxable foreign income or gains to the UK. This is the case whether the money is being brought in for the individual’s use or for the use of a relevant person.
A “relevant person” includes:
- the individual’s spouse or civil partner
- People living together as though being their spouses or civil partner
- Children or grandchildren under 18 years.
Other relevant persons include trusts and companies linked to the individual or relevant persons.