Remittances to the UK Print
Where a remittance is made to the UK, the remittance is matched with the funds in the account from which the remittance is made, in the following order:
Firstly with the current year’s income;
Secondly with the current year’s capital gains;
Thirdly with any capital paid into the account during the current year.
If that is insufficient to match the amount remitted the process is repeated for the income, then gains then capital paid into the account in the previous year, and so forth until the amount of the remittance is matched.
There are further rules regarding the order of matching different sources of income, and that is discussed in the section on “Mixed Accounts”.
Robert, who came to the UK in July 2013, and is not domiciled in the UK receives a gift of £8m from his father during 2020/21. He places this on deposit offshore and receives interest of £50,000 for the year 2020/21, and £200,000 per year thereafter. His UK source taxable income is in excess of £150,000 per annum, so he pays tax at the highest rates. He remits income of £50,000 in December 2021, and a further £150,000 in March 2023. In both cases sufficient income to cover the remittance is received in the year of remittance.
For 2020/21 his overseas income is £50,000, so it is beneficial for him to pay tax of£22,500 (at the rate of 45%) on the arising basis.
For 2021/22 it is beneficial for Robert to pay tax on the remittance basis, so he has to pay£22,500 tax on the amount remitted, plus the £30,000 remittance basis charge. If instead he decides to pay tax on the arising basis, he would have to pay £90,000 on the overseas income of £200,000, but he would be able to remit the funds to the UK without incurring a further tax charge.
For 2022/23 Robert is better off by paying tax of £90,000 on the arising basis. (The tax payable on the remittance basis would be £67,500 + £30,000.)
Looking at the balance within Robert’s offshore bank account, it is necessary to split this into taxed, and untaxed funds, as follows:
|Total, £||Taxed, £||Untaxed, £|
Where tax is paid on the arising basis, but not all of the overseas income is remitted to the UK, any balance remaining should be transferred into a separate account so that it is not mixed with untaxed overseas income, and in particular it is kept segregated from the overseas income on which the remittance basis charge has been paid (i.e. the Nominated Account). It is of prime importance that no funds on which the RBC is paid are remitted to the UK at least until all other funds have been exhausted.
Income on which tax has been paid on the arising basis may be remitted to the UK at any time without any further tax arising. This is so even where there has been an increase in the tax rate between the year for which the tax was paid on the arising basis, and the year during which the income is remitted to the UK. It is for this reason that such funds should be segregated from subsequent overseas income or gains.
Reverting to the above example, if the income on which tax is paid on the arising basis is paid into a separate account then Robert could remit this to the UK without incurring a further tax charge. This should be done before the end of the year in which the relevant income arises. Ideally to keep untaxed, and taxed income separate the interest should in the first instance be credited to an account which does not contain any previous years’ income, so that at the end of the tax year the only income in the account is in respect of that year. It should then be transferred into either an account for taxed income if tax is going to be paid on the arising basis for that year; or into the account for untaxed income if the remittance basis will be claimed. If a decision cannot be made then it should be transferred to a new account and held separately until it can be decided which account it should be transferred to. Alternatively, a new income account could be opened each year to receive the interest for that year. Whichever method is adopted, the intention should be to segregate income which will be taxed on the arising basis from income taxable on the remittance basis as this is likely to reduce the tax payable when some of the income is subsequently remitted to the UK.
If Robert had kept separate accounts for taxed and untaxed income he could have remitted funds in the following manner:
|Total, £||Taxed Account, £||Untaxed Account, £|
In this manner Robert would have saved tax of £22,500 on the remittance in 2020/21 as the £50,000 could have come out of the account containing the taxed income of the previous year rather than out of the income on which he claims the remittance basis. In addition, it would be much easier for him to access the remaining £50,000 of taxed income within the taxed income account. Lastly, if Robert spends money overseas, he can do so out of the untaxed income account without wasting income on which UK tax has been paid.
The above example is a very simple case. In practice tracking all cash movements is likely to require a fair degree of analysis work.
Ideally, for the years Robert claims the remittance basis, he should leave the income to accumulate offshore, or spend it offshore, and if he requires funds in the UK, he should remit clean capital to the UK instead. (See section on Keeping Capital Clean below.)
Where overseas income is remitted here by a non-UK domicile who is taxed on the remittance basis, the remitted income does not benefit from the reduced rates of tax generally applicable to savings income but is charged at the normal tax rates. In particular, it should be noted that dividend income is taxed at the full rates and does not benefit from the rates of tax applied to dividends paid by UK companies, or paid to individuals taxed on the arising basis.
Where sale proceeds of an asset on which a capital gain is made are remitted to the UK, the whole of the gain is treated as being remitted here in priority to any original capital used to acquire the asset. The purchase and sale of assets has to be tracked to enable a calculation of the amount of gains within the proceeds of a disposal which are subsequently remitted to the UK.
The diagram below indicates how various sources of income and gains should be segregated from the original capital, and from each other, to ensure that different categories may be remitted to the UK in the most tax efficient manner.
If during a temporary period of non-residence in the UK of less than 5 complete tax years, an individual remits income or gains to the UK which arose in a year prior to departure, then the amounts remitted will be liable to tax in the UK for the year of return. If the period of non-residence in the UK is for 5 complete tax years or longer, then any income remitted to the UK during a year of non-residence is not taxable.
An important point to note is that if an individual has a period of non-residence in the UK for any period and after he resumes UK residence he remits income to the UK which arose before he departed from the UK, that income will be taxed as a remittance. The period of non-residence will not “wash” that income. Overseas income arising to the individual during a period of non-residence may however be remitted to the UK without triggering a tax charge.