Tax on Foreign Income UK
In order to determine what course of action would be taken for an individual’s basis of assessment on tax in the UK on foreign income, the fundamental question is whether the individual is a UK resident and/or domiciled or not.
Domicile
An individual can have a domicile in the country where his/her permanent home is located. So, contrary to nationality, a person can only have a single domicile at a time. A domicile is of 4 types: Domicile of Origin, Domicile of Dependency, Domicile of Choice & Deemed Domicile.
Residence
If a person meets residency criteria set out in the UK, he/she becomes a UK resident.
In order to qualify, there are 3 tests:
- Automatic non-UK residence tests
- Automatic UK residence tests
- Sufficient ties tests
If a person doesn’t pass the 1st test and meets the criteria in the 2nd or 3rd test, he/she becomes a UK resident.
Basis of Assessment on Foreign Income – Income Tax:
There are two methods of the basis of assessment:
- Arising Basis (duty to pay tax when foreign income earned)
- Remittance Basis (duty to pay tax when foreign income is remitted to the UK)
If the person is resident & domiciled in the UK, income will be assessed on arising basis whereas if the person is not a UK resident, income tax is exempt. In addition, if the person is a resident but not domiciled, it depends upon the amount of unremitted income to the UK. If unremitted income is:
- Less than 2000 GBP: the remittance basis will be used. The personal allowance will be available.
- More than 2000 GBP: then the arising basis will be used. The personal allowance will also be available, and if the taxpayer elects to choose a remittance basis, the personal allowance will not be available. A possible remittance basis charge will also be paid.
If taxed on a remittance basis, all overseas income will be taxed at non-savings income rates. Also, the double Taxation Relief (DTR) will be available whether taxed on a remittance basis or arising basis to make sure the individual is not taxed twice on the same income.
Basis of Assessment on Foreign Income – Capital Gains Tax:
When an individual makes capital gains by disposing of an asset outside of the UK, the tax implications would be different for UK residents and non-residents. If an individual is not resident in the UK, all capital gains are exempt for CGT purposes. However, if the individual is a UK resident, then:
If UK-domiciled,
- Taxable on foreign gains
- DTR available
If not UK-domiciled, foreign gains will be taxable on the basis of unremitted gains to the UK. If unremitted gains are:
- Less than 2000 GBP: remittance basis will be used. Annual exempt amount (AEA) & DTR will be available. Overseas losses are allowable.
- More than 2000 GBP: arising basis will be used. AEA & DTR will be available. Overseas losses are allowable. If the remittance basis is used, No AEA will be available & possible remittance basis charge may be imposed. If RBC applies, gains will be taxed at a higher rate.
