Background
UK tax resident, non-domiciled, individuals who are claiming the remittance basis of taxation, do not pay UK tax on foreign income and gains, as long as these are not remitted to the UK.
It is, however, crucial to ensure that this tax benefit is properly planned for and claimed. For more information regarding formally claiming the remittance basis, please see article UK Remittance Basis – It Needs to be Formally Claimed.
Failure to plan properly, before arriving in the UK and becoming UK tax resident, could mean that the benefits available are lost and an unwelcome letter from HM Revenue & Customs (HMRC) might be received.
Case Study
To clearly highlight the risks of not taking the right advice, at the right time, please see a case study below regarding an individual moving to the UK.
- 1 March 2021 (Day 1)
Mr and Mrs Non-dom decide to leave their current home in Australia and move to the UK during the summer of 2021, so that their two minor children can start school early in September 2021.
They speak to their Australian tax adviser and make sure that they carry out local tax planning in preparation for leaving Australia. They have been told by a friend, who had already moved the previous year, that “as they are not originally from the UK, they will be taxed on the ‘remittance basis’, and therefore their non-UK source income will not be taxed in the UK”.
They are pleased as they believe this means:
| Assumed: NONE of the following would be taxed in the UK: |
| income from the rental property they have in Australia; and |
| dividends (from their large share portfolio) held in a Hong Kong bank; and |
| interest on the equivalent of £2million cash savings, currently sitting on long term deposit (until the summer of 2022), at the same Hong Kong bank as above. |
At this point, they do not seek any UK tax advice.
What a shame!
- 10 August 2021 (Day 2)
Having arranged the correct visas, they move to the UK ready for the new school term.
They had £50,000 of cash in an Australian current account, that they now remit to their new UK bank account. They use this for rent and living expenses.
- 10 August 2022
Having lived in the UK for a year, and with the children now well settled in school, they decide that they will be staying in the UK until such time as both children have completed their education. They therefore decide to purchase a house.
Since Day 2, they have continued to receive rental income from their Australian rental property, as well as from the family home that they left behind. This income has been paid into an Australian bank account.
The dividend income has carried on being received into the Hong Kong bank account. The long-term deposit of £2million, plus accrued interest, has expired and this income is now earning very little interest in the Hong Kong current account. They therefore decide to put these monies back on deposit for a further three years.
- They need £1million to buy the new home in the UK, along with a further £250,000 for stamp duty, renovation costs and school fees.
They therefore sell the rental property in Australia. The sale proceeds of £1.1million (which includes £100,000 capital gain), are placed in the same Australian bank account as the rental income. Their dividend income, held in the Hong Kong bank account total £150,000. They decide to remit the money in both of these accounts to the UK, in order to purchase the property.
- 10 April 2023
Mr and Mrs Non-dom awake one morning to find a brown envelope, sitting ominously on their doorstep, from the UK tax authority, HMRC.
That afternoon, they visit a local chartered accountant who has the rather difficult task of informing the couple that they owe £28,000 of UK capital gains tax and more than £300,000 in income tax. This could partially be reduced by double tax relief, but there would still be a substantial unnecessary tax liability. On top of this, they were late filing their UK tax returns for the tax year 2021/2022 and have therefore also incurred fines and penalties.
Turn Back Time: The Potential Positive Effects of Good Planning
The above unfortunate chain of events started on Day 1, in March 2021.
The outcome could have been so different and could have resulted in a UK tax liability of ZERO.
When Mr and Mrs Non-dom heard about the ‘remittance basis’ from a friend and looked up some articles online, they should have taken advice from a UK adviser, as well as taking advice from their Australian tax advisor.
The UK tax advisor would have told them:
| they would become tax resident in the UK from 6 April 2021 (having moved to the UK on 10 August 2021), and would therefore have been liable to file a tax return by 31 January 2023 and pay any taxes due; and |
| on Day 1, they should have instructed their Australian bank to pay new rental income into a new bank account (with the same bank); and |
| on Day 1, they should have instructed the Hong Kong bank to keep dividend income and interest from that cash deposit, in new separate accounts; and |
| when they sold the Australian rental property, they should not have remitted this income to the UK. |
Instead, they should have remitted £1,250,000 of the £2million, from their original cash savings, to purchase their new home in the UK and to cover the stamp duty, renovation costs and school fees.
- Had they taken the final step detailed above, they would have retained the same value of investments in Australia and Hong Kong as if they had not taken the UK advice.
- However, they would have remitted capital that they had PRIOR to becoming UK tax resident, which would NOT therefore have been taxable.
The steps recommended above, are not complicated, and many international banks are capable of implementing this account segregation for their UK resident clients.
Summary and Additional Information
The remittance basis of taxation, which is available for non-UK domiciled individuals, can be a very attractive and tax efficient position, but it is crucial that it is properly planned for and formally claimed. Mr and Mrs Non-dom did not take appropriate UK advice and paid the price.
If you require additional information on this topic, further guidance regarding your possible entitlement to use the UK remittance basis of taxation, and how to properly claim it, please contact your usual Dixcart adviser or speak to Paul Webb or Peter Robertson in the UK office: advice.uk@dixcart.com.
Dixcart UK, is a combined accounting, legal, tax and immigration firm. We are well placed to provide these services to international groups and families with members in the UK. The combined expertise that we provide, from one building, means that we work efficiently and coordinate a variety of professional advisers, which is key for families and businesses with cross-border activities.
By working as one professional team, the information we obtain from providing one service, can be shared appropriately with other members of the team, so that you do not need to have the same conversation twice! We are ideally placed to assist in situations as detailed in the case study above. We can provide cost effective individual and company administration services and also offer in-house expertise to aid with more complex legal and tax matters.
