In the world of UK taxation, non-domiciled (non-dom) individuals residing in the United Kingdom face a crucial decision regarding the basis on which their income and gains are taxed.
The Arising Basis and Remittance Basis represent two distinct approaches to taxation in the United Kingdom, each with its own set of implications and considerations.
In essence, the choice between the Arising Basis and the Remittance Basis involves a careful evaluation of an individual’s residency status, sources of income, and long-term financial strategy.
Arising Basis vs. Remittance Basis
Under the Arising Basis, individuals are required to pay UK tax on their worldwide income and gains for the specific tax year. This method involves straightforward taxation on the entirety of one’s income and gains, regardless of the source.
Determining tax under the Arising Basis is a relatively straightforward process, involving the taxation of global income and gains for the tax year.
Contrastingly, the Remittance Basis introduces a different tax treatment. Individuals opting for the Remittance Basis pay tax on income originating from UK sources and foreign income and gains remitted to the UK.
Crucially, foreign income and gains are excluded from UK taxation if they are kept offshore. On the other hand, the Remittance Basis requires a more strategic approach and a deeper understanding of the individual’s financial circumstances.
It allows for the exclusion of foreign income and gains from UK taxation as long as they are kept offshore.
Qualifying for the Remittance Basis
Qualifying for the Remittance Basis in the United Kingdom involves meeting specific conditions and criteria, emphasising UK tax residency, non-domiciled status, and possession of foreign income or gains.
- Tax Residency Criteria: To meet the UK tax residency criteria, individuals must spend 183 days or more in the UK during the tax year. In addition, ties and connections to the UK are taken into consideration when determining tax residency.
- Non-Domiciled Status: Individuals born outside the UK who consider their long-term home overseas qualify as Non-Domiciled.
- Foreign Income Requirement: A crucial prerequisite for utilising the Remittance Basis is the possession of foreign income. Individuals must have income originating from outside the UK to qualify for this alternative tax treatment.
Drawbacks of the Remittance Basis
- Loss of Allowances: Opting for the Remittance Basis may result in the loss of allowances for Income Tax and the annual Capital Gains exemption.
- Remittance Basis Charge: Individuals using the Remittance Basis may be subject to a Remittance basis charge, which could be £30,000 or £60,000, depending on the length of their UK residence.
- Complex Record-Keeping: Utilising the Remittance Basis often requires robust record-keeping to track foreign income and gains. This can add complexity to financial management.
- Potential Loss of Foreign Tax Credits: There is a potential risk of losing foreign tax credits when opting for the Remittance Basis, impacting the ability to offset taxes paid in foreign jurisdictions.
Claiming the Remittance Basis
Claiming the Remittance Basis involves specific procedures that individuals need to follow. An official claim is required if unremitted foreign incomes and gains exceed £2,000. This claim is submitted through a UK tax return.
A noteworthy aspect is the flexibility provided, allowing individuals to opt-in, and opt-out based on their preferences. This means they can choose the Remittance Basis for one year and switch to the arising basis the following year.
Importantly, if foreign incomes and gains are kept offshore, there is no need for disclosure, simplifying the process for those utilising the Remittance Basis.
Conclusion
In conclusion, the decision between the Arising Basis and Remittance Basis is a pivotal one for Non-Domiciled individuals in the UK, necessitating a careful evaluation of residency status, income sources, and long-term financial strategy.
The Arising Basis entails straightforward taxation on worldwide income, while the Remittance Basis offers a different approach, taxing UK and remitted foreign income, excluding offshore gains.
