Move to the UK and Earn Tax-Free Investment Income

The norm for personal income tax systems around the world is that residents of a country pay tax on their world income, although some countries provide special rules for those from abroad. For people moving to the United Kingdom from other countries (and for certain other individuals with some non-UK connection), investment income earned around the world can be non-taxable unless it is brought back to the United Kingdom. The UK revenue authority has just published a helpful guide on this subject. Reform proposals may end individuals’ ability to continue this special treatment indefinitely.

UK tax law distinguishes between income and capital gains, and each is taxed separately. Therefore, the following discussion distinguishes between “income” and “gains.”

UK residents are normally taxed on the arising basis of taxation, which means that world income and gains are taxable in the United Kingdom. However, a person who is resident in the United Kingdom but not domiciled there (a “non-dom”) may choose between the arising basis of taxation and the remittance basis of taxation. Generally, an individual’s domicile is the jurisdiction of permanent residence of his or her father at the time of the individual’s birth.

On the remittance basis, the individual will pay tax on (1) any income and gains that arise or accrue in the United Kingdom, and (2) any foreign income and gains that are remitted (that is, brought) to the United Kingdom. Thus, a person who chooses the remittance basis of taxation does not pay tax on income and gains that are not remitted to the United Kingdom. Investment income, for example, can be kept offshore. (Of course, non-UK taxes may apply.)

However, a long-term UK resident who chooses to claim (that is, be taxed on) the remittance basis could be liable to pay the remittance basis charge (RBC). The RBC is essentially a flat amount that one pays for the privilege of accessing this special tax regime. There are three levels of the RBC: £30,000 for individuals who have been UK-resident in at least 7 out of the preceding 9 UK tax years; £60,000 for individuals who have been UK-resident in at least 12 out of the preceding 14 UK tax years; and £90,000 for individuals who have been UK-resident in at least 17 out of the preceding 20 UK tax years. (At the time of writing, £1.00 is worth Cdn$1.73.)

The breakeven point at which claiming the remittance basis becomes economically beneficial varies with the tax rate and the number of years that the person has been a UK resident. For example, a person paying tax at the 45 percent rate who has lived in the United Kingdom for 17 or more of the preceding 20 taxation years will find the remittance basis worthwhile if it allows him or her to avoid paying tax on £200,000 or more of income (£200,000 × 45% = £90,000). The choice to be taxed on the remittance basis is made separately for each tax year.

A 2015 government consultation paper includes proposals eliminating the ability to use the remittance basis for individuals who have been resident in the United Kingdom for at least 15 of the past 20 tax years. Also, individuals domiciled in the United Kingdom at birth and who subsequently acquire a foreign domicile will not be able to return to the United Kingdom as non-doms; they will revert to having a UK domicile for tax purposes whenever they are resident in the United Kingdom. Although these changes were to take effect on April 6, 2017, they have not been included in Finance Bill 2016, which is currently before Parliament.

Jamie Herman
Hennick Herman LLP, Richmond Hill
jaherman@hh-llp.ca

Canadian Tax Focus
Volume 6, Number 3, August 2016
©2016, Canadian Tax Foundation