Tax Implications of Transferring Money to the UK
Billions of pounds in commercial and personal money transfers move through the UK every day. In 2020, the inflow of personal remittances alone was worth 0.1% of GDP. However, funds may be income, savings, sales, deposits, dividends, royalties, gifts, or inheritances, but they all have one thing in common – the taxman (or woman) is watching and if they can, they’ll take their share.
Determining if money received from abroad is liable for tax is not a simple task. A variety of factors come into play. Read on to discover more about the tax implications for the funds you receive from overseas.
Do I have to pay tax on money transferred from overseas?
Possibly. Your residency status, whether the funds are income, savings, a gift, or an inheritance, and what tax treaties the UK has with the sending nation, will determine if you must pay tax or not. However, if you are a UK resident, and the funds are income, or an inheritance from a deceased person who is classed as UK domiciled, then normal UK tax laws will usually apply.
What factors influence taxes?
Tax rules for transferring money to the UK are complicated, with different factors determining if the funds are taxable:
1. Residency status
The residency status of the beneficiary is an important factor in determining if funds transferred from abroad are taxable in the UK. If you are a UK resident, and the funds are classed as income, or an inheritance from a deceased person who was also UK domiciled, then you will usually be liable to pay tax. If you are deemed to be a non-UK resident, then you will not have to pay taxes on income or an inheritance from abroad.
Whether or not an individual is a UK resident for tax purposes is determined by the government’s Statutory Residency Test, key elements of which are:
If you’ve lived in the UK for 183 days or more in the tax year, you are a UK resident. No other tests need be considered.
- You are a non-UK resident if you were resident in the UK for one or more of the 3 tax years before the current tax year, and you spend less than 16 days in the UK in the tax year.
- You are a non-UK resident if you were resident in the UK for none of the 3 tax years before the current tax year and spend less than 46 days in the UK in the tax year.
- If you work full-time overseas, you are a non-UK resident if you spend less than 91 days in the UK in the tax year.
2. Income, savings, inheritance, or gift?
What are the funds? Are they income, savings, inheritance, a gift? How money coming into the UK from abroad is classified is the second most important point in deciding if it is taxed or not. Generally, income and income from savings are taxable, as are inheritances from deceased persons who are UK domiciled. Transfers of savings, and inheritances from deceased who were not UK domiciled are not liable to tax. Cash gifts from non-UK residents are also tax-free, but you may pay UK tax on any income you derive from the gift, such as bank interest.
HMRC’s definition of income from overseas is broad, and it includes:
- Overseas salary.
- Overseas pension.
- Overseas rental income.
- Profit from running a business overseas.
- Gains from selling an asset (such as an overseas property or shares held abroad).
- Interest on savings.
3. Source of funds
The reporting of money received from abroad is similar, regardless of which country the funds come from. However, the source of funds matters because it determines if the UK has a tax treaty with that nation, and if funds are taxable in the country of origin or the UK.
Do you pay tax on inheritance money from abroad?
It depends where the deceased was domiciled. If they were permanently domiciled out of the UK, inheritance tax is only due on any UK assets they may have, (i.e., real estate or bank accounts). If the deceased has lived in the UK for 15 of the last 20 years, or they had a permanent home in the UK during any of the last 3 years of their life, they are classed as UK-domiciled and standard UK inheritance tax rules will apply.
What are the tax limits for UK non-domiciled people?
Many people who are resident in the United Kingdom, but are not domiciled in the UK, (such as foreign students, or migrant workers on temporary contract who are permanently domiciled in another country), receive money from abroad to cover costs and expenses. These beneficiaries are entitled to certain tax-free allowances:
- When foreign income is under £2,000.
- When foreign employment income is under £10,000 and tax is already paid in the country it was earned in, (or none if that nation had a 0% income tax rate).
- When foreign investment income is under £100.
There are no tax implications for incoming money transfers that meet these allowances.
What is the Remittance Basis?
The Remittance Basis is a tax limitation scheme for individuals who are a resident of the United Kingdom but are not domiciled in the UK. Individuals pay a fixed sum to HMRC to prevent them from having to pay tax in the UK on all their overseas earnings. Current Remittance Basis charges are:
- If the individual is non-domiciled in the UK but has been a resident in the UK for seven out of the last nine years, the annual charge is £30,000.
- If you, as the individual, are non-domiciled in the UK but have been a resident in the UK for twelve of the last fourteen tax years, the annual charge is £60,000.
The Remittance Basis allows individuals to only pay tax on money that is transferred to the UK instead of being taxed on all overseas earnings. Therefore, the Remittance Basis is only appropriate for individuals who have overseas income on which they know their UK tax on that income would exceed either £30,000 or £60,000 per year.
How to limit one of life’s great certainties
Only two things in life are certain, and taxes are one of them. However, what you pay, why you pay, or even if you should pay at all, can be confusing when it comes to incoming money transfers. A myriad of rules, allowances, and determinations must be considered, and it is easy to make mistakes that could prove expensive. The key lesson here is that it doesn’t matter if individuals or businesses (https://www.cleartreasury.co.uk/insight/move-currency-offices) receive funds from abroad rarely or regularly, they must always seek financial advice to limit their UK tax exposure.
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