Active and passive income is accounting terminology used to describe how your business generates its income.
If your business is active it generally means that 50% or more of your income is derived from providing a service or trade and you’re actively participating in it. Active businesses may include manufacturing, buying and selling products. An active business will equally mean less than 50% of your income is from passive sources. Some typical examples of active businesses are consulting, manufacturing, accountancy services, farming, retailing.
If your business is passive it generally means more than 50% of your income comes from passive sources such as rent or from assets that produce passive income such as interest or dividends from shares. Examples of this would be investment management, rental income, royalties, landlords.
If you’re unsure of the FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) status of your business, we’d suggest you ask your tax adviser or accountant. Our explanations don’t constitute tax advice.
We may need to let HMRC know about accounts with passive income.