Background to the UK tax system – Domicile, Residency & Income Tax
The law of domicile has a fundamental bearing on the way that individuals are subject to tax on their foreign income and capital gains. Domicile is a common law concept and an individual is domiciled in the jurisdiction that he or she regards his or her permanent home. You cannot have more than one domicile at any time.
An individual’s residence status and their domicile will affect the extent to which their income and capital gains are taxable in the UK. In the UK an individual’s residence status is determined by the Statutory Residence Test (SRT). Residence applies on a tax year basis and the UK tax year runs from 6 April to 5 April. The SRT contains some detailed rules but to summarise, there are three tests which must be considered:
- Automatic non-UK residence test – if the individual meets this test then they are non-UK resident. If they do not meet this test, they move on to test 2;
- Automatic UK residence test – if the individual meets this test then they are UK resident. If they do not, then they move on and consider test 3;
- Sufficient ties test – this test considers the number of ties an individual has to the UK in conjunction with their days of UK presence to determine residence status. The more ties they have to the UK the fewer days they can spend in the UK without becoming UK resident.
Split Year Treatment – Overseas & UK
For individuals coming to the UK, It is possible for a tax year of arrival to be ‘split’ between a UK and an overseas part. If split year applies an individual will only be taxable as a UK resident for the UK part of the tax year.
Double Taxation Treaties
In some cases, double taxation treaties will be relevant and should be used to determine where an individual is treated as resident in the UK or the other jurisdiction. The individual must meet the residence tests in both jurisdictions in order to use the double tax treaty for this purpose.
Taxation of Income & Gains
An individual’s residence and domicile position are the key factors in determining the extent to which UK taxes will apply. UK taxation will apply as set out in the table below and is subject to the terms of any relevant double taxation treaty.
|Type of income or gains||UK resident and UK domiciled||UK resident, non- UK domiciled||Non-UK resident|
|UK employment income||Taxable in full||Taxable in full||Taxable in full|
|UK investment income||Taxable in full||Taxable in full||Taxable to the extent tax is deducted at source|
Rental income – Taxable in full
|Non-UK employment income||Taxable in full||Taxable in full unless foreign employer and duties wholly overseas. Subject to remittance basis of taxation|
|Non-UK investment income||Taxable in full||Taxable in full subject to remittance basis of taxation||Not taxable|
|UK capital gains||Taxable in full||Taxable in full||Only taxable if the disposal relates to an interest in UK property or land .|
|Non- UK capital gains||Taxable in full||Taxable in full subject to remittance basis of taxation||Not taxable|
Remittance Basis Tax
UK resident and non-UK domiciled individuals may be taxable on the ‘remittance basis’, meaning that their foreign income and gains are only subject to UK tax to the extent they are brought into the UK. The remittance basis applies on a tax year basis and in some cases the remittance basis may apply automatically (if your foreign income and gains are less than £2,000). In others, it will need to be claimed. If you claim the remittance basis the individual will lose the benefit of the annual tax allowances. Once an individual has been resident for a sufficient number of years a charge will need to be paid in order access the regime.
There are a number of actions that you should consider before becoming UK resident. For example:
Segregation of funds – if you would like to be taxed on the remittance basis in the UK you should consider segregating your funds so that you are able to identify tax consequences of making a remittance from a particular source. Funds which can be remitted free of UK tax consequences are known as ‘clean capital’ and this includes income and gains which you receive before commencing UK residence. Clean capital should be kept separate to foreign income and gains to which the remittance basis of taxation applies.
Accelerating payments – If there is any flexibility as to when income and gains can be realised, you may wish to consider that this happens before you commence UK residence (e.g. distributions from trusts or the payment of dividends/bonus etc).
Responsibilities – If you are a trustee or director of a company or have another position, care should be taken to review the position before you become UK resident as the relevant entity may become UK resident by virtue of your personal residence position.
Review of worldwide asset and income sources – to understand any UK issues which may arise.
The above is just a summary of things that you may wish to consider. Further advice should be sought if this is relevant to you.
UK Tax Returns
The UK operates a system of self-assessment for individuals and it is therefore the taxpayer’s responsibility to declare income and gains arising. You may need to file a tax return to HMRC to report your income or gains or to make a claim for the remittance basis of taxation. You do not need to do a tax return if the remittance basis applies automatically as your foreign income ang gains are less than £2,000. The deadline for submission of the UK tax return is 31 January following the tax year end. For the current 2020/21 tax year (6 April 2020 – 5 April 2021) the tax return is due 31 January 2022.
UK Inheritance Tax
The worldwide estates of UK domiciled and UK deemed domiciled individuals are chargeable to UK IHT. Someone is deemed domiciled in the UK if they have been UK resident for 15 out of the preceding 20 tax years. Non-UK domiciled individuals (who are not deemed domiciled under the rules) are only within the scope of UK IHT on their UK situs assets or foreign assets which derived value from UK property.
If you, or one of your clients, are considering a move to the UK and are wondering about the tax implications then please get in touch.
Read more about international tax for non residents as well as Domicile and Non Dom Tax Advice or be sure to read about expanding a business overseas, even more info on corporate and business tax advice.