Expatriate tax – what is the tax position when moving to the UK?
For non-UK nationals, relocating to Britain promises the start of many new and exciting experiences, adventures and relationships. Without wishing to dampen high spirits, in the case of the latter, the harsh reality is this is likely to extend to the UK tax authority, ‘HMRC’.
Whichever country you relocate from, expatriate tax affairs can be the source of many headaches. But meeting your liability to UK taxation, in addition to that of your home country, is non-negotiable.
This means taking the time to understand your position and how best to approach managing those liabilities in a tax-efficient manner.
In this article, we take a look at the expatriate tax position in respect of Income Tax, Capital Gains Tax and Inheritance Tax.
Are you UK tax resident?
Your liability to UK tax will be primarily determined by your tax residence.
Residence status and the basis of UK tax liability:
Income Tax (IT)
UK residents: Subject to UK IT on worldwide income
Non UK residents: Subject to UK IT on UK source income only
Capital Gains Tax (CGT)
UK residents: Subject to UK CGT on worldwide chargeable gains
Non UK residents: Not subject to UK CGT on gains (other than residential property since 6 April 2015)
Inheritance Tax (IHT):
UK & Non UK residents: Residence only indirectly affects IHT. UK domiciled individuals will be subject to IHT on their worldwide estate. Those who are long term residents of the UK can be become ‘deemed domiciled’ for IHT purposes and be taxed in the sam way as UK domiciles.
Put simply, individuals classed as UK tax residents will be required to pay tax on income earned in the UK and worldwide, whereas individuals who are not UK resident will be liable to Income Tax on UK source income, and on capital gains relating to UK residential property disposals.How then do you confirm your tax residence?The Statutory Residence Test (SRT) is used to determine if you are UK tax resident.The SRT looks at three main heads applied to your circumstances:
- Automatic Overseas Tests (“AO Tests”). If you qualify as being ‘automatically overseas’ then you are found to be non-UK resident.
- Automatic UK Tests (“AUK Tests”). If one of the tests is met then you are classed as automatically UK resident.
- ‘Sufficient ties’ Test. This test is a tally of the number of ties you have with the UK, and effectively determines the number of days you can be physically present in the UK before becoming resident. Abovethe relevant threshold you will be UK tax resident.
For example, if you have relocated to the UK for employment, you would usually become a UK tax resident from the day you arrive.
However – even where you do not qualify as UK resident, you may still find you are caught by HMRC in the following areas.The SRT can be complex to use, particularly where you are borderline under any of the criteria. Read more about the application of the SRT, or seek advice on your individual circumstances.
Expatriate tax in the UK: Capital gains tax
Liability to capital gains tax arises on the gain (broadly the profit on the disposal) of certain classes of UK assets. The prevailing capital gains tax rate is then applied to the amount of the gain, less any available tax reliefs and exemptions.
Currently, non-UK residents are generally speaking exempt from the UK capital gains regime, except where a gain has been made on the disposal of a UK residential property post-6th April 2015 – known as Non Resident Capital Gains Tax (NRCGT).
Where the property was held before 6th April 2015, the gain is ‘sliced and diced’ into the part that arose before this date – not taxable – and the part from after the date – deemed taxable.
Following the Autumn Budget 2017, NRCGT is being extended to direct holdings of UK commercial property and also to indirect interests in any UK real estate as and when the shares are sold in ‘property-rich’ companies. It is likely that these new rules will be introduced for disposals from April 2019 onwards.
Note also that non-residents must also declare their gains to HMRC within 30 days of the disposal.
Expatriate tax in the UK: Income tax
If you are not UK resident, you will not be liable to pay UK tax on your foreign-earned income.
Your UK income however is a different matter.Your employment earnings in the UK will always be taxable here, regardless of your tax residence status or if you are only working in the UK for a short period.
Non residents who receive an income in the UK are required to disclose their yearly UK earnings on a self-assessment tax return and pay any tax directly themselves.
If you’re an employee in the UK, tax will be deducted directly from your salary via your employer’s payroll system – known as the Pay As You Earn system (PAYE).
The amount of tax you pay will be determined by your UK earnings.
If you will also be in receipt of other sources of UK income in addition to your UK salary – capital gains on UK assets, dividends etc – it’s likely you will have to complete a self-assessment tax return, on an annual basis. Check on the HMRC website if you need to file a tax return.
If you are UK tax resident, you are liable to pay UK taxes on your worldwide income, not just income arising in the UK.
For nationals of some countries (for example, the US) you may also remain a tax resident in your home country, and you will need to manage the double taxation effect, as your UK earnings become taxable both in the UK and in your home country.
The UK benefits from double taxation agreements (DTA) with more than 100 countries, to ensure your income is not taxed twice.
The exact nature of the relief varies between different countries, and the type of income or gains arising – allowing for income tax either to be exempt in one country or for the tax paid in one country to be given as a credit in the other.
To claim treaty relief, you will need to file a self-assessment tax return.
Expatriate tax in the UK: Self-employed non residents in the UK
Self-employed individuals coming to the UK usually face a more complicated tax position;managing business and personal tax matters as well as issues of double taxation.
Depending on your tax residence, operating your business in the UK – for example as a local branch of a foreign limited entity – could bring the profits into the UK tax regime.
We can advise on the position and management of your business and personal tax affairs across the UK and your country of residence.
Expatriate tax in the UK: Other considerations
Temporary non residence
Anti avoidance rules are in place preventing individuals from benefiting from advantageous tax liability following brief periods of non-residence.The temporary non residence rules are complex, and you are advised to seek advice to avoid falling foul of HMRC scrunity.
Of significance for those using the remittance basis, the ‘ordinary residence’ status was abolished effective April 2013. We can advise on the implications and current options.
Domicile and residence are quite different. While not a tax-specific concept, domicile does have a number of tax consequences.
If you were born in for example Russia and lived and worked there all your life, and then aged 50 decided to move to London, you would be non UK domiciled. It is possible, and quite common, to be UK tax resident without being UK domiciled, meaning you are liable to tax on your UK income, capital gains on UK assets and foreign income and gains brought into the UK (known as “the remittance basis”.
Holding ‘non dom’ status can be favourable in tax terms, albeit the advantages have been curtailed by recent changes in legislation. If you hold non-dom status, despite being UK tax resident, provided your income is not brought into the UK, it can remain beyond the clutches of the UK tax regime.
The taxation of non-doms and the remittance basis are complex. For example, it’s not always advantageous to claim the remittance basis for foreign income and gains, so specialist advice should be sought if you think this applies to you.
Leaving the UK
When you leave the UK, your tax year will usually be split into two – a non-resident part and a resident part. This means you only pay UK tax on foreign income based on the time you were living here. This is called ‘split-year treatment’.
You don’t need to claim split-year treatment – it will be applied automatically if you meet the relevant conditions. However if you are completing a self-assessment tax return you may need to understand whether and how the split-year treatment applies to you in the tax year in which you leave the UK to complete the return correctly. In these instances we would recommend seeking specialist advice.
Enterprise Tax can advise on expatriate tax issues of moving to the UK
As specialist tax advisers, we are experienced in helping non-UK tax residents and non-doms to manage their tax affairs, in the UK and overseas.We can help with:
For more information, please contact one of our chartered tax advisers.