A fundamental principal of the UK tax system is that everyone resident in the UK is assessed for UK tax on both their UK and foreign income – regardless of where they arise or whether they are subject to taxation elsewhere.
Examples of foreign income include
· Earnings relating to work duties performed in another country (even if this is for a UK employment, or the earnings are paid in or from the UK);
· Profits from running a business in another country;
· Income from renting out a property in another country;
· Gains from selling or giving away overseas assets, for example, a house or shares;
· Interest on savings in overseas bank accounts;
· Overseas pension income ;
· Other overseas investment income, for example, dividends on shares in overseas companies.
Non-residents only pay UK tax on their UK income and gains – they do not pay UK tax on their overseas income
There are special rules for UK residents who are not domiciled in the UK (non-doms) – these are considered later.
Who is a UK Resident ? The Statutory Residence Test
Priorto April 2013, there were no rules to determine a taxpayers residence status and questions of residence were decided by case law. However in schedule 45 of the Finance Act 2013, formal rules were introduced by HMRC to provide clarity and guidance around residence issues and since then, a taxpayers residence in any given tax year is determined through a formal process known as the Statutory Residence Test (SRT). The test examines an individual’s travel, working and other arrangements in some detail and the residence status thus determined is used to assess the taxpayers liability to both Income Tax and Capital Gains Tax. As you will see however, the bar for being non-resident is set quite high and the SRT doesn’t always provide a definitive answer.
The test comprises a number of steps that are applied in the following order (the order is important as it is possible under some circumstances to be resident inthe UK and resident in another country at the same time)
1. If an individual has spent 183 days or more in the UK in any tax year, they are resident for tax purposes.
2. If not, the three automatic non-residence tests are applied – if any one of these is satisfied, the individual is non-resident for tax purposes in that tax year.
3. If these do not apply, the second and third automatic residence tests are applied – if either of these is satisfied, the individual is UK resident for tax purposes in that tax year.
4. If none of the above apply, the sufficient ties tests are applied to determine residence.
In limited exceptional circumstances, specific days spent in the UK can be ignored when counting days for various ofthe tests set out in the earlier flowchart. The exceptional circumstances concession will only apply where the person’s inability to leave the UK is out of their control and applies for a maximum of 60 days in any one tax year. HMRC has confirmed that specific circumstances relating to the Covid-19 pandemic, such as official Government advice not to travel from the UK, will be considered exceptional. However, HMRC will consider the facts and circumstances of each case individually, so advice should be sought before placing any reliance on the concession.
It is also worth being aware as mentioned earlier that just because the SRT has deemed an individual’s residence to be in the UK, that doesn’t mean that they aren’t resident in another country and in some circumstances, it may be possible to be resident in more than one country at the same time according to the specific rules applied to each. Where that is the case, the taxpayer will need to review any double taxation arrangements that may be in place and determine whether any “tiebreaker” clauses exist – the tie breaker clauses will usually trump the UK’s SRT rules.
How HMRC Assess Working Full Time Abroad per the SRT Rules
The question of whether an individual has been working full time abroad is not always as straightforward as simply claiming that they have a full-time job abroad (although in some cases it might be). HMRC apply (quite complex) rules contained within the SRT to make their determination.
Step 1 - The test can be applied to any period of 365 days and starts by determining the number of days in that period where an individual worked in the UK for 3 hours or more on that day. Those days will be disregarded even if the individual did some overseas work on that day too.
Step 2 - The next step involves calculating the net overseas hours worked in that period by adding up all the hours the individual has worked abroad on all employments and trades on the non-disregarded days.
Step 3 – Involves calculating the Reference Period by deducting from the 365 day period above, the following
· Disregarded days
· Gaps in employments (i.e. breaks between jobs – doesnt apply to the self-employed)
· Annual and parenting leave
· Sick leave
Step 4 – The number of days in the Reference Period are then divided by 7 and the answer rounded down to the nearest whole number (ot 1 if less than 1)
Step 5 – The net overseas hours calculated in Step 2 are divided by the number of weeks calculated in Step 4. If the answer is 35 or more, the individual will be judged as having worked abroad full time in that year.
This test can equally be applied in reverse to judge whether an individual has worked full-time in the UK in a given year.
Where the application of the automatic tests doesn’t produce a conclusive determination of residence for an individual, the “sufficient ties” test is applied. In essence this means that residence in the UK will be deemed for those for whom the automatic tests are not conclusive but there are sufficient other ties that suggest they are indeed resident in the UK.
What Happens in the Year you leave or Return to the UK ?
In general terms, the application of the SRT will result in an individual being resident or non-resident for the whole of the tax year. However, when an individual either starts to live abroad, or comes to the UK from abroad in a tax year, it may be possible to split the year into two parts and tax each separately according to the residence status in that part. This is known as split-year treatment
The individual must be UK resident forthe full tax year as determined by the SRT for split-year treatment to be available in that year
There are eight sets of circumstances(each with detailed rules) when SRT may be available
· Case 1 - Starting full time work overseas
· Case 2 - Partner of someone starts full time work overseas
· Case 3 - Ceasing to have a home in the UK
· Case 4 - Starting to have a home in the UK only
· Case 5 - Starting full time work in the UK
· Case 6 - Ceasing full time work abroad
· Case 7 - Partner of someone ceases full time work abroad
· Case 8 - Starting to have a home in the UK (not an only home)
Where an individual's circumstances falls into more than one case, the cases will be prioritised with cases 1-3 being prioritised in that order. For the remainder there are additional rules for which specialist guidance should be sought
In each case, specialist advice shouldbe sought to determine whether split year treatment is available and appropriate.
Domicile and Taxation
Domicile is a general legal concept and is quite different from residence, citizenship or nationality. An individual mayonly have one domicile at a time and is normally regarded as being domiciled in the country where they have their permanent home.
However, there are circumstances where they may have a different domicile and the following three types of domicile are generally recognised :-
· Domicile of origin - Generally acquired from an individual’s father at birth (but where the parents are not married, it is acquired from the mother). It is often the country of where someone was born. An individual born in the UK to a non-UK domiciled father does not automatically become UK domiciled
· Domicile of choice - Obtained once an individual reaches the age of 16, if they are already living in a country other than the domicile of origin and intend to stay there
· Domicile of dependence - Until an individual has the legal capacity to change it, they will generally acquire the domicile of the person on whom they are dependent
In the UK, you normally self-assess your domicile status although if there is a question over your domicile status, a court can make a formal ruling.
Ultimately, having clarity as to your domicile is important because it can affect your tax position. The table below illustrates how the taxation of income and gains is affected by domicile and residence
The key difference between UK domiciled and non-domiciled residents is that UK domiciled residents are taxed on their worldwide income and gains regardless of whether the income or gains arise in the UK or overseas (the Arising Basis of taxation) where as non-domiciled residents have a choice as to how their foreign income and gains are taxed between the Arising Basis or the Remittance Basis (see later for a detailed explanation)
With effect from April 2017, certain individuals who are not UK domiciled will be deemed to have a UK domicile for tax purposes if either
1. They are domiciled outside the UK but were born in the UK with a UK domicile of origin or
2. They have been resident in the UK for 15 of the previous 20 tax years.
Taxation of Non-Doms – The Remittance Basis
Individuals who are resident in the UK but not domiciled in the UK (non-doms) are able to choose how their overseas income and gains are assessed for UK tax. Instead of being taxed on an arising basis (as for UK domiciled individuals), non-doms may opt for their overseas income and gains to be taxed on a remittance basis.
Where they exercise this option, non-doms will only be taxed on foreign income and gains to the extent that they are remitted to the UK (so earnings left abroad are not taxed). Individuals claiming the Remittance Basis will not normally qualify for a personal tax allowance or for the capital gains tax exempt allowance.
In addition to losing their personal allowances, long term UK resident non-Doms are also liable for a special Remittance Basis charge which is payable for each year that the Remittance Basis is claimed and is as follows :-
· UK resident for at least 7 out of the last 9 years - £30,000
· UK resident for at least 12 out of the last 14 years - £60,000
Individuals who have been resident for at least 15 out of the last 20 years cannot claim the Remittance Basis for taxation (they are deemed to be UK domiciled) and overseas income is taxed on an arising basis. Where these charges are payable, they will be in addition to any tax that is due on any remitted income.
For non-doms who have unremitted overseas income and gains of less than £2,000 in a tax year, the remittance basis is applied automatically (so doesn’t have to be claimed) and the personal allowance and the capital gains tax allowance is not withdrawn.
Overseas Workday Relief
If you are non-UK domiciled and come to work in the UK, then provided you have not been resident in the UK for at least the three previous consecutive UK tax years, you may be able to claim tax relief for earnings relating to work you have done overseas in your first three tax years of UK residence. This relief is available for taxpayers who claim the Remittance Basis of taxation and where the earnings relating to their work abroad are paid and not remitted back to the UK. If those earnings however are remitted back to the UK, they will be taxable.
The relief is subject to quite specific conditions and we would strongly advise anyone considering claiming this relief to read HMRC’s guidance on gov.uk. In particular, it's worth knowing that the rules relating to what is deemed to be remitted to the UK from a bank account containing more than one type ofincome are complex. There are simplified rules available if you set up a‘qualifying account’ in advance of receiving your first salary payment.
Non Residents and Investment Income
With the exception of income from property in the UK and investment income connected to a trade in the UK through a permanent establishment, the tax charge for non-residents on investment income arising in the UK is restricted to the amount of tax, if any, deducted at source.
If the tax charge is limited in this way, personal allowances won’t be given against other income. This restriction doesn’t apply in the overseas part of a split year.
If you’re not resident in the UK,the tax you pay on all your income can’t be more than the amount of tax that would be chargeable on income, other than the ‘disregarded income’ shown below, but before the deduction of any personal allowances due plus the amount of tax deducted at source from the ‘disregarded income’
‘Disregarded income’ includes:
· interest and alternative finance receipts from banks and building societies
· dividends from UK companies
· income from unit trusts
· income from National Savings and Investments
· profits from public revenue dividends
· profits or gains from transactions in deposits
· certain social security benefits, such as State pensions or widows’ pensions
· taxable income from purchased life annuities except annuities under personal pension schemes
For non-residents therefore, it is usual to do two tax calculations – one with the income above disregarded and no tax allowances given and another with all income included and full allowances given – the lower amount is then used to determine the taxpayers liability to tax.
In general, it is a principle of UK taxation that income is only taxed once. However, where individuals have overseas earnings, some individuals may find themselves in a situation where they have been taxed twice on the same income - by both the UK and the country they are or have been living in. Many countries have double tax agreements with the UK which may provide partial or full relief dfor double taxation with relief given either before they have been taxed or as a refund after they have been taxed.
Each double tax agreement sets out the country tax is paid in, the country in which relief should be applied for and the amount of relief available.
The types of income on which relief can be obtained include
· Wages and other pay
· Bank interest
Gains from selling UK residential property do not qualify for relief under double taxation agreements.
Where the tax rates in the two countries are different, the higher rate of tax is generally the rate paid.
Property located abroad is not normally subject to inheritance tax (IHT) where the property in question is owned by non-UK residents. Such properties are called excluded properties.
UK residents however should declare their foreign assets and income on the “foreign” section of their tax return and in the event of their death, these assets will be added to their estate and maybe subject to IHT. Where you have a situation like this, it is best to seek professional advice as the rules are complicated.
What the preceding notes should have illustrated is that taxation of overseas income can be a very complex area with lots of detailed rules and regulations. It is therefore hugely important that professional advice is sought as early as possible when doing anything involving overseas income sources.