Many members request information on taxation in the UK and we advise that they consult an independent specialist because every case can be very different and the rules can be as beneficial as they are complex.
However, for a flavour, here are some general guidelines.
The UK tax year runs from 6 April to 5 April [for historic reasons] and a personal tax return is, generally, required to be submitted, with any tax paid, on or before the following 31 January.
The UK operates a self-assessment basis for its tax returns, which means that the taxpayer considers what needs to be reported and calculates the amount due then submits this information to the UK tax authorities, HM Revenue & Customs (HMRC). HMRC then reserve the right to enquire into any items they consider may not have been reported accurately, generally only within 12 months of submission.
Your UK tax position depends on a combination of your UK residence and your ‘domicile’ status.
Even if you are not actually UK resident, if you work for an non-UK employer but spend some of your time working in the UK, the UK can tax you on the proportion of your earnings attributable to the UK ‘duties’. This is very often extinguished if there is a suitable Double Taxation Agreement in place between your host jurisdiction and the UK but you are required to claim the treaty relief.
Alternatively, if you are UK resident and work for a UK employer but you are ‘domiciled’ outside the UK, if some of your ‘duties’ are carried on overseas, in your early years of UK residence you may be able to defer, or even avoid altogether, being taxed on the proportion of the earnings attributable to the overseas ‘duties’.
In some rare cases, ‘dual contracts’ have been used by international groups (usually banks) to materially reduce an employee’s UK income tax exposure but this practice has been significantly curtailed and it has always required very specialist advice and diligent implementation.
The Remittance Basis
Individuals that are UK resident but not UK ‘domiciled’ are taxed by default on their worldwide income and gains. However, the Remittance Basis may be available in relation to your non-UK income and gains such that they are only taxed in the UK when ‘remitted’ here.
The Remittance Basis can be automatic but it is more usually claimed. Where a claim is made, there is also be an associated ‘fee’ once you have been UK resident for 7 tax years. This fee starts at £30,000 and increases the longer you have been UK resident until your 16th year, in which the Remittance Basis is no longer available.
The Remittance Basis can be claimed or not claimed as required in any particular year and is usually claimed on your UK tax return.
Below are some useful definitions relating to the UK tax system?
Resident (now determined by the Statutory Residence Test “SRT”)
This is only a sample of the items in the SRT
- If you are in the UK for 183 days or more in a tax year, you are UK ‘resident’ for that year for tax purposes;
- If you have a ‘home’ in the UK that you spend 30 or more days in and either no ‘home’ overseas or one or more ‘homes’ overseas, where none of which you spend more than 30 days in you could be UK resident;
- If you work full time in the UK for any period of 365 days, you are very likely to be UK resident;
- If you are neither ‘automatically not UK resident’ or ‘automatically UK resident’ under the specific tests, then whether you are UK resident will depend on how many “ties” you have in the UK and how many days you spend in the UK – the more ties, the less time it takes to become UK resident.
- Everyone has only a single ‘domicile’. The most important and binding is your Domicile of Origin, which is acquired at birth. You take your father’s domicile if you are born when your parents are married. It need not be the country in which you are born. For example, if you are born in France while your father is working there, but his permanent home is in the UK, your domicile of origin is in the UK.
- A Domicile of Choice can be adopted by permanently moving to a new specific jurisdiction. This suppresses a Domicile of Origin but if it is lost, the Domicile of Origin revives.
- There is also a concept of Deemed UK Domicile that applies for Income Tax, Capital Gains Tax and Inheritance Tax. This is imposed on individuals with a foreign Domicile of Origin at the beginning of their 16th tax year of UK residence [looking at a rolling 20 year period]. This has a significant impact for those with wealth held outside the UK but can be mitigated with suitable planning so advice should be sought in good time.
The UK has Double Taxation Agreements with many countries that aims to ensure two things:
- You either only pay tax on a particular source of income or gains in one country; or
- Where both countries can tax the same item, you suffer a reduced rate of withholding tax where appropriate and receive credit so you only suffer whichever proves to be the highest effective rate.
If there is no agreement and you have already paid tax overseas you can usually claim either of the following:
- Credit against your UK tax liability; or
- A deduction when arriving at your taxable income or gains.
Note: US citizens are subject to US taxes on their worldwide income and gains and are still required to file their US tax returns regardless of where they are living. If your tax liability is zero there is no penalty for not filing, but you may risk eligibility for future exclusions or deductions by not filing a timely and accurate return–go to https://uk.usembassy.gov/ under ‘U.S. Citizen Services’, particularly https://uk.usembassy.gov/u-s-citizen-services/internal-revenue-service-u-s-taxes/
The Taxation chapter information has been kindly provided by Buzzacott’s Private Client team.