An individual’s tax residence and domicile status will determine their UK tax liability for any tax year.
Residence and domicile
The statutory residence test (SRT) has applied since April 2013 and we have a flowchart available to give an indication of when an individual will be classed as resident or non-resident in the UK. It may be possible to split the tax year of departure from the UK, meaning that some ‘post departure’ income and gains will not be taxed. The SRT and split year rules are complex and detailed advice should be obtained if relevant.
A person’s country of domicile has its basis in international law and is considered separately from tax residence. In very broad terms, it is the country in which an individual has their permanent home. A UK domicile of origin is only likely to be lost if the intention is to settle abroad permanently and indefinitely, sufficiently severing ties with the UK.
Any individual who has been resident in the UK for 15 of the past 20 tax years will be deemed to be UK domiciled for tax purposes, unless they are non-resident in the current and all of the previous three tax years.
Income Tax for non-UK residents
Non-UK residents are only subject to income tax on UK source income. For the 2019/20 tax year, the rates of income tax payable on taxable income after deducting any personal tax allowances available are listed below. There are special rates for dividend income. This is a broad overview, and there are other allowances, reliefs and restrictions that may apply.
|Band||Taxable income||Tax rate||Special dividend rate|
|Basic rate||Up to £37,500||20%||7.5%|
|Higher rate||£37,50 to £150,000||40%||32.5%|
|Additional rate||Over £150,000||45%||38.1%|
A non-resident is taxable on UK source savings income, and UK dividend income is deemed to have a 7.5% tax credit attached to it. The non-resident can either be taxed under the normal rules, or disclaim any entitlement to the income tax personal allowance and limit their UK tax liability on UK savings income to the UK tax deducted at source.
Rental income from UK property is taxable in the UK, regardless of the landlord’s residence position. The tenant or letting agent for a non-resident landlord of a UK property is required to account to HMRC for basic rate tax (currently 20%) at source on the rental income arising, unless the landlord registers under the Non-Resident Landlord Scheme and completes annual UK tax returns. Any additional tax must be paid through self-assessment. The restriction of tax liability to tax deducted at source does not apply to property income.
A UK tax liability will only arise on income relating to a UK employment or a foreign employment where duties that are more than incidental are performed in the UK.
Returning to the UK within five years
Individuals who leave the UK and then return to the UK after a period of non-UK residence of five years or less may have to pay income tax on specific types of income arising during the period of non-residence, such as some pension payments, certain distributions from closely controlled companies, chargeable event gains, and some remittances of foreign income. Consideration should be given to keeping appropriate records.
Capital gains (CGT) for non-UK residents
The maximum rate of CGT is 20% (28% for disposals of residential property and carried interest).
A non-UK resident is generally only subject to UK CGT in relation to UK property, shares in UK ‘property-rich’ companies and certain business assets. A separate Briefing Note is available that deals with the taxation of gains on UK property by non-UK residents.
Individuals returning to the UK after a period of non-UK residence of five years or less may have to pay CGT if they sold assets, held before they left the UK, during the period of non-residence.
Particular care is needed where gains have been ‘held over’ on a gift and the recipient leaves the UK, as this can trigger a CGT charge.
Inheritance Tax (IHT)
An individual with a legal or deemed UK domicile is within the scope of IHT on all worldwide assets. Non-UK domiciled individuals (whether or not UK resident) are liable to UK IHT only on UK situs assets. Shares in a non-UK company are generally treated as non-UK situs. If the non-UK company owns UK residential property the shares are likely to be within the charge to IHT.
If an individual loses their UK domicile, they remain deemed domiciled in the UK and liable to IHT on worldwide assets for at least three years after the change in domicile.
Employed earners - National Insurance contributions (NIC)/social security
Liability for NIC or social security in the UK, or in the new country of residence, will be determined by the countries involved and any reciprocal agreements between them. It may be possible to pay voluntary UK NIC to retain future UK benefits.
For more information please contact your usual Smith & Williamson adviser or:
Geoff Everett - email@example.com
Edward Emblem – firstname.lastname@example.org
Garry Bell – email@example.com
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.