An individual’s UK tax liability is largely determined by their tax residence and domicile status for any tax year.
Residence and domicile
The statutory residence test (SRT) has applied since April 2013 and a flowchart is available to give an indication of when an individual will be classed as resident or non-resident in the UK for tax purposes. It may be possible to split the tax year of arrival in the UK, meaning that some ‘pre-arrival’ income and gains will not be taxed. The SRT and split year rules are extremely complex and detailed advice should be obtained.
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. The father’s country of domicile when the individual is born (known as a domicile of origin) is relevant but this can be superseded by a domicile of dependency or by acquiring a domicile of choice. A domicile of choice is acquired by settling indefinitely in another country and severing ties with the previous country of domicile.
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. A person with a UK domicile of origin who was also born in the UK will be taxed as if they are UK domiciled for income and capital gains tax (CGT) purposes when they become UK tax resident, even if they have previously acquired a non-UK domicile of choice elsewhere. There is a small grace period for such individuals for inheritance tax (IHT) purposes, as they are only deemed domiciled from the start of the second year of residence.
Basis of Taxation
The UK tax year runs to 5 April. A tax return is normally required where tax is payable or if certain tax reliefs (including those under double taxation agreements with other countries) are to be claimed. The filing deadline is 31 January following the end of the tax year, and any tax not collected during the year is also payable at this time.
Individuals who are UK resident and domiciled are taxable on their worldwide income and gains. Where a UK resident is not domiciled or deemed domiciled in the UK, they can elect to be taxed on the remittance basis, being charged to UK tax on all UK income and gains and only on foreign income and gains which are remitted to the UK. However, a remittance basis charge of £30,000 will be payable if the remittance basis is claimed by those who have been UK resident for 7 out of the previous 9 tax years. A higher charge is payable by longer term UK residents. In addition the personal income tax allowance and the CGT annual exemption are lost if the remittance basis is claimed.
For the 2018/19 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, although these do not apply to remitted dividends. This is a broad overview, and there are various other allowances and restrictions that may apply. Relief may be available under double taxation agreements with other countries.
|Band||Taxable income||Tax rate||Special dividend rate|
|Basic rate||Up to £34,500||20%||7.5%|
|Higher rate||£34,501 to £150,000||40%||32.5%|
|Additional rate||Over £150,000||45%||38.1%|
Employees coming to the UK to work may, depending on individual circumstances, be able to claim some travel and subsistence expenses, trips to their home country and tax relief for duties performed outside of the UK as part of their employment.
Individuals returning 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, distributions from closely controlled companies, chargeable event gains and remitted foreign income.
Capital gains tax (CGT)
Individuals will be subject to CGT on the sale of chargeable assets, such as real estate and shares. The maximum rate of CGT is 20% (28% for disposals of residential property and carried interest).
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.
Inheritance tax (IHT)
An individual with a legal or deemed UK domicile is liable to IHT at 40% on all worldwide assets. An IHT free nil rate band of £325,000 (2018/19) is available. 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. Where the non-UK company owns UK residential property however, such shares will be brought within the charge to IHT.
An additional IHT nil rate band of £125,000 may be available in respect of the main residential property in 2018/19, increasing to £175,000 by 2020/21.
Note that even if you have lost your domicile of origin in the UK, you remain ‘deemed’ domiciled in the UK for IHT purposes for the first three tax years after a change in domicile from the UK.
National Insurance contributions (NIC)
Liability for NIC or social security in the UK or in the previous country of residence will be determined by the countries involved and any reciprocal agreements between them.
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.