Your intentions, your ties with the UK and the structure of your assignment or move, can have a huge impact on how you will be taxed in the UK, therefore, it is vital any tax planning takes place before you arrive in or leave the UK, when your move is being planned and structured.
So many people leave this until after they have left or arrived in the UK, thereby missing out on generous tax savings, or worse finding themselves in a double tax situation.
On this website you will find various notes on the UK tax situation surrounding individuals both to and from the UK.
It is impossible to highlight all the possible circumstances you may come across, therefore these notes are intended to be a brief guide to highlight the issues you should consider and are not definitive.
The way you will be taxed in the UK very much depends on your own individual circumstances, therefore, it is important that you seek professional advice as soon as you know you are moving overseas or coming to the UK.
Remember, fees for good quality professional advice may initially appear high, but compared to the tax savings that may arise (see examples) and the peace of mind you achieve from being tax compliant, they are well worth the expense. Don't be tempted to go for the cheapest fee possible. Often you will lose out in the end, with you not getting the level of service you deserve and with corners being cut, leaving you potentially exposed if the Revenue were to enquire into your affairs.
Myths abound about UK taxation of expatriates such as:
"I've been in the UK for less than 183 days therefore I won't be taxed in the UK".
True, there are instances when you may not be taxed in the UK if you are here for less than 183 days, but certain conditions need to be satisfied and often these are not met. In a lot of cases, the individual is taxable in the UK even though they are in the UK for less than 183 days and may not be tax resident.
"I'm paid in my home country, therefore, I won't be taxable in the UK".
Where you are paid does not generally determine what is taxable in the UK (Only in certain situations will this be important). The UK taxes on a source basis, therefore, if you are carrying out work in the UK, this is taxable in the UK no matter where you are paid from or by whom.
"I'm not working in the UK, therefore I'm not taxable in the UK".
If you normally live in the UK and are not absent from the UK for a certain amount of time or retain ties with the UK, you may remain taxable in the UK on your worldwide income, possibly being in a double tax situation where you are taxed twice on the same income.
"My secondment is only a few months, therefore, will be very simple and won't cause any tax issues".
Short assignments often cause the most problems, with double tax issues arising because say UK tax residence hasn't been broken, but the individual has become resident and/or taxable in the country they are visiting.
"I'm leaving the UK and therefore, won't need to pay UK tax."
A common misconception with Brits leaving the UK. Depending on your circumstances, you could well remain taxable in the UK even if you are not a UK tax resident.
Such myths can cause the unwary to get into trouble with the tax authorities and can incur large tax bills, which include penalties surcharges and interest. In the UK, these penalties can be up to a 100% of the outstanding tax due (up to 200% in certain circumstances).
Beware of friends who try to advise you on your tax situation, as so often what is suitable advice for one person is not suitable for another.
Your tax residence status is fundamental as to how you will be taxed in the UK. UK tax residence is established under the Statutory Residence Test (SRT), which, depending on your circumtances, can be a complex and lengthy affair, as it is made up of various subtests. Which tests apply depend on your circumstances each tax year, so different tests may apply each year.
The SRT is basically made up of 3 parts. The first part to look at are the automatic overseas tests. If you satisfy one of these then you are not resident. If you don't satisfy any of these, you then need to look at the second part, the automatic UK tests. If you satisfy one of these tests then you are resident. If not, then you look at the third and final part, the sufficient ties test, which looks at certain ties you have with the UK and the number of days you have spent in the UK. You then refer to specific tables depending on your circumstances for the tax year concerned, to establish if you are resident or not in the UK.
Ordinary residence was a concept used before 6 April 2013. It was a type of residence that had more permanence than just residence alone. Ordinary residence no longer exists, having been abolished when the SRT was introduced during April 2013.
If you left the UK or arrived in the UK before 6 April 2013, then your situation will be more complex as you will be covered by 2 sets of residence rules - the old rules in existence prior to 6 April 2013 and the SRT. The old rules still have some effect on establishing your tax residence now, as some of the tests under the SRT make reference to an individual's residence established under the old rules.
As mentioned above, establishing your tax residence in the UK can be complex and depends on your circumstances each tax year. Tests under the SRT that apply for one year may not apply the following year. Professional advice should therefore be sought, as in practice unexpected results are arising under the SRT e.g. an employee working a typical 9 to 5 day, 5 days a week overseas, may not be regarded as working full-time overseas and so can't claim non-residence under the full-time work overseas test. Similarly, an employee who is on a rota basis (works a number of weeks and then has some weeks off) may also not satisfy the full-time work overseas test and so is not able to claim non-residence under the full-time work overseas test. The only home in the UK test under the automatic UK tests, is also in practice catching out expats outside of the UK and making them resident in the UK. for tax purposes.
It is possible that you may be resident in not only the UK but also another country, for example the country you have just left or going to, leading to the possibility of tax being paid in both the UK and this other country i.e. double taxation arises. In this situation, relief may be available under a double tax treaty that may exist. It is important to realise that certain conditions need to be met, and often these conditions are not met, resulting in no relief being immediately available. In this situation, tax relief is available for either the foreign or UK tax, but this is normally only received when the relevant tax returns have been filed resulting in a long delay in the repayment of tax. This could result in real cash flow issues for yourself (or your employer if you are tax equalised).
Residence for Other Purposes
The above relates to residence for UK income tax purposes only. The definition of residence for UK social security contributions (national insurance contributions - NIC) and benefits, double tax treaties and immigration is different.
Your domicile status can also have an effect on how you are taxed in the UK. Domicile is not your nationality or citizenship. It is a complex area and there are many factors which are taken into account when considering you domicile status. As with residence, your domicile status depends on your circumstances. Generally, your domicile is where your permanent home is; it is where you ultimately intend to end up. You can only have one domicile at any one time.
There 3 types of domicile:
- Domicile of origin
- Domicile of dependency
- Domicile of choice
1. Domicile of origin
When you are born you take on your father's domicile, so if say you are an Australian born in Australia, but your father has a UK domicile (because say he emigrated to Australia from the UK), then your domicile of origin will be UK and not Australian.
2. Domicile of dependency
Until the age of 16, your domicile will follow the domicile of your father or the person who has legal responsibility for you.
3. Domicile of choice
Once you are over 16 you can adopt a domicile of choice, however, if you have a UK domicile of origin, this is extremely difficult to do. You must reside in a country and intend to stay there permanently. Providing evidence of this intention can prove to be extremely difficult and professional advice should be sought sooner rather than later if you are moving permanently away from the UK.
A UK domicile will have important consequences for UK inheritance tax, where tax residence is not important in establishing your inheritance tax liability, which can arise not only on your death, but also on any gifts you make.
Taxation of Earnings in the UK
How your earnings are taxed in the UK will depend on your residence and domicile status.
Any earnings arising in the UK will be taxed in the UK regardless of whether you are resident or not, unless the work you have done in the UK can be argued to be incidental to your overseas work.
If you are resident in the UK, you will be taxed in the UK on all your worldwide earnings.
In certain circumstances you may be able to get relief on overseas workdays if you are a foreign domicile based in the UK. There are a number of important conditions which need to be met with this, one important one being that you must not remit these earnings to the UK otherwise they will become taxable. (Remittance for tax purposes is complex and includes many forms and not just the simple transfer of funds. For instance, the Revenue regard the use of overseas credit cards in the UK to be a remittance. So many foreign nationals working in the UK are caught by this rule.)
If you are a foreign domcile who is resident in the UK, the rules on the remittance basis of taxing overseas income & gains needs to be considered and an assessment made as to whether it is beneficial or not to claim the remittance basis. Very often, less UK tax arises if the remittance basis is not claimed.
Tax planning is available to take advantage of this point, so contact UK Expat to discuss further.
Other UK Income
If you have any source of UK income, this will remain taxable in the UK, regardless of whether you are tax resident or not in the UK. Certain types of income will automatically have tax deducted at source, meaning that in certain situations you may be due a tax repayment, however, you need to claim this. It is not automatically repaid.
Relief or exemption from UK tax may be be available under a double tax treaty (see the double taxation section below), however, this needs to be claimed and is not automatically given.
It is possible to be taxable in both the UK and another country on the same income. This may occur if you are carrying out work say in the UK and haven't broken residence in your home country and so remain taxable in that country. The UK has an extensive system of Double Taxation Treaties with numerous countries around the world. The aim of these treaties is to alleviate double taxation arising. However, there are conditions which need to be met in order to take advantage of a particular treaty, therefore, tax planning before the start of your move is crucial in order to take advantage of these treaties. Very often a tax treaty can't be used, because the relevant conditions have not been met.
If the benefit of a double tax treaty cannot be taken, tax relief is usually available for any double tax paid, however, you need to claim this and there can be a significant time lag between paying the additional tax and obtaining the tax relief. This can cause a real cash flow issue for you.
Contact UK Expat for further details. If you wish to discuss how we can help you with your UK tax, please contact us.
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