Personal taxation

An individual’s residence status for the purposes of taxatio...

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...rent ways, affect an individual’s liability for UK taxes.

In each tax year, the residence status of each individual has to be established. A new statutory test to achieve this was introduced from 6 April 2013 and consists of three parts.

Automatically not resident in the UK

The 'automatic overseas' tests determine non-UK residency. Always treated as non-resident will be:

Individuals who are in the UK for fewer than 16 days in the tax year

Individuals who have not been resident in any of the three previous tax years and are resident for less than 46 days in the current tax year

Individuals who have left the UK to carry out full-time work (35 hours per week if employed or as a self-employed individual), if they are in the UK for fewer than 91 days in the tax year and fewer than 31 of these days are spent working in the UK (a working day is classed as a period longer than three hours)

Automatically resident in the UK

If an individual does not meet any of the overseas tests, they will be considered UK resident if:

They are in the UK for 183 days or more in the tax year

Their only home is in the UK (i.e they have a UK home for at least 91 consecutive days and live in it for at least 30 days in the tax year)

They carry out full time work in the UK

For example, Beryl, who is now retired, lives in her villa in Portugal from October to February each year and returns to the UK from March to Septe...

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...to the 'deeming rule' where:

They have three or more ties for the tax year

They have been present in the UK on more than 30 days without being present in the tax year (known as qualifying days)

They have been resident in one or more of the three previous tax years

If all three conditions are met, then the deeming rule means that after the first 30 qualifying days, all subsequent qualifying days within the tax year will be treated as days of presence.

For example, Mary was resident in the UK until 2023/24. For 2023/24 she does not meet any of the automatic tests but has four UK ties. During the tax year she spent 40 days in the UK where she was present at midnight and also present on a further 50 days. Mary is a leaver and without the deeming rule she would be treated as if she had spent between 16 and 45 days in the UK and would not be UK resident. However, she meets the conditions for the deeming rule to apply and so she must count an additional 20 days (the first 30 qualifying days are excluded). She is therefore treated as spending between 46 and 90 days in the UK and, with the four UK ties, is a UK resident for 2023/24.

If an individual who is treated as UK resident goes abroad to take up a contract of employment that will last for at least a complete tax year, how will they be treated in relation to residence status?

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Domicile is different from residence and nationality. It is the country which is an individual’s natural home and the place they would return to if they went abroad. While residence status can change, domicile is usually held for life, even if long periods are spent abroad.

Under UK law it is not possible to have a dual domicile.

Domicile of origin

Domicile of origin is given at birth. In England and Wales, children normally take the domicile of their father, with illegitimate children or those born after a father’s death taking the domicile of their mother. Domicile of origin follows that of the relevant parent until the child reaches age 16. In Scotland, the child takes the domicile of the country with which they are most closely connected. A wife’s domicil...

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...ter 10 December 1974, their UK domicile status remains for three years after they acquire a domicile of choice in a foreign country. This means that there will be a minimum of three years after departure from the UK before foreign assets can be disposed of without a liability for UK inheritance tax. In reality, the actual timescale may be much longer, as the three-year period only begins after the new domicile of choice has been acquired.

From 6 April 2013, changes in legislation allow individuals who are domiciled outside of the UK and have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for IHT purposes.

What will happen to an individual who acquires a domicile of choice and then later abandons it?

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Most individuals in the UK are resident and domiciled here, but the rules vary depending on the exact status.

Resident in the UK

In relation to income tax, all worldwide earned and investment income, whether or not it is brought into the UK, is liable. Only 90% of income from a foreign pension is liable and relief is available where overseas investment income cannot be brought into the UK because of exchange restrictions in the country of origin.

A liability for capital gains tax arises on chargeable gains that occur anywhere in the world.

Where the individual is also domiciled in the UK they will be liable for inheritance tax on assets anywhere in the world.

Not resident in the UK

The taxation of individuals who are not resident in the UK but have a UK domicile varies depending on the particular ...

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...resident for any part of at least four out of the seven tax years immediately preceding their year of departure and became non-resident for a period of less than five tax years. Any gains made in the year that someone leaves the UK are taxable in that tax year and any future gains will become taxable in the year they resume residence. Any gains made on the disposal of assets acquired after becoming non-resident, and in years of non-residence, are fully exempt.

Inheritance tax

Where an individual is treated as domiciled in the UK, inheritance tax is chargeable on transfers of property anywhere in the world.

When would an individual who is not resident  in the UK not be liable for income tax on income from employment duties performed in the UK?

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Prior to the 6 April 2008, individuals who had a domicile outside of the UK were able to obtain tax benefits, but this changed with the Finance Act 2008. The main change brought about by the Act is that certain people who claim the remittance basis are now liable for an annual tax charge.

The remittance basis

Individuals who are domiciled outside of the UK (and in some circumstances individuals who are domiciled in the UK) may be taxed on income arising outside of the UK on the remittance basis. We clarified in the section on domicile that, in general terms, this means they are only taxable on income brought into and used in the UK.

More specifically, income and gains are treated as remitted to the UK if the following two conditions are met. Firstly, if money or property is brought to, received or used in the UK, by or for the benefit of a relevant person, or services are provided in the UK for the benefit of such a person. Secondly, the property or consideration for the service consists of, or is directly or indirectly derived from, the income or gains, or the income or gains are used abroad in a direct or indirect way to pay for the property or service. These conditions also cover remittances by way of a gift to another person and remittances involving connected operations. An outright gift to an individual who then brings the money into the UK is outside of the scope.

A ‘relevant person’ is defined as a taxpayer, their spouse or civil partn...

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...inheritance tax liability. If he remains in the UK and has been resident for 7 years, he will become liable for the annual charge if he starts to claim the remittance basis. It would, however, only be worthwhile claiming the remittance basis if his unremitted income is more than £75,000 (£75,000 x 40% = £30,000) or £140,000 (£140,000 x 40% = £60,000).

Not resident in the UK

Income tax

For individuals who are not resident or domiciled in the UK, they are generally only subject to UK income tax on investment income arising in the UK (in the same way as those who are UK domiciled), employment income from duties and trades carried on in the UK and income arising from UK property.

Capital gains tax

Unless the individual is a temporary non-resident there will be no liability for capital gains tax.  Temporary non-residents are liable for tax on gains made during the period of temporary non-residence, but can elect for this to be taxed on the remittance basis. The definition of temporary non-resident and timing of the tax charge is the same as for individuals who are UK domiciled.

Inheritance tax

A liability for inheritance tax will arise of the transfer of property situated in the UK.

The annual tax charge introduced in the Finance Act 2008 for those claiming taxation on the remittance basis does not apply where the unremitted income and gains are less than what amount?

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Each individual is responsible for determining their own residence and domicile status and calculating their appropriate tax liability in the UK under the self-assessment system.  Those individuals required to complete a tax return must also complete the non-residence pages if, in a particular tax year, they consider themselves to be not UK resident, resident for only part of a year or not domiciled in the UK and it is relevant to their income or capital gains.  If these additional pages are not completed, they will ...

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....

Where a domiciled individual then claims non-domicile status for the first time on a tax return, they will have to state the exact date when the domicile changed and answer additional questions. Where a first-time non-domicile claim is made without advance authorisation, HMRC will open an enquiry to fully investigate the circumstances.

Where an individual is claiming non-resident status on their self assessment tax return, what additional information will they need to provide to HMRC?

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To avoid the situation where an individual may have income or gains from a source in one country while being resident in another, and therefore being liable for tax in both countries, the UK has entered into double tax agreements with 150 countries around the world. The full list of these can be found on the HMRC website.

Residence status

An individual may be regarded as a UK resident and also a resident of another country at the same time, which may result in an element of double taxation. Most double taxation agreements have a process for establishing a single residence status.

Non-residents

A resident of a country which has a double taxation agreement with the UK may be able to claim a total or partial exemption from UK tax on some types of income from UK sources and capital gains tax on the disposal of asse...

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...any countries charge a form of capital gains tax on local property held by non-residents. If a double taxation agreement exists, a credit will usually be given against the UK tax for any foreign tax paid. This could eliminate the UK liability if the foreign tax is higher, but any excess cannot be repaid.

Inheritance tax

Many double taxation agreements include provisions to prevent a double tax charge on the transfer of assets on death. A unilateral agreement also exists which allows HMRC to give a credit against any foreign tax paid on transfers of foreign property that have had a tax imposed on them similar to inheritance tax.

Explain the tax liability of a non-UK resident, who is eligible, through a double taxation agreement, to receive a tax credit with a dividend payment.

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There are special rules which apply to trusts set up by individuals domiciled outside of the UK, which are complex and subject to anti-avoidance legislation.

In overview:

An overseas trust can become subject to UK income tax if it has a UK resident trustee

If there are no UK trustees, it is not subject to UK income tax, but anti-avoidance...

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...poses with the normal consequences applying

An overseas trust created prior to the settlor becoming deemed domiciled in the UK can retain its tax advantages if the settlor, their spouse and/or minor children do not benefit from it

How would an overseas trust be treated in relation to capital gains tax?

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The establishing of an individual’s residence and domicile status can be a complex and lengthy process. For this reason, it is always advisable for individuals leaving the UK for prolonged periods of time to take professional advice. This can greatly assist in planning the most tax-efficient way of handling their affairs.

This chapter has contained many detailed and complex explanations for the extensive number of possible residence and domicile status scenarios. To assist with your learning, you can f...

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...s not domiciled in the UK or the Republic of Ireland.

** The annual tax charge of £30,000 is payable under the remittance basis where the individual has been resident in the UK for at least 7 out of the previous 9 years. The charge increases to £60,000 where residence in the UK has been for at least 12 out of the previous 14 tax years. The tax charge is imposed on income and gains that remain outside of the UK and is in addition to any tax paid on income and gains that are remitted.

 

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