UK tax advisor Kieran offers his consulting services to provide UK expat tax advice on the important tax issues to consider when moving to the United Kingdom.
There are certain UK tax issues that expats need to consider. These are particularly related to whether they are a tax residents or not, and if they must file a tax return.
This guide provides UK expat tax advice on the following topics:
- UK income taxes
- Who has to file a UK tax return?
- UK taxes for non-residents
- UK taxes for residents
- Short-term visits to the UK
- Self-employment in the UK
- Students in the UK
- New tax residence rules: How to determine your UK tax status
- Applying for the residence tests
- Day counting – the midnight rule
- Exceptional circumstances
- Domicile and the remittance basis
- UK capital gains tax (CGT)
UK income taxes
For most people, moving to the UK will mean taking up employment. For tax purposes being an employee is a good thing, not least because your UK tax affairs should be relatively simple – income tax will be automatically deducted from your pay check – but also because your UK employer will take responsibility for paying most of your UK taxes. The UK government provides more information on UK income taxes.
The UK has a system of self-assessment for taxes, similar to the US and Australia. Under this system, anyone subject to pay UK taxes can be required to file an annual tax return to disclose taxable income and capital gains. Fortunately, this requirement does not usually extend to most employees; their taxes are taken care of through the payroll tax deductions or PAYE (Pay As You Earn).
However, even if you pay tax through PAYE on your employment income, you may need to file a self-assessment tax return if you have other income sources. You can do a test to see if you need to file a self-assessment tax return.
Who has to file a UK tax return?
PAYE relates mainly to payments you receive through your employer. It only collects tax on employment earnings. It cannot take into account other income or gains that you might have (especially if they are outside the UK), such as rental earnings, bank interest, or share dividends. If you do have income like this, you could be required to file a tax return.
If you move to the UK for employment you usually become a UK tax resident from the day you arrive. The UK tax year runs from 6 April to 5 April. If you’re in the UK for 183 days or more in a single tax year, you are a UK tax resident for that year. If you are in the country for less than 183 days, you may qualify as a non-resident taxpayer.
Whether you are a tax resident or not is quite complex; the rules changed significantly since tax reforms in April 2013. There are booklets (RDR1 and RDR3) available from HM Revenue & Customs determining your residency status. There are also more details on the new residence rules below.
UK taxes for non-residents
Anyone who is not a UK tax resident is only liable to pay UK tax on their income or gains arising in the UK. For example, if you live and work in the US but have a rental property in the UK you are taxable in the UK on the net UK rental profit.
Non-residents who receive an income in the UK must disclose their yearly UK earnings on a self-assessment tax return and pay any tax directly themselves.
UK taxes for residents
Once you become a UK tax resident, you are liable to pay UK taxes on your worldwide income. For nationals of some countries, you may also remain a tax resident in your home country. In this case, your UK earnings are taxable both in the UK and in your home country.
However, the UK has an extensive network of double taxation agreements – more than 100 at the last count – which ensure that your income is not taxed twice. These double taxation treaties allow for income tax either to be exempt in one country or for the tax paid in one country to be given as a credit in the other. The exact nature of the relief varies between different countries, and the type of income or gains arising.
If you need to claim treaty relief in the UK, you must file a self-assessment tax return. Get professional advice on this point.
Short-term visits to the UK
If you are working in the UK only for a short period, you may not need to become a UK tax resident during your stay. In this case, your income arising outside the UK will not become taxable here. However, your employment earnings in the UK will always be taxable there, regardless of your personal tax residence status.
Self-employment in the UK
If you come to the UK for an extended stay as part of your own business activity then you should seek professional advice, as part or all of your business profits could be taxable in the UK, depending on your tax residence status.
The double taxation treaty with your home country should avoid double taxation of your business income. But if you trade in the UK through a foreign limited company, corporate taxes could be payable in the UK if your company constitutes as a permanent establishment, for example, a UK branch.
Students in the UK
If you come to the UK to study, even for an extended period, you are unlikely to have tax issues. Your income is likely low and for tax purposes, scholarships or bursaries from overseas can usually be disregarded. Family gifts and personal savings before arrival in the UK also don’t count.
But as with anyone else, you are liable to pay taxes on your worldwide earnings if you become a UK tax resident. If you have overseas income sources, these can be subject to taxation, too.
New tax residence rules: How to determine your UK tax status
As outlined above, your tax residence status is fundamental to your UK taxation requirements. The basic structure for determining residency consists of three tests:
- Automatically non-UK resident test
- Automatically UK resident test
- Sufficient ties and day count test.
Before we look at these tests in detail there are some changes which need to be considered:
- Temporary non-residence is stricter: New anti-avoidance rules prevent people from using short periods of non-residence to receive income free of UK tax. These rules already apply to capital gains, pension scheme withdrawals and remittances of foreign income in some cases.
- Ordinary residence is abolished: The concept of ordinary residence was abolished in the April 2013 reforms. In practice, this change affects foreign nationals who claim the remittance basis of taxation.
Applying for the residence tests
The first step is the ‘automatically non-resident’ test.
You are not a UK resident if you:
- spent less than 16 days in the UK during the tax year;
- were not a UK resident in the previous three tax years, and you spent less than 46 days in the UK during the tax year; or
- have left the UK for full-time work abroad (this includes self-employed work).
Work abroad is full-time if it’s more than 35 hours per week during the tax year. As for working in the UK, you can work up to 30 working days per year without violating your non-resident status.
If you don’t qualify automatically as a non-resident under the test above then the next step is to consider whether you would be considered automatically as a UK tax resident.
Automatically UK resident
You will be an automatically UK tax resident for a tax year if:
- you spent at least 183 days in the UK during the tax year;
- your only home was in the UK for more than 90 days during the tax year and you occupied that home for at least 30 days; or
- you were in full-time work in the UK for a continuous 12 month period (not necessarily coinciding with the tax year).
In many cases, it’s possible to not meet the conditions of either the automatic non-resident test or the automatic resident test. In these cases you need to consider a series of further tests known as the ‘sufficient ties test’.
Sufficient ties test
Taken together, the number of your ties with the UK and the days spent in the UK can decide your tax residence status. KPMG wrote an overview of how the UK ties and days tests work together: download it here. Otherwise, the tie tests are listed below:
You have a UK family tie if you are the following relation of a UK resident:
- a spouse
- a civil partner
- someone with whom you are living together as a partner
- a minor child.
A minor who is only resident in the UK because they’re in school isn’t a tie provided they spend less than 21 days in the UK outside term time. A half-term holiday would count as term time for these purposes.
You have a UK accommodation tie if:
- you have available accommodation for a continuous period of at least 91 days in the tax year, ignoring any gaps of fewer than 16 days;
- available accommodation is widely defined, and can include a home in the UK, holiday home, temporary retreat or similar, and can include the use of a hotel if the same hotel is always used.
You have a UK work tie if you spend at least 40 days working in the UK. Here, a working day is at least three hours.
You qualify for the 90-day tie if you have spent more than 90 days in the UK during at least one of the previous two tax years.
This only applies when you leave the UK. You qualify for the UK country tie if the UK was the country where the greatest number of days was spent during a tax year.
Day counting – the midnight rule
For day counting purposes, days spent in the UK at midnight are counted.
However, an anti-avoidance provision applies to those who manipulate this rule to attempt to qualify for non-resident status, despite spending considerable time in the UK and having substantial ties.
Days spent in the UK as a result of exceptional circumstances aren’t counted as UK days, up to a maximum of 60 days.
Domicile and the remittance basis
When researching UK tax conditions, you may come across the term ‘domicile’.
Domicile is different to tax residence – you can be a UK tax resident but domiciled elsewhere. In short, your domicile is your ‘true home’.
If you are domiciled outside the UK then it may be possible to exclude foreign earnings and gains from UK income tax (even if you are a UK tax resident) as long as the income is not brought to the UK. This is being taxed on the remittance basis and is only available to persons who are domiciled outside the UK.
It is not always advantageous to claim the remittance basis for foreign income and gains. Seek specialist advice if you think this applies to you.
UK capital gains tax (CGT)
Not all countries have the concept of capital gains, so this can be overlooked by those coming to the UK. Capital gain refers to the profit made on any investment, which is taxable in certain countries.
If, for example, you had an asset that you acquired at USD 4,000 and sold for USD 7,500, then the profit of USD 3,500 was a capital gain. CGT applies to most assets although there are exemptions for cars, your home and a few other specific assets.
The CGT applies if you’re a UK tax resident and can extend to assets outside the UK. CGT can be avoided by careful financial planning but there are certain traps for the unwary. Seek professional advice.