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.
If you are planning to move to the United Kingdom there are certain UK tax issues that expats need to consider, particularly related to whether they will be classed as UK tax residents or non-UK tax residents, and if they are required to file a UK 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)
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 as their taxes are taken care of through the payroll tax deductions known as PAYE (Pay As You Earn).
However, even if you are paying tax through PAYE on your employment income, you may be required 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.
PAYE relates mainly to payments you receive through your employer, so 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 (for historical reasons), and if you are in the UK for 183 days or more in a single tax year you will be classed as 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 classified as a tax resident or non-resident is quite complicated, and the rules have changed significantly since tax reforms in April 2013. There are booklets (RDR1 and RDR3) available from HM Revenue & Customs determining your residency status, and there are more details on the new residence rules below.
Anyone who is not classed as 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 are required to disclose their yearly UK earnings on a self-assessment tax return and pay any tax directly themselves.
Once you become a UK tax resident, you are liable to pay UK taxes on your worldwide income, not just income arising in the UK. For nationals of some countries (for example, the US) you may also remain a tax resident in your home country (ie. double taxation), so 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 will certainly need to file a self-assessment tax return and professional advice on this point will most likely be needed.
If you are working in the UK only for a short period, you may not be required 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.
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.
If you come to the UK to study, even for an extended period, you are unlikely to have tax issues. Your income will likely be low and for tax purposes, scholarships or bursaries from overseas can usually be disregarded, as can family gifts and personal savings accumulated before arrival in the UK.
But as with anyone else, you are liable to pay taxes on your worldwide earnings if you become a UK tax resident, so if you have overseas income sources these can be subject to taxation, too.
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, targeted anti-avoidance rules have been introduced to 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 (see below).
The first step is the ‘automatically non-resident’ test.
You will not be classed as a UK resident if:
- you spent less than 16 days in the UK during the tax year;
- you 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
- you have left the UK for full-time work abroad (this includes self-employed work).
For the purposes of this test, work abroad is considered to be ‘full-time’ if it is on average more than 35 hours per week over the whole tax year. Where some employment duties are performed in the UK you can spend up to 30 working days per year in the UK without violating your non-resident status.
If you do not 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 is 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 have written a very good overview of how the UK ties and UK 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 child who is only resident in the UK because they are in full-time education would not be considered 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, where a working day is defined as minimum three hours.
You will 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 will qualify for the UK country tie if the UK was the country where the greatest number of days was spent during a tax year.
For day counting purposes, days spent in the UK at midnight are counted.
However an anti-avoidance provision will apply to individuals 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 will not to be counted as UK days, up to a maximum of 60 days.
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 known as 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, so specialist advice should be sought if you think this applies to you.
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 – say stocks – 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.
CGT applies if you are a UK tax resident and can extend to assets outside the UK depending on your domicile status. CGT can be avoided by careful financial planning but there are certain traps for the unwary, so it’s important to seek professional advice.