UK FAQ's

I’m being seconded to the UK. Is there anything I can do to minimise my taxes?

Yes. However this does depend on your personal circumstances and in particular your residency and domicile position. If you are considered resident but not ordinarily resident in the UK it is possible to get tax relief on your earnings for the days you worked outside the UK.

Furthermore if you are considered not domiciled for UK tax purposes you may not be subject to UK tax on the investment income you generate outside the UK. Further professional advice should be sought before your assignment in the UK begins.

What are the rates of income and capital gains tax in the UK?

The rates if income tax in the UK for the 2008/09 tax year are 20% and 40%. All UK residents are entitled to a personal allowance of £6,035 (though this may be taken away – see later questions to see in what circumstances this may happen) on which they do not pay tax. Thereafter the next £34,800 of income is taxed at 20% and above this amount, tax is charged at 40%.
Capital gains tax is levied at a flat rate of 18% on the “profit” on the disposal of certain assets. This rate may be reduced to 10% on the disposal of certain business interests.

I live and work in the UK but I also suffer foreign tax on income from overseas? Should I be paying tax in the UK as well as overseas?

If you are suffering foreign tax on income generated overseas it is possible for you to claim foreign tax credits against such income if it is subject to UK tax. However under certain double taxation treaties the right of tax may fall to the UK authorities. In this scenario it would be necessary to make a claim for repayment in the country the tax was withheld.

I’m a UK citizen going to work in the US. Is there anything I need to consider?

Moving overseas is a major step and such a move should not be made without seeking professional tax advice. Some issues you should consider are;
In the US you may suffer State income tax as well as Federal tax.
The US generally taxes on a cash basis. If you were to receive income, sell an asset or exercise stock option while US resident, irrespective of when the income was earned, the asset purchased or the stock options were granted, you will suffer US tax on these events.
You may have UK tax efficient savings or pension plans that are currently chargeable to tax in the US.
Moving abroad can provide an opportunity for tax planning and minimisation, but it is important that a full tax strategy is prepared before the move, not afterwards.

My spouse is not domiciled in the UK. Does this affect our tax situation?

In a word – yes. Domicile is an important concept in UK taxation and in particular Inheritance Tax. The whole concept of transfers between spouses is predicated on the basis that both spouses are either UK domiciled or non-UK domiciled. Where one spouse is domiciled outside the UK and the other is domiciled in the UK, detailed estate planning is required in order to avoid potentially disastrous tax burdens on the family.

I am currently not domiciled in the UK but have been resident in the UK for a number of years and have heard this may affect my domicile position. Is this correct?

In short – yes. Domicile is an important concept in UK taxation for income, capital gains and inheritance tax. In the UK domicile is a common law concept and is not defined within tax legislation. However within the legislation pertaining to inheritance tax a concept known as “deemed domicile” was introduced. After an individual has been resident in the UK for at least seventeen of the previous twenty UK tax years, they will be considered to be a domicile for UK inheritance tax purposes ONLY. For this test, if you are resident for a part of a UK tax year, then this is treated as residence for the whole year. The consequences of being deemed domiciled for UK inheritance tax purposes will mean that your worldwide assets will come into the charge to UK inheritance tax and your ability to settle assets in trust is severely restricted. The UK does have a few Estate Taxes treaties with other jurisdictions, including the US, which could also affect the tax consequences of any proposed transfers during lifetime or on death.
You should note that the principle of deemed domicile is currently only applicable to inheritance tax and you will still be subject to UK income and capital gains tax on your non-UK assets in the same manner unless you acquire a domicile of choice in the UK under common law.
Professional advice should be sought by anyone who is concerned by their domicile position and the effect it may have on their tax affairs.

I am currently non-resident for UK tax purposes but I own an investment property in the UK that is currently let through an agent. The agent is withholding UK tax against the income I receive, is this correct?

In principle, yes. As a non-resident of the UK, HM Revenue & Customs (HMRC) will seek to tax UK income at source. It is possible to apply for such income to be paid gross. A Form NRL1 (for individuals) can be filed with HMRC to declare that you are up to date with your tax filings and payments and that you agree to file and pay all future taxes on a timely basis. If you obtain approval from HMRC the tenant will no longer need to withhold UK taxes. This does not abate the need to file and pay UK income tax with regards to the UK rental income you receive. This should still be done annually.

I am currently not domiciled in the UK but would like to obtain a UK passport/citizenship. Will this affect my UK residency and/or domicile status?

Without wishing to sit on the fence the answer to this question is yes and no. Obtaining a UK passport will certainly not impact your UK residency status as this is dependent upon the time spent in the UK allied to your current, past and future intentions.
With regards to one's domicile position, as stated above this is a common law concept in the UK and not one action by an individual will cause a persons domicile to change. A fundamental principle of domicile under UK law is that every person receives at birth a ‘domicile of origin’. A domicile of origin is generally the fathers domicile at the time of one's birth, although different circumstances give rise to different answers so if you wish to obtain clarity please seek further professional advice.
It is an onerous task to change one's domicile of origin by acquiring a domicile of choice. A number of factors will decide whether a person has acquired a domicile of choice. Acquiring a UK passport or citizenship does not in itself lend to acquiring a domicile of choice in the UK but it is a factor that will need to be considered if a person’s domicile is challenged by HMRC.
If you have any concerns at all in this regard you should seek professional advice.

I am currently resident in the UK and use my offshore credit card as well as funds from my offshore bank account in the UK. Are there any tax implications in doing so?

Unfortunately this is a possibility. If you are UK domiciled you will be subject to tax on a worldwide basis, so this is not typically an issue. However, care will need to be taken if you have acquired a UK domicile as there are special rules dealing with income and gains earned whilst you were non-UK domiciled.

Non-UK domiciled individuals who claim the remittance basis of taxation are only subject to tax on their foreign income and gains if they are subsequently “remitted” to the UK. The definition of a remittance has been widened in the Finance Act 2008, so as to catch just about all circumstances where foreign income and gains are brought to the UK. This includes situations where a credit card is used in the UK and the credit card is settled with non-UK income or gains. There are specific new rules dealing with the matching of remittances to the UK with the types of income and gains that may be contained in the bank account from which the funds originated.

Finally, certain gifts made outside the UK where the funds come to the UK can also be regarded as taxable remittances to the UK made by the donor.

As with all complex tax issues, please seek professional advice should you have any concerns.

I want to purchase a property in the UK, which will be funded in whole or part, from non-UK monies. What are the UK tax consequences of doing this?

As explained above, the new rules on remittances to the UK could well mean that you trigger a tax charge in the UK. Where you need to fund the purchase of a property in the UK with foreign funds, then advice should be sought.

If you finance the purchase of a UK property with a non-UK mortgage, the payment of interest and capital will be regarded as creating a remittance to the UK, which could be subject to UK tax. If you have a non-UK mortgage in place as at 12 March 2008, there are special transitional rules, which may be of assistance.

I’m leaving the UK for a few years and may dispose of some UK and foreign assets while non-resident. As a non-resident of the UK I shouldn’t suffer any UK tax should I?

Typically non-residents of the UK are not subject to UK capital gains tax on disposals of assets during their period of non-residency. However, if that period of non-residency does not cover full five tax years, anti-avoidance provisions within the UK legislation will come in to play. Whether an asset becomes chargeable is then dependent upon the time of acquisition and disposal.
Any assets that would come in to charge based on the above provisions would be chargeable to the individual in the tax year they return to the UK after their period of absence.
If you require further advice on the above please contact Frank Hirth for further help or seek other professional advice.

I am arriving in the UK shortly. When will my residency start?

Where an individual, who at the time is not resident, comes to the UK, his residence status will depend on whether he is a short term visitor or a longer term visitor. This distinction depends initially on the intentions of the individual at the time of his arrival, but if those intentions are subsequently changed, his residence and ordinary residence status may need to be revised.

Longer term visitors
An individual will be treated as resident in the UK:

If he intends to live here permanently or to remain here for two years or more he will be treated as resident from the day of arrival;
If he intends to visit the UK regularly for an average of 91 days or more over the next four years he will be treated as resident from the date of arrival;
For any tax year in which he owns accommodation in the UK or takes such accommodation on a lease of three years or more.

Short Term Visitors
If the intentions of an individual on the length of his stay are indefinite, his residence or ordinary residence status may be determined as above. If not:

He will be treated as resident for any tax year in which he is present in the UK for 183 days;
If he is not present in the UK for 183 days in any year of assessment, but his visits in four consecutive years have averaged 91 days or more, he will be treated as resident and ordinarily resident from the beginning of the fifth year;

If he decides in any of the preceding four years that he intends to make visits averaging 91 days or more, he will be treated as resident and ordinarily resident from the beginning of the year in which he makes that decision.
These rules are complex and professional advice should be sought to determine you residency status as soon as possible.

HM Revenue & Customs is in the process of reviewing the rules on residence and has stated that they will be formulating a revised definition, which will be released by the end of the year and should take effect from 6 April 2009.

What is ordinary residence? How will this affect my tax position?

As if the concept of residence were not complicated enough, there has arisen the concept of ordinary residence! The explanation for the concept is quite simple, even if its definition is more difficult. Tax legislation is intended to tax residents, but if someone absents themselves for tax residence purposes, but without really severing their connection with the United Kingdom the UK government still want to have access to some tax. Thus they have introduced certain legislation that taxes transactions by persons ordinarily resident in the United Kingdom. The main examples are essentially in the capital gains tax area.

Once again, there is no statutory definition of ordinary residence. Broadly it denotes greater permanence than residence and is equivalent to habitual residence (a term in double tax treaties). If an individual is resident in the United Kingdom year after year he is ordinarily resident in the United Kingdom. Similarly, a person may be resident in the United Kingdom, under the 183 day rule without becoming ordinarily resident.

Your ordinary residence status may impact how you are taxed in the UK particularly on your employment income. It is possible to obtain relief against your employment income for earnings that are deemed to be foreign earnings. Foreign earnings relate to the employment income generated while working overseas. As such if you were to work 20% of your time outside the UK it is possible to obtain relief from UK tax against 20% of your employment income as long as a minimum of 20% of your salary was paid and retained outside the UK. Please seek professional advice on the above before undertaking any planning exercises.

What is the significance of domicile to my tax position in the UK?

Domicile is of importance primarily in connection with overseas income. UK residents of foreign domicile are liable to tax on their income and capital gains on a worldwide basis unless they elect to be taxed on a remittance basis.

If an individual has been resident in the UK for less than 7 of the previous 9 UK tax years then they will lose their entitlement to a personal allowance for income tax and an annual exemption for capital gains tax if they claim the remittance basis.

If an individual has been resident in the UK for more than 7 of the previous 9 UK tax years, then they will also need to pay a UK tax charge of £30,000 per annum. This operates so as to disapply the remittance basis of taxation to a nominated amount of non-UK income and gains so as to create a tax charge. The rules on this can be draconian and great care needs to be taken to ensure that the nomination is valid.

It is possible to elect in and out of the remittance basis of taxation, though given the complex rules on remittances particular care needs to be taken with structuring your bank accounts and investments to ensure that you do not fall foul of the rules.

Given the importance of domicile for UK tax and the complexity of the new legislation, it may be necessary to seek professional advice to determine your tax status and organise your affairs in a UK tax efficient manner.

I am leaving the UK, when will my residency cease?

It will depend on your reasons for leaving the UK.

Where an individual goes to work abroad full time in a trade, profession, vocation or employment, his residence status has always been determined without regard to the availability of accommodation in the UK available for his use, provided that none of the activities of the trade, profession or vocation are carried out in the UK, or that all the duties of the employment are performed outside the UK (other than those merely incidental to the overseas duties).

Where an individual goes to work abroad full time in a trade, profession, vocation or employment, he is regarded as not-resident and not-ordinarily resident from the day following the date of his departure to the day preceding his return, provided that:

His absence from the UK and the period of full time work both include at least one complete year of assessment; and
His visits to the UK during the period are less than 183 days in any year and average less than 91 days per year. The average is taken over the period of absence up to a maximum of four years. Any days spent in the UK because of exceptional circumstances beyond the individual's control, such as illness, are not normally counted in computing the average number of days spent in the UK.

On his return to the UK, such an individual is regarded as resident.

Where an individual who is resident in the UK, goes to live abroad (other than to work full time there), the Revenue do not normally consider that he has ceased to be resident unless he can show that he has left permanently or to live abroad for at least three years. If he can give evidence of this (e.g. by acquiring accommodation abroad as a permanent home), he will be provisionally treated as not resident from the day following the date of departure.

An individual leaving the UK who claims he is no longer resident is asked to complete Form P85 which asks for details of his proposed stay abroad. If he has been in employment in the UK he will be given Form P85(S) which, in addition to asking for those details, enables him to claim any repayment of UK tax for the year of departure which may be due.

There are number of other factors that may impact a persons residency status on departure so please seek professional advice to clarify your personal status.

I understand that if I leave a proportion of my income offshore I will not suffer any UK tax on that proportion. Is this correct?

This is correct if you claim the remittance basis of taxation. This should be regarded as a simple economic decision and will depend on the amount of income you generate outside the UK, whether tax is deducted from the income and any requirement for the funds in the UK. As mentioned above, you can elect in and out of the remittance basis of taxation on a year by year basis, though if you choose to do this and require monies in the UK, then care will need to be had to the complex remittance basis rules.

It may be possible to gift income bearing assets to a spouse to improve your respective tax positions, though advice should be taken as this can inadvertently create other unwanted tax consequences.