A Guide for individuals Coming to the UK
Prepared by Menzies LLP April 2013 Contents Scope 3 Why is my tax residency relevant? 3 When would I be considered resident (UK tax resident) in the UK? 3 Can I be tax resident in more than one country? 3 Can I split the tax year when I arrive in the UK? 3 What about when I leave the UK? 3 What is domicile status? 3 Why is my domicile relevant? 3 Domicile of origin 4 Domicile of choice 4 Deemed domicile for inheritance tax purposes 4 I understand that there are favourable rules for foreign domiciliaries. 4 What is meant by the remittance basis? 4 Do I have to claim for the RBA to apply? 4 I understand that I need to pay the remittance basis Charge in order to claim the remittance basis of assessment. 5 Are there any exceptions where the RBC doesn t apply? 5 What if I choose not to claim the RBA? 5 If I claim the RBA do I need to keep detailed records of my overseas income and gains? 5 Can I remit capital to the UK free of UK tax? 5 Should I keep personal assets outside the UK? 5 I have heard that non UK resident trusts and other structures are helpful to mitigate UK tax? 5 Should I have a UK Will? 6 How will my employment income be taxed in the UK? 6 How is the tax in respect of my employment income paid? 6 Split contracts and separate employments 6 What is Tax Equalisation? 6 Will accommodation expenses that my employer pays for me whilst I am in the UK be taxable in the UK? 7 What about travel and subsistence expenses? 7 What about my relocation expenses? 7 I will continue to pay pension contributions in my home country - how will these be treated for UK tax purposes? 7 Will I qualify for a UK personal allowance? 7 Do I have to pay UK National Insurance contributions? 7 How do I claim for the UK tax paid if I still have to pay tax in my home country? 8
Scope The purpose of this guide is to provide a general response to the more frequently asked questions concerning direct taxes in the UK by those coming to the UK. To that end individuals coming to the UK should also acquaint themselves with the variety of indirect taxes that apply, such as VAT, business rates and council taxes. The direct taxes dealt within this guide concern income tax, which is directed towards an individuals earned and unearned income, capital gains tax (CGT) which is applied to capital gains on the disposal or deemed disposal of capital assets, such as investments and property, and inheritance tax (IHT) which arises in relation to one s estate on death, and in connection with certain gifts into trusts. Why is my tax residency relevant? As a general rule while income tax will apply to UK source income, such as employment income, investment income and rental income, regardless of one s tax residency, if you are UK tax resident you will be liable to pay UK tax on all UK and worldwide income and capital gains. When would I be considered resident (UK tax resident) in the UK? You are regarded as being UK resident if you are physically present in the UK for 183 days or more in any one fiscal year, which ends 5 April. If you are present in the UK for less than 16 days then you are definitely not UK resident. For those who fall between the two limits there are a number of tests that need to be looked at to determine your residency status. These are summarised in a flow chart at the end of this guide. Special rules apply to the year of immigration or emigration. When counting the number of days spent in the UK you include all days that you are in the UK at the end of the day (that is at midnight). Can I be tax resident in more than one country? Yes it is possible for you to be resident in more than one country at any one point in time. This is mainly due to the fact that different countries have different tax years. In these circumstances the double tax treaty between the countries will usually aim to resolve any potential double taxation conflicts by the inclusion of a tiebreaker clause. Can I split the tax year when I arrive in the UK? Previously a split tax year was only available by HMRC concession. However under the new residency rules it is possible to split the tax year if you have acquired a home in the UK and it is now your only home. Similarly if you take up full time employment in the UK you will be able to split the tax year. What about when I leave the UK? If you have been resident in the UK, and leave to take up full time employment abroad then you can qualify for the split year treatment. Similarly if you go overseas for a period which includes the whole of the following tax year and you do not have any homes available to you in the UK during that period then you will be able to split the tax year. What is domicile status? Whereas an individual can be resident in more than one country, an individual can only have one domicile. An individual is domiciled in the country (or in some cases the state) of their origin, the country which they regard to hold their cultural and family roots, and where one has permanent habitual ties of a settled nature. Why is my domicile relevant? The worldwide assets of an individual who is UK domiciled, or deemed UK domiciled, are exposed to IHT on death.
Conversely, in the case of a foreign domiciliary, only assets situated in the UK are subject to IHT on death. Domicile of origin This is acquired at birth, and is usually the domicile of your father (or mother if you were born outside marriage). Your domicile of origin is extremely hard to displace. Domicile of choice A domicile of choice may be acquired by taking identifiable and substantive steps to acquire another domicile in a country of choice. Habitual residence or citizenship in a particular country is not sufficient to demonstrate a change of domicile. One needs to demonstrate permanent residence with settled intent. Deemed domicile for inheritance tax purposes If you have been resident in the UK in 17 out of the last 20 years you will be deemed UK domiciled for inheritance tax purposes alone. A deemed UK domicile is of no relevance to income tax or CGT. I understand that there are favourable rules for foreign domiciliaries A UK domiciled UK resident individual is subject to income tax and CGT on their worldwide source income and capital gains. By contrast, a UK resident foreign domiciliary who has paid the Remittance Basis Charge (RBC) of 30,000 (see below) is only subject to UK income tax and CGT in respect of UK source income and gains, and overseas source income and gains actually remitted to the UK. In effect, the foreign domiciliary can avoid paying income tax and CGT on foreign income and gains unless they are remitted to the UK. The price for this privilege is the RBC. What is meant by the remittance basis? The remittance basis of assessment (RBA) is a choice available to UK resident individuals who are not UK domiciled, or if UK domiciled not ordinarily resident in the UK. Under the RBA an individual is not liable to UK income tax or CGT on foreign income or foreign gains unless they are remitted to the UK. The generic term remittance is widely defined and concerns money, assets or services brought into or enjoyed in the UK which represent or derive from foreign income or gains. Remittances of pure capital to the UK are not chargeable to UK income tax or CGT. For individuals who are intent on coming to the UK, and are likely to become UK tax resident, certain steps should be taken to arrange their foreign bank accounts to facilitate the separate identification of pure capital, proceeds of capital gains and income. Where funds are mixed, complex rules exist to determine what is remitted to the UK, and in what order. Do I have to claim for the RBA to apply? Yes and no. If you have a foreign domicile and you are over the age of 18, and you wish the RBA to apply then you will be required to make the appropriate claim, which is dealt with as part of your annual self assessment return. However if you: have unremitted foreign income and or gains of less than 2,000, or are under 18 years of age or have not reside in the UK for more than six of the last nine tax years, and have no UK income or gains in that year and no relevant foreign income or gains have been remitted to the UK, then you need not make such a claim.
I understand that I need to pay the RBC in order to claim the remittance basis of assessment Rules introduced from 6 April 2008 require any UK resident foreign domiciled individual to pay an annual RBC of 30,000 or 50,000 depending on how long they have been in the UK if they wish to claim the Remittance Basis of Assessment (RBA). Furthermore, anyone paying the RBC, and claiming the RBA will lose their entitlement to UK personal tax allowances. The RBA can be chosen on an annual basis, and as such the RBC need only be paid when such a basis of assessment is to be applied. The individual has the choice. Are there any exceptions where the RBC doesn t apply? There are certain exceptions where the RBA is available without having to pay the annual RBC: If you have not been resident in the UK for at least seven of the last nine tax years. You will however lose any entitlement to UK personal tax allowances. Individuals who are under 18 years of age. If you have unremitted foreign income and or gains of less than 2,000 then you will not have to pay the RBC. In addition you will keep any entitlement to UK personal tax allowances. What if I choose not to claim the RBA? Then you will be subject to UK income tax and CGT on all of your worldwide income and gains as it arises. However, you should be entitled to claim UK personal tax allowances, and any UK tax due will be subject to any double tax relief received elsewhere. If I claim the RBA do I need to keep detailed records of my overseas income and gains? The RBA is fairly straight forward in its meaning, but necessitates arduous record keeping and banking arrangements to keep track of where your worldwide funds are, and more importantly what they represent. For example, income arising in one year that was held in a bank account could be spent to buy an asset. That asset will then represent the income in point, and if that asset were ever brought into the UK there would be a taxable remittance. Similarly, income needs to be traced from one bank account or asset to another. The burden is harsh, and the onus of proof lies with taxpayer. Can I remit capital to the UK free of UK tax? Yes, but you will need to be able to demonstrate that whatever it was that was brought to the UK was pure capital, and that it doesn t represent or derive from foreign income or gains. As an example, all funds held before becoming UK tax resident are pure capital. They can be remitted to the UK free of tax. That is so long as they haven t been mixed with income or gains arising after the point that you became UK resident. Should I keep personal assets outside the UK? Generally yes. The reason is simple; once the asset, typically money, is brought into the UK any income arising will be UK sourced and therefore taxable on the arising basis. Similarly if you were to die, the value of the funds held in the UK may be subject to IHT. I have heard that non UK resident trusts and other structures are helpful to mitigate UK tax? Yes they can be. Indeed trusts and other offshore structures can provide many practical advantages including tax deferral and mitigation, especially in relation to IHT. There are also numerous non fiscal reasons for using non UK resident trusts such as estate and succession planning and asset protection.
Should I have a UK will? It is always wise to have a UK will prepared to provide authority for your appointed executor to deal with your UK assets. A foreign will may not provide the necessary legal capacity. One must not void the other. How will my employment income be taxed in the UK? The taxation treatment will hinge on whether you are UK domiciled and/or UK resident. Each tax year will be looked at in isolation, and your UK taxation position will depend upon how long you are in the UK for. You will not be able to use the split year treatment. If you are not UK resident you will only be liable to tax on your employment income that relate to the time you spend working in the UK. If you are UK resident you will be taxable on your worldwide duties if you are employed under one contract of employment for your UK and overseas duties. However if you are UK resident, not UK domiciled and work under one contract for both your UK and offshore duties then in the first three tax years you are UK resident you should be able to apportion your salary as to your UK and offshore duties. The offshore element of your salary could then be subject to the RBA. This is known as Overseas Workday Relief (OWR) If you are UK resident but not UK domiciled but work for an overseas company under an overseas employment contract you may be able to claim the remittance basis on your overseas salary. The claim for the remittance basis of assessment could result in payment of the RBC. How is the tax in respect of my employment income paid? Income tax and National Insurance (NI) is generally deducted at source from any UK employment income. By default the entire salary will be subject to UK income tax and NI. An employer can ask HMRC for permission to just deduct tax and NI from the proportion of the salary that relates to the UK duties of the employee if the employee is not resident or OWR applies. Split contracts and separate employments As noted above problems can arise where an individual is employed by an overseas employer to perform duties both in and outside of the UK. The entire employment income will suffer UK income tax (subject to OWR). In these cases it is often preferable to be employed by: 1. The overseas employer under two contracts of employment, one for UK duties, and one for foreign duties; or 2. A UK employer for UK duties and an overseas employer for foreign duties. There are technical complexities with both, and cases must be considered on there own merit. The ability to load foreign earnings is thwarted by complex anti-avoidance rules. Either way this will invariably result in the individual having to make a claim under the RBA so as to avoid UK tax on the salary paid in respect of duties performed overseas. This may also result in payment of the RBC. What is tax equalisation? Many employers wish to compensate their employees who they send to work abroad (or in the UK) for the cost incurred in relation to foreign taxes. In essence they may wish to ensure that their staff are not penalised for working in another country where an additional tax burden arises. Typically the employer may agree to meet any UK income tax liability that arises in respect of their UK source employment income, and they may also provide a professional adviser to deal with their UK tax affairs.
The payment of any part of an employee s UK salary, including the UK tax, is a taxable benefit, and it is necessary to gross up the employee s net emoluments, benefits in kind and the tax charged to determine the final figure for taxable earnings. HMRC have defined a method for this grossing up procedure. Will accommodation expenses that my employer pays for me whilst I am in the UK be taxable in the UK? If you are seconded to the UK, and your visit is intended to be less than 24 months on arrival, then the cost of accommodation can be paid by your employer without this benefit being taxable on you. HMRC will also allow the cost of renting a property for you to live in whilst you are in the UK. This is best achieved by having your employer rent the property on your behalf. What about travel and subsistence expenses? If you are on secondment for less than 24 months, you can obtain relief for all subsistence costs paid by your employer whilst on that secondment. This may cover other costs associated with accommodation such as utility bills, and personal expenditure attributable solely to the business travel. The cost of business travel paid by your employer, including that for you to travel from your home in the UK to the workplace will not be taxable. If you were to be provided with a car allowance, this would be taxable as if it were your salary. What about my relocation expenses? The first 8,000 of qualifying removal expenses and associated benefits are exempt from income tax, however there is no limit on qualifying expenses for NI purposes. That all said the exemptions and reliefs are subject to you being able to satisfy a number of conditions. I will continue to pay pension contributions in my home country how will these be treated for UK tax purposes? For your contributions to a foreign pension scheme to be allowable for UK tax purposes, it is necessary for you to demonstrate that the foreign pension scheme would qualify if it were a UK pension scheme, and that it doesn t provide benefits which are excluded for UK schemes. If this cannot be demonstrated employer contributions to the scheme will be taxable on you as a benefit, and no relief will be provided for personal contributions. Will I qualify for a UK personal allowance? All UK tax resident individuals may claim personal allowances, with two exceptions: 1. They are claiming the RBA, and their offshore income exceeds 2,000. 2. Their net UK income exceeds 100,000, in which case the personal allowance starts to be reduced. The following, while not UK resident may also claim UK personal allowances: Citizen of an EEA state. A present or former employee of the British Crown or a widow(er) of a British Crown employee. A resident of the Isle of Man or Channel Islands. A national and/or resident of a country with which the UK has a double tax treaty allowing such a claim. Do I have to pay UK NI contributions? There is no obligation to account for Class 1 NI contributions if you come from either an EEA country or a country with which the UK has a reciprocal agreement, and you hold a certificate showing that contributions continue to be made in that country.
If you do not qualify for a certificate, Class 1 NI contributions will be payable in the normal way if your employer has a place of business in the UK. For employees not normally resident in the UK, who are sent to the UK to work by a non UK employer who has a place of business abroad, NI contributions are not generally payable for the first 52 weeks of employment in the UK. If the company does not have a place of business in the UK, the company may not have to pay employers contributions although the employees contributions may still be due. How do I claim for the UK tax paid if I still have to pay tax in my home country? If you are taxed twice in different countries in respect of the same income, you may be able to claim relief for any double taxation charge. Relief is generally limited to the lower of the foreign or UK tax charged. Double taxation relief can only be claimed in respect of income subject to the RBA to the extent that it is brought into the UK. The rules are nonetheless complex. The above FAQ s provide a very general response to some of the more common questions asked by individuals coming into the UK. In all cases clarity should be obtained, and where possible action can be taken to mitigate exposure to UK tax.
Start Resident in one of the last 3 tax years, present in the UK less than 16 days Non resident or Not resident in last 3 tax years, present in the UK less than 46 days or Full time working abroad, work in the UK less than 30 days, present in the UK less than 91 days None of the above Present in the UK more than 183 days Resident or Works full time in the UK or Has a home in the UK and spends no more than 30 days in an overseas home None of the above CONNECTION a UK resident family Accessible accommodation in the UK Work in the UK more than 40 days Present in the UK more than 90 days in either of the previous two tax years Spend more time in the UK than any other country (do not tick if non resident for last 3 years) Total connections The table below shows the number of days you can spend in the UK and still be treated as non resident: Connection factors Been resident in the UK in any of the past 3 tax years Not been resident in the UK in any of the past 3 tax years 1 Up to 120 days Up to 182 days 2 Up to 90 days Up to 120 days 3 Up to 45 days Up to 90 days 4 Up to 15 days Less than 46 days 5 Up to 15 days N/A