By moving to the UK you may become liable to pay UK income and capital gains tax, in addition to any tax liability in your home country.
Understanding how expatriate tax works can be crucial in determining whether relocating to the UK is a financially viable move for you and your family.
The following guide looks at the basic rules relating to expatriate tax and how these could affect you.
Expat tax: general rules
When determining your liability to UK tax, Her Majesty’s Revenue & Customs (HMRC) will look at your residence status.
Typically, a UK resident is liable to UK tax on all worldwide income and capital gains.
A non-UK resident, however, is only chargeable to tax on income and gains originating from the UK.
This would include, for example, income, profits and gains arising from UK-based employment, UK-based property, UK pensions and partnerships, and savings and dividends, where the source of income is in the UK.
Restrictions may be applicable if you are a non-resident from a country with which the UK has a double taxation treaty in place, as this may limit UK taxation to only certain types of income, such as income from UK pensions and property, and where the disregarded income rule applies.
Double taxation agreements
As a UK resident, even if your foreign income and gains have already been taxed in another country, they will still be taxable in the UK.
That said, relief may be available for tax paid on foreign income under the provisions of any relevant Double Taxation Agreement (DTA). The UK benefits from DTAs with a number of countries.
If a DTA is in place, you may be entitled to some or all of the foreign tax back. In this way you will avoid being taxed twice. How much relief you get, and how you claim, depends on the double-taxation agreement.
If you are UK resident and resident in another country, known as dual residency, and the UK has a DTA with the other country, there may be special provisions that determine where you will pay tax.
In relation to capital gains you will usually pay tax in the country where you are resident and be exempt from tax in the country where you made the gain, albeit with the exception of gains made on UK residential property (see non-resident capital gains tax below).
Determining residence status
The ‘statutory residence test’ will be used to determine if you are UK tax resident and comprises three different components:
- The automatic overseas test
- The automatic UK test
- The sufficient ties test
You will be treated by HMRC as resident in the UK if you do not meet the criteria under the automatic overseas test and you meet any of the criteria under the automatic UK test or, alternatively, you satisfy the sufficient ties test.
Whether you are UK resident usually depends on how many days you spend in the UK during the relevant tax year.
Automatic overseas test
You are automatically non-resident if either:
- You were resident in the UK for one or more of the previous three tax years and you spent fewer than 16 days in the UK in the relevant tax year.
- You were not resident in the UK for any of the three preceding tax years and you spent fewer than 46 days in the UK in the relevant tax year.
- You work abroad full-time and spent fewer than 91 days in the UK, of which no more than 30 were spent working
Automatic UK test
You are automatically resident if either:
- you spent 183 or more days in the UK in the relevant tax year.
- your only or main home was in the UK and you spent at least 30 days there in the relevant tax year.
If you do not conclusively meet the requirements of the automatic overseas or UK tests, you will instead need to apply the sufficient ties test to determine your residence status.
Sufficient ties test
The sufficient ties test looks at the number of different ties or connections you have in the UK, such as family or work ties, together with how many days you have spent in the UK in the relevant tax year.
The number of days you spend in the UK in any given tax year will dictate the number of UK ties that are needed for you to be UK resident.
Non-domiciled residents & expat tax
If you are classed as UK resident, you are liable to pay UK taxes on the arising basis of taxation. This means that all your worldwide income and gains will be taxable in the UK.
However, there are special rules for UK residents whose permanent home or ‘domicile’ is abroad.
In taxation terms, domicile and residence are quite different. Your domicile is usually the country your father considered his permanent home when you were born, although this may have changed if you subsequently moved abroad.
If you are UK tax resident but not domiciled in the UK, you have a choice of whether to use the arising or remittance basis of taxation. If you use the remittance basis this means you only pay UK tax on any foreign income or gains you bring, or remit, to the UK.
However, by using the remittance basis you will lose any available personal tax allowances, and may have to pay a remittance basis charge if you are a long term resident. Any income and gains arising in the UK will also remain taxable in full.
The statutory residence test is designed to determine residence status for the whole tax year. However, if you move in or out of the UK part way through a tax year, that year may be split into two parts.
Subject to meeting the relevant criteria, in one part of the tax year you will be treated as UK resident and in the other part you will be treated as non-UK resident. This is known as ‘split-year treatment’.
The split-year treatment means you will only pay UK tax on foreign income and gains based on the time you were living in the UK.
Non-resident income tax
If you are classed as non-UK resident, you will not be liable to pay UK tax on income arising overseas. However, you will still be subject to UK tax on income earned in the UK, such as employment earnings.
If you are an employee in the UK, tax will be deducted directly from your salary via the ‘Pay As You Earn’ system (PAYE). Any UK based self-employed earnings must be disclosed to HMRC by submitting a self-assessment tax return.
Non-resident capital gains tax
You will not usually be liable to pay capital gains tax arising in the UK if you are non-UK resident. The exception to the rule is for non-residential property. You will have to pay UK capital gains tax on any profit arising from the sale of UK residential property, even if you are not classed as resident in the UK.
As a result of proposed changes, non-UK residents may also soon be chargeable on gains accruing on the disposal of commercial property.
Additionally, you may be liable to both income and capital gains tax where you used to be a UK resident and you return to the UK within five years of leaving. This is known as ‘temporary non-residence’, whereby special rules apply to prevent tax avoidance.
Applying the statutory residence test, and the different definitions within its three components, can involve complex calculations.
Equally, the taxation rules relating to non-domiciled UK residents, double taxation agreements or split-year treatment can become complicated.
If you are not conclusively resident or non-resident, or you need help working out your domicile status and the advantages of claiming the remittance basis, or you are unclear about any of the other expatriate tax rules, then professional advice should always be sought.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.