Did you know that your UK residence and domicile status impacts how much UK tax you are liable to pay? Not only will maintaining a UK non-resident status affect your UK tax exposure, so too does the date you decide to return and become a UK resident again.
If you are UK resident but not domiciled in the UK (i.e. you have a permanent home abroad) you will only be liable for UK tax on the income and gains made in the UK. Provided certain conditions are met, your overseas income and gains can be excluded from UK tax liability. However, this is a complex matter and you should consult the services of an overseas tax planning specialist to avoid unknowingly breaking any tax laws.
Tax rules for non-residents:
Personal tax allowance
Regardless of your domicile status, any income sourced in the UK is liable to tax. However, as a non-resident UK national you are still entitled to the same personal tax allowances as a resident. Currently, the allowance is £12,500 for the tax year ending 5th April 2020. This can be set against any UK income that you may have including bank interest, rental income and pensions.
Non-residents are liable to pay UK tax on any income with the following exception. Disregarded income refers to any dividends or interest earned. As a non-resident, the tax liability cannot exceed the combined sum of tax withheld on disregarded income along with the person’s tax liability, if those allowances had been ignored. It’s a complicated issue and if you are in any doubt, take expert tax advice on your particular circumstances.
Capital gains tax
Capital Gains Tax (CGT) may apply when you sell your home abroad or other assets such as shares that attract capital gains tax as opposed to income tax. You need to calculate your residence status in the same way as for income tax, as laid out below. In short, UK residents are liable to pay tax on UK and foreign income/gains. However, non-residents only pay CGT if they return to the UK or if they sell UK land or property.
Once you have been a non-UK resident for more than five complete years, there are considerable tax benefits when it comes to overseas income and worldwide capital gains. These are exempt from UK taxation unless there is a disposal of UK land, property and assets as part of a UK trade.
Stamp duty land tax
There have been several changes to Stamp Duty Land Tax (SDLT) in recent years.
Currently, non-resident first-time buyers will pay 1% stamp duty on properties up to £300,000 in England and Northern Ireland. The rates are different for properties in Scotland and Wales.
Why is understanding my residence status important?
There are many instances when it could be beneficial to secure or maintain being non-UK domiciled. For example, when it comes to Inheritance Tax, if you are UK domiciled then your worldwide assets fall under the scope of UK Inheritance Tax regardless of your UK residency status. However, if you are not UK domiciled, only your UK assets are liable to Inheritance Tax.
How to calculate your residence status
Working out whether you are a UK resident for tax purposes depends upon several factors. All calculations should be made within the same tax year (6 April to 5 April), not a calendar year (from January to December).
The basic rules are that you are considered a UK resident if you spent more than 183 days in the UK. Alternatively, you are a UK resident if your only home is in the UK and you owned, rented or lived in it for at least 91 days total, 30 of which must have been in the tax year in question.
On the other hand, you are a non-resident if you spent fewer than 16 days in the tax year in the UK. You are also non-resident if you work abroad full-time and spent less than 91 days in the UK (including a maximum 30 days working).
For those working abroad, a few days extra in or out of the country could radically change your residence and tax status. In such cases it is advisable that you consult a specialist in expat tax matters.
Residence in more than one country
In some cases you can be considered a resident in the UK and in another country at the same time. This is known as dual residency. When it comes to tax law, every country is different so you should take expert tax advice. In some cases, countries operate a double tax treaty with the UK. This means that if you pay tax on an earned amount in one country you will not be liable to pay tax on the same amount in your other country of residence.
If you move to or from the UK during a tax year you can have it calculated as a split year. In this instance you only pay UK tax on foreign income during the time you were living in the UK.
Filing a non-resident tax return
You need to inform HMRC when you leave the country or become non-resident. However, you may still be liable to pay tax on UK income including pensions, rental income, bank interest and any earned income. You may need to complete a self-assessment tax return to declare this income. However, you do not need to inform HMRC if you have already claimed tax relief under the double taxation agreement.
Tax mitigation for non-residents
Tax liabilities for non-residents and expats can be a minefield for the uninitiated. As already mentioned, even if you are a non-resident you may still be liable for tax on UK earned income, pensions, capital gains, inheritance and other sources of revenue. You should seek expert tax advice as every situation is individual, particularly where double tax treaties are in place.
Consulting a specialist in expat tax could save you money in the long run as well as allowing you the peace of mind to sleep well at night.
For more information on overseas tax planning or to discuss your own personal situation, please contact us.