For most UK citizens, the question of what income and gains should be included on their tax return is easily answered because they are both UK domiciled and UK tax resident. Anyone domiciled and resident in the UK will need to report their worldwide income and capital gains on their return. However, what happens if you are either non-UK domiciled (non-dom) but UK resident, or UK domiciled but non-UK resident?
In these circumstances, different rules apply and the last four years have seen considerable change to tax legislation in this area as the Government seeks to expand the scope of what can be taxed within the UK. Non-doms make a significant contribution to UK tax revenues, but their numbers are falling. The decline of this small but significant group of UK taxpayers has been partly attributed to tax changes surrounding ‘deemed domicile’, which made their status in the UK less attractive.
Brexit uncertainty has also led some to reconsider whether the UK remains an attractive base for them and their finances, or whether the UK remains an attractive base for them and their finances, or whether they should move to a different European country.
In most cases, non-doms leaving the UK are no longer liable to UK tax. However, for those leaving the UK who are domiciled in the UK, it is not as straightforward.
Someone who is domiciled in the UK is an individual whose permanent home is in the UK. That person may have more than one tax residence, but they can only have one domicile at any given time. Everyone has a domicile, which they acquire at birth. This will not always be the country of birth or the country they currently live in. You can change the domicile of origin acquired at birth to a domicile of choice once you are over 16, but such a change can be difficult to prove to HMRC.
Your domicile is usually the country which you consider to be your permanent home but working out which country you are domiciled in can be complex. As it is up to you to determine your own domicile status and with big amounts of tax often at stake, it is wise to seek professional help to determine your position.
Becoming a non-UK tax resident
Since 6 April 2013, UK tax residence status has been determined by the statutory residence test, which contains four components that need to be considered each tax year. These are:
- how much time you have spent in the UK in a tax year
- automatic overseas test
- automatic UK test
- sufficient ties test.
In the simplest terms, you will be considered a non-UK resident for tax purposes if you meet the automatic overseas test. You will, however, be considered a UK resident if you do not meet the automatic overseas test and you meet one of the automatic UK tests or the sufficient ties test. If you spend more than 183 days in the UK in a given tax year, you would usually be considered a UK resident.
UK Domiciled, non-UK resident
Regardless of your residence or domicile, income arising in the UK is usually taxable in the UK. If you are non-resident, your foreign income is generally out of scope of UK tax. However, tax treaties are in place between the UK and other nations which determine how certain types of income must be dealt with where you reside.
Many people who have left the UK own residential properties in the UK, which they rent out in their absence. Any profits arising from the letting of these properties are subject to UK income tax, regardless of tax residence status. Letting agents are required to deduct a withholding tax to cover any potential tax due, but this can be the incorrect amount and, in many cases, will be too much.
In general, a non-resident person is not liable to capital gains tax in the UK. However, this is subject to a number of exceptions, and it is wise to seek advice before disposing of any assets so you don’t trigger an unnecessary tax charge.
Your tax resident status can also affect your entitlement to UK income tax and capital gains tax allowances and exemptions. However, you will still be entitled to a personal allowance in the UK each year if any of the following apply:
- you hold a British passport
- you’re a citizen of a European Economic Area (EEA) country
- you’ve worked for the UK Government at any time during that tax year.
Double taxation treaties
It’s possible to be considered a tax resident in more than one country at the same time, therefore, it’s possible to be subject to tax on the same income and gains in more than one country. Usually when this occurs, you will not necessarily have to report the income or gains on the tax returns of both countries because most countries have tax treaties to set out in which country you should be taxed on any source of income. Where such a treaty does not exist and tax is paid in both countries, the UK usually allows you to credit the foreign tax paid on that income against the tax due in the UK on that income.
If you’d like to know more about how these rules may affect you, or want to learn more about our international services, don’t hesitate to get in touch.