The Expat and Tax

The Expat and Tax

 The taxation of individuals in the UK is determined by “residence and domicile” status. Tax residents are liable to UK tax on their worldwide income. However, expats who are regarded as not domiciled in the UK may elect to not be liable to UK tax on offshore income and capital gains if the funds are not remitted to the UK.

Non-resident expats are subject to tax on UK-source income, such as compensation attributable to UK workdays and certain UK-source investment income.

How is income taxed in the UK?

An employee is taxed on all their remuneration and benefits from employment received during a tax year which ends on 5 April.

All salaries and fees earned by directors are taxable as employment income. Directors and employees earning at an annual rate of £8,500 or more in a tax year, including benefits and expenses, are assessed on a wider range of benefits in kind than other employees.

Individuals who are resident are taxed on their worldwide employment income.

Effective from 6 April 2013, a new form of overseas workdays\’ relief is potentially available.

This is available for UK tax residents who are non-domiciled, if they have not been UK tax resident throughout the preceding 3 UK tax years and if the remittance basis is claimed and the remuneration related to those overseas workdays is both paid and retained offshore. This could apply to your UK taxes as a returning expat.

Overseas workdays\’ relief is likely to apply to the UK tax year in which the individual first becomes UK tax resident and to the two subsequent UK tax years. Overseas workdays\’ relief may also apply to individuals who were already resident in the UK at 6 April 2013 if they were regarded as ordinarily resident during the 2012-13 tax year and if they had not been UK tax resident as expats throughout the preceding three UK tax years.

In addition, the expatriate tax advice regarding earnings of non-UK domiciled expats from separate employment with a non-resident employer for which all of the duties are performed wholly outside the UK may be taxed on the remittance basis if they choose. However following the reform of that law, the income from such contracts is much more likely to be taxable as it arises with new expat tax laws.

Tax is normally deducted from employment income at source under the Pay-As-You-Earn (PAYE) system.

Self-employment income – Tax is charged on the profits or gains of trades, professions and vocations carried out wholly or partly in the United Kingdom by UK residents. Expat tax rules in the UK dictate that a business carried out wholly overseas by a UK resident individual is regarded as foreign income and, consequently, may be taxed on a remittance basis.

 A non-resident expat is charged on any business exercised within the United Kingdom, or on the part of the trade carried on in the UK if the trade is carried on partly in the UK and partly overseas.

Expatriate tax returns can be complex – especially regarding offsetting trading losses. It is advised that expert expat tax advice is sought.

Investment income – Expat income from most investments in the United Kingdom is received after tax is withheld or paid at source wholly or in part. Savings income, such as UK bank and building society interest, and interest distributions from UK unit trusts, is taxable income in the year of receipt, and taxed at source, at the basic rate (20%). The final rate of tax applicable on savings income depends on the level of income together with other income.

Tax paid at source is taken into account when the final tax is calculated for expats. Consequently, if an expat\’s tax liability on savings income is higher than the tax deducted at source, additional tax is payable.

UK dividends carry a non-refundable 10% notional tax credit. A similar treatment applies to dividends from non-UK companies. Like savings income, the tax rate applicable to UK dividends depends on the level of income aggregated with other income.

Foreign dividends remitted to the United Kingdom by a higher or additional rate taxpayer benefitting from the remittance basis are taxed at a higher rate tax of 40% or additional rate tax of 45% rather than 32.5% or 37.5%, respectively. Foreign dividends received by resident individuals who are not using the remittance basis remain taxable at the same rates as UK dividends.

Taxes for expats with regard to income from UK leased property are based on the rates applicable to earned income (20%, 40% and 45%). The property income subject to income tax is the net profit from rentals after deduction of qualifying expenses, such as mortgage interest, repairs and maintenance. The net profit is calculated in accordance with UK rules even if the rental income arises from foreign leased property and is taxed on the remittance basis.

Leasing agents for non-resident expat landlords should withhold the basic tax rate of 20%, unless HMRC issues a direction to them authorising gross payment to the landlord.

If an individual has more than one rental property, all profits and losses from properties that are leased commercially in the tax year are pooled together to give an overall profit or loss for the year. Special rules can apply to properties leased at less than a commercial rent and to furnished holiday leases. Typically, other property losses can be carried forward.

Expatriate tax rules stipulate that non-residents are liable to UK tax on investment income from UK sources only, regardless of their domicile status. However, they may claim to have their investment income from any non-UK source income taxed on the remittance basis if it suits them.

Double tax relief and tax treaties for Expats

If income is doubly taxed in two or more countries, relief for double taxation is typically available through a foreign tax credit or exemption. The relief usually takes the form of a foreign tax credit if an expat is resident in the UK for the purpose of a double tax treaty. In this case, any foreign taxes paid on doubly taxed income can be taken as credit against the UK tax liability on the same source of income. The credit that can be claimed is limited to the lesser of the foreign taxes paid or the amount of equivalent UK tax on the doubly taxed income. In the absence of a treaty with the country imposing the foreign tax, unilateral relief may be claimed under UK domestic law.

If an individual is resident in the UK and treaty-resident in a country with which the UK has entered into a double tax treaty as an expat, a claim may be made in the UK to exempt from UK tax the income that would otherwise be taxed in both countries if the treaty contains the relevant articles.

The UK has entered into double tax treaties with many countries covering taxes on income and capital gains.

Expat tax and residency

The UK applies a statutory residence test to determine whether an individual is resident in the UK Professional advice should be obtained for any queries regarding the different rules that applied before 6 April 2013 which might affect expats.

Any individual who has not been UK resident in any of the preceding three UK tax years is generally regarded as conclusively non-resident if they spend no more than 45 days in the UK in any UK tax year. Other tests may also apply to expats.

For expat tax advice purposes, an individual coming to the UK is likely to be regarded as conclusively UK tax resident if they do not meet any conditions to be regarded as conclusively UK non-resident and satisfy any of the following conditions:

  • ·         They work sufficient hours (at least 35 hours per week on average) in the UK, assessed over a 365 day period, with more than 75% of their workdays being UK workdays (full time working in the UK, or FTWUK).
  • ·         They have their only home or all their homes in the UK, for a period of at least 91 days, and at least 30 days of the 91 day period fall in the UK tax year concerned.
  • ·         They spend at least 183 days in the UK in the UK tax year.
  • ·         They meet the sufficient ties test.

Particular rules apply to individuals who have relevant jobs in international transport, such as air crew. These rules exclude them from the FTWA and FTWUK tests.

For a prospective expat who is neither conclusively resident nor conclusively non-resident, a sufficient ties test applies under the SRT. The sufficient ties test looks at the number of connections factors that the individual has with the UK and the number of days spent in the UK Five possible connection factors can apply to determine the extent of the individual\’s connection to the UK, and the more connection factors that an individual has, the fewer days they may spend in the UK in a tax year without becoming UK tax resident. The following are the five connection factors that an individual may have:

  • ·         They have a UK substantive employment (at least 40 UK workdays).
  • ·         They have UK accommodation.
  • ·         They have more than 90 days present in the UK in either of the preceding 2 UK tax years.
  • ·         They have UK-resident family (spouse, civil partner or minor children).
  • ·         They have been UK tax resident in any one or more of the three preceding UK tax years and they have spent more days in the UK than in any other country.

An individual who has not been tax resident in the UK in any one of the preceding 3 tax years does not become a UK resident in the following circumstances:

  • ·         They spend up to 120 days in the UK and have no more than two connection factors.
  • ·         They spend up to 90 days in the UK and have no more than three connection factors.
  • ·         Complex statutory definitions apply in all cases.

In principle, residence is determined for a tax year as a whole, but under the SRT a taxpayer who is UK tax resident may be eligible for split-year treatment in certain circumstances. Expert expat tax advice should be sought in such cases.

Under English law, an individual\’s domicile is the country considered to be their permanent home, even though they may be currently resident in another country. It may be a domicile of origin, choice or dependency.

Domicile status affects how an individual\’s offshore income and/or capital gains are taxed. A non-UK-domiciled expat can have their offshore income and/or offshore capital gains taxed on either the remittance basis or the arising basis if based in the UK. An individual who is taxable on the arising basis is subject to UK tax on their worldwide income and capital gains, regardless of where they arise.

An expat who is taxed on the remittance basis can potentially keep certain of their foreign income and gains outside the scope of UK tax by having them paid offshore and not subsequently remitting them to or enjoying them in the UK. According to expat tax rules, “Remittance” is widely defined to include direct and indirect remittance, and professional advice should be taken as necessary to determine when the remittance basis may be claimed.

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