If you receive income from overseas sources or are no longer resident in the UK, you may face significant difficulties in determining where to pay income tax. While the situation of individual expatriates may vary and each case will be assessed by HMRC on an individual basis, the most important factors in determining where to pay tax are undoubtedly UK tax residence and domicile status.
What is UK tax residency status?
Whether you are a UK tax resident will determine where you pay your taxes – in the UK or another country.
- If you are a UK resident for tax purposes, you will pay tax here on all income and gains earned in the UK as well as abroad,
- If you are a UK resident for tax purposes, you will pay tax here on all income and gains earned in the UK as well as abroad,
Your residency status is not permanent. It can easily change depending on how much time you spend in the country. It is therefore subject to review every tax year.
How do I determine my tax residence?
A statutory residency test has been in place since April 2013. It aims to simplify the process of determining tax residency.
The Statutory Residence Test consists of three separate tests. You must take them in the correct order. This means that you start with the first test. Only if you answer 'no’ to all the conditions listed there can you proceed to the second test. If you are still unable to establish your tax residency on the basis of Test 2, proceed to Test 3.
Automatic test for non-residents – you will not be resident in the UK if
- You have spent less than 16 days in the UK in the tax year and have lived in the UK for at least one year in the three tax years before the current tax year,
- You have not been resident in the UK for the last three tax years and have spent less than 46 days in the UK,
- You work full time abroad during the tax year and spend less than 91 days in the UK (including at least 31 days in the UK).
Therefore, if you can answer 'yes’ to any of the above, you are not entitled to UK tax residency. This also means that there is no need to carry out any further tests.
Automatic test for UK residents – if you do not meet any of the criteria for the first test, you can proceed to the automatic test for UK residents. If:
- You spend at least 183 days in the UK during the tax year,
- You have a home in the UK for at least 90 days and spend at least 30 days there,
- You work full time in the UK for 365 days without significant breaks in your work (excluding holidays).
– You are a UK tax resident.
Sufficient ties test – take this if you do not meet any of the automatic non-domicile or UK resident test criteria.
There are four different ties: family, accommodation, work, and the 90-day tie. How many of them you need to meet depends on the number of days spent in the UK during the tax year. Thus, in the case of:
- 16 – 45 days, 4 ties are required,
- 46 – 90 days, a minimum of 3 ties are required,
- 91 – 120 days, a minimum of 2 ties are required,
- more than 120 days in the UK, a minimum of 1 tie is required.
However, if you have not been resident in the UK for any of the three years prior to the tax year in question, you will need to determine whether you have spent time in the UK:
- 46-90 days in the tax year and have all 4 ties,
- 91-120 days and have at least 3 ties,
- more than 120 days and have at least 2 ties.
What is domicile status?
Let’s move on to the second factor that can play a role in determining your tax liability – domicile status. In the UK, this refers to the country where you live all your life and have a permanent home or 'roots’.
- If you are a UK resident and domiciled in the UK, you must pay tax in the UK on income earned both in the UK and abroad,
- If you are resident in the UK but not domiciled in the UK, you will only be taxed in the UK on overseas income if you bring it into the country.
It’s also worth mentioning that there are exceptions that can affect your residency status. You can read more about these below.
How do you determine your domicile status?
There are three types of domicile in the UK:
- Domicile of origin – this is your father’s domicile at the time of your birth, not the place where you were born. If your parents were not married at the time of your birth, you take your mother’s domicile,
- Dependent domicile – applies until the age of 16. It must remain the same as that of the person who supports you. This means that it can change if, for example, your parents move,
- Domicile of choice – applies after the age of 16. To obtain it, you must provide sufficient evidence that you are living permanently in another country and intend to remain there for the rest of your life.
There is also the concept of deemed UK domicile. This applies to individuals who live outside the UK but were born in the UK and have been resident or tax domiciled in the UK for at least 15 of the last 20 tax years.
What is considered foreign income and gains?
There are several sources of potential foreign income and gains which, although earned outside the UK, are subject to UK tax. These include
- Income from working abroad,
- Profits from running a business abroad,
- rental income from property abroad,
- Profits from the sale or disposal of assets abroad, such as property or shares,
- interest on foreign bank accounts,
- income from a foreign pension.
However, some foreign gains (such as foreign gambling or lottery winnings or gifts given abroad) are not taxable in the UK.
How to declare foreign income and gains?
If:
- you meet the two criteria above (UK tax residence and UK domicile status), or
- You are UK tax resident but not UK domiciled and bring foreign income into the UK,
– you must declare that income and gains to HMRC. You do this by completing a self-assessment tax return. You have until 31 January of the following tax year to file your return and pay the tax.
There is an exception for dividends. If their total does not exceed £2,000 (including UK dividends), you do not have to declare this income.
Double taxation of foreign income and gains – what can you do?
If you are subject to tax on foreign income and gains, you may find yourself in a situation where you are taxed twice. This will happen if
- you have residency status both in the UK and in the country where you earn income,
- you come to work in the UK but also earn income in your home country,
- you are from the UK but go abroad,
- you are a tax resident of two countries at the same time.
However, double taxation treaties have been put in place to deal with such situations. These allow you to clearly determine in which of the two countries you should pay tax.
If you already know that you are at risk of double taxation, you can apply for relief. To do this, complete the relevant form from the foreign tax authority and send it to HMRC. HMRC will confirm whether you are UK tax resident and then return the form to the foreign tax authority.
However, if your income or gains have already been taxed in another country, you will still need to file a self-assessment with HMRC. You can claim foreign tax relief by completing the relevant information on the form. How much you can claim back depends on the specific double taxation agreement between the UK and the other country.
