As an individual, your tax liability in the UK depends on your residency and domicile status.
Your residency is where you live permanently or on a long-term basis. For tax purposes, your residency is determined by the Statutory Residency Test. You can read all about the Residency test in an article I wrote here so that you can determine if you are resident for Tax purposes or not.
Your domicile is normally your country of origin or where you were born.
- If you are resident and domiciled in the UK, you pay tax on the arising basis . This means you will have to pay tax in the UK on any income earned throughout the world.
- If you are resident but not domiciled in the UK, you pay tax on the remittance basis. This means you will need to pay tax in the UK on any income earned in the UK and any income remitted (brought back) to the UK which was earned from around the world.
- If you are not resident in the UK, you will only need to pay tax in the UK on income which is earned in the UK.
As you can see, your residency and domicile status is important in determining if you pay tax in the UK.
Arising Basis of Tax
Most people who were born in the UK and live here will pay tax on the arising basis. This means that even if you earn income form abroad like Spain for example, you will need to declare that income on your SA return and will be taxed in the UK.
The spanish authorities might charge you tax on that income but you still need to declare than income to HMRC. HMRC has agreements with many foreign tax authorities called Double Taxation Reliefs (DTR). The most common DTR is called the Foreign Tax Credit Relief (FTCR) and the main aim of this is to ensure people who earn money abroad are not taxed twice.
With this FTCR you don’t get refunded by HMRC but you instead get a tax credit to use against your income.
The FTCR relief is usually the smaller of the UK tax due on the foreign earnings and the amount of relief available under the treaty the UK has signed with the foreign tax authorities.
For an individual to get Foreign Tax Credit Relief, they must make a claim to HMRC. For claims to be successful, the following conditions need to be met:
- Individual must be resident in the UK for the year of the claim.
- Admissible Tax must have been paid – Admissible Tax is the tax paid in the foreign country which broadly correlates to UK income tax, corporation tax or capital gains tax.
- The income or gain is the gross amount, unless the deduction method is used. (Deduction method is an alternative to FTCR and it is where an individual pays UK tax on net foreign income; this is beneficial when the individual has losses or capital allowances).
- If the individual is taxed on the arising basis, return and claim should include full income and gains arising.
- Use Pound Sterling (£) for all claims to relief.
- The amount of FTCR can’t exceed UK Tax due, it can’t create a repayment( FTCR can’t exceed admissible foreign tax), and it can’t be set against other foreign or UK gains as a credit. The tax credit stays wight he income or gain to relieve double taxation or that income or gain alone.
- Amount of relief is restricted to the minimum foreign tax payable. ALL allowable expenses should be claimed in the foreign country.
The UK normally gives unilateral tax relief when the income is not covered by a Double Taxation Agreement(DTA). Unilateral relief is only due for taxes charged on income or gains which correspond to UK income tax, corporation tax or capital gains tax.
Remittence Basis of Tax
If a person is resident in the UK but not born here i.e. not domiciled here, they are charged tax only on the income earned in the UK and on income earned abroad which is remitted back to the UK.
Remittence basis taxpayers must decide each year if they want to be charged on the the remittance basis.
The following income and gains can be taxed on the remittance basis:
- Relevant Foreign Earnings
- Foreign Specific Employment Income
- Relevant Foreign Income
- Foreign Chargeable Gains
Remittance Basis taxpayers:
- Lose Personal Allowance – so don’t get the tax free income individuals on the arising basis receive.
- Lose the Annual Exemption Amount – so don’t get the Capital Gains tax free amount
- May have to pay a remittance basis charge (£30,000)
Individual don’t need to claim remittance basis and don’t lose their Personal Allowance and Annual Exempt Amount in these situations:
- If unremitted foreign income and gains are less than £2,000
- if Individual is not a long term resident and has no income tax or capital gains tax in the Uk other than investment income not exceeding £100 and makes no taxable remittence of foreign income or gains. (Long term resident is resident in UK for 7 of the past 9 years)
Please note that non-dom status and the remittance basis is a hot topic in UK tax and thus the rules are always changing. Make sure that you keep up to date with these legislative changes in order to pay the correct amount of tax.
(For residence purposes, the United Kingdom consists of England, Wales, Scotland and Northern Ireland, but not the Channel Islands or the Isle of Man. Like the rest of the world, these are foreign, overseas or abroad, for residence purpose)