Taxes for Expats in UK

    Your complete guide to expat tax in UK:

    Tax rates

    2017/2018 income tax rates

    Taxable Income Band GBP National Income Tax Rates
    0 - 45,000 20%
    45,001 - 150,000 40%
    150,001 + 45%

     

    A tax free personal allowance of GBP 11,500 is available to certain expat taxpayers. The personal allowance is reduced by GBP1 for every GBP2 of “adjusted net income” over GBP100,000.

    The tax rates for dividends are 7.5%, 32.5% and 38.1%

    Capital gains are taxed as follows:

    • 10% and 20% tax rates for individuals (not including residential property and carried interest)
    • 18% and 28% tax rates for individuals for residential property and carried interest
    Who pays

    Who pays tax in the UK?

    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 it works

    How is income taxed in the UK?

    Expatriate tax advice on employment income - An employee is taxed on all remuneration and benefits from employment received during a tax year ending on 5 April.

    All salaries and fees earned by directors are taxable as employment income. Directors and employees earning at an annual rate of GBP8,500 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.

    DTAs

    Taxes for expats in the UK: Double tax relief and tax treaties

    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 advice on pensions and how double tax treaties can benefit expats is available in the AES International knowledge library.

    Residency

    Expat tax advice on 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:

    1. They have a UK substantive employment (at least 40 UK workdays).
    2. They have UK accommodation.
    3. They have more than 90 days present in the UK in either of the preceding 2 UK tax years.
    4. They have UK-resident family (spouse, civil partner or minor children).
    5. 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.

    IHT

    Do I have to pay inheritance and gift tax?

    Inheritance tax (IHT) may be levied on the estate of a deceased person who was domiciled in the United Kingdom or who was not domiciled in the United Kingdom, but owned assets situated there. This means it can apply to the assets of deceased expats. An individual who does not have a UK domicile for IHT purposes is taxed only on UK-located assets. For IHT purposes, UK domicile is extended to apply to individuals resident in the United Kingdom for substantial periods (currently defined as residence in the United Kingdom in any 17 of the last 20 UK tax years).

    IHT is levied on the confirmed value of an individual's estate at death. If the deceased was domiciled in the United Kingdom for IHT purposes, the taxable estate includes worldwide assets; otherwise, it includes only UK assets.

    IHT is also levied on gifts made by the deceased within seven years prior to death. The main IHT rate is 40%.

    Various exemptions and reliefs are available.

    To prevent double taxation for expats, the United Kingdom has entered into inheritance tax treaties with 10 countries.

    CGT

    Do I have to pay capital gains tax?

    An individual who is resident and domiciled in the UK is taxed on gains arising on sale of assets located anywhere in the world. However, an individual not domiciled in the United Kingdom who elects to be taxed on the remittance basis for that year is taxed on sales of overseas assets only if the proceeds are remitted to the United Kingdom.

    In this case, the gain element of the sale proceeds is regarded as being remitted ahead of the capital. All individuals who are subject to UK capital gains tax (CGT) are entitled to an annual CGT exemption, but this is lost if the remittance basis is claimed.

    Effective from 6 April 2013, individuals who leave the United Kingdom during the year and who are considered resident before departure and who qualify for split-year treatment under the SRT are not normally chargeable to CGT on gains realised in the non-resident part of the tax year. This can be beneficial for expats’ capital gains taxes.

    However, individuals who, on departure, had been resident in the UK for four out of seven of the preceding UK tax years remain subject to “temporary non-residence” rules if their period of absence from the UK does not last for at least five years.

    The rules become increasingly complex where the temporary non-residence rules apply. Professional expat tax advice is recommended.

    The UK recently introduced a new CGT charge applying to the sale of UK residential property by non-resident expats. UK residential property includes any interest in UK land or buildings that, during the period of ownership, has either consisted of a dwelling or is an off-plan purchase on which a dwelling is to be built.

    The charge under the new regime applies to sale on or after 6 April 2015 without any transitional provision. However, the taxpayer may choose one of three alternative methods to reduce the chargeable gain with respect to any part of the gain attributable to the period before 6 April 2015 if the property was acquired before that date.

    Any non-resident expats who sell UK residential property need to file a NRCGT return within 30 days after the conveyance, regardless of whether tax liability exists. However, individuals who are already in self-assessment system do not normally need to compute the tax liability arising or include a computation of any gain or loss within that time frame. Penalties for late filing and late payment apply, and further professional advice should be taken as necessary.

    Various reliefs are available for CGT. The most common relief is main residence relief, which exempts all or part of a gain that arises on a property that an individual has used as their only or main home, if certain conditions are met.

    Entrepreneurs' relief is a relief available to taxpayers who sell or give away their businesses. This relief aims to reduce the rate of capital gains tax on qualifying disposals to 10%. Gains are eligible for entrepreneurs' relief up to a maximum lifetime limit, which is currently £10 million. Many other reliefs are available and may apply to expats.

    Capital losses can be automatically deducted from capital gains in the same year. Any allowable unused capital losses may be carried forward indefinitely to relieve future gains. Losses realised by non-domiciled taxpayers who have claimed the remittance basis are not normally regarded as capital losses except in certain circumstances.

    State pension

    Do expats qualify for a state pension

    In general, National Insurance contributions (NICs) are payable on the earnings of individuals, including expats, who work in the United Kingdom.

    Special arrangements apply to individuals working temporarily in or outside of the United Kingdom. Under certain conditions, an employee is exempt from contributions for the first 52 weeks of employment in the United Kingdom.

    Your state pension entltment comes down to how many years of NICs you've made.

    Finally...

    We believe the above information is accurate, however tax rates and rules can change, and we are NOT tax experts. Therefore, please do not rely exclusively on the information to determine your liability for tax.

    Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.

    If you'd like our help to source someone to assist you, please get in touch and we will do all we can to help.

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