Foreign Aspects Of Tax: Residence/Ordinary Residence/Domicile
UPDATE October 21, 2013:
Following their overhaul of the way that statutory residence is determined (covered in our Budget 2013 blog here), HMRC has released updated guidance in booklets RDR1 and RDR3. These replace the previous guidance, HMRC6, and contain examples covering typical situations that may apply to you if you have foreign income or spend a significant amount of time out of the UK.
Generally cases are clear cut, but if they are more complicated (for example, how do you determine what counts as ‘significant ties’ to the UK?) it could be worth consulting a chartered tax adviser to navigate you through the process. RDR3 is especially important, as it contains some significant changes to the split year treatment guidance.
This week we shall be focusing on a topic that is relevant to lots of people – namely, how much tax do I have to pay if I have earnings outside the UK? The answer, of course, can be more complicated than you think (after all, Britain has the most complicated tax system in the world), but we shall do our best to shed some light on the question.
The key question you have to ask is: Am I classed as resident and/or ordinarily resident and/or domiciled in the UK?
Note that the following information is for individuals only, not companies.
- There is no fixed definition of ’residence’, helpfully.
- If you are resident in the UK, you are liable to pay tax on all your income, wherever it comes from, at UK tax rates, including Capital Gains tax.
- However, if you are resident, but are not domiciled and/or ordinarily resident in the UK, there are special rules which may apply to your foreign income and gains.
Am I resident?
- There are lots of tests, and it is difficult to prove that you aren’t resident.
- If you are present in the UK for more than 183 days in a tax year, or average 91 days in a tax year over a 4 year period, you are considered resident, no exceptions.
- Even if you are present for fewer than 183 days, or average less than 91, it does not necessarily mean you are classed as non-resident for tax purposes, as in Gaines-Cooper vs HMRC.
- Robert Gaines-Cooper followed the guidelines for days present in the UK, however was deemed to be resident, since despite residing in the Seychelles it was shown that he continued to have significant ties to the UK (His wife and son lived in a house in the UK, he frequently attended social functions such as Royal Ascot).
- If you leave or enter the country for permanent residence part-way through the tax year, then it may be split into resident and non-resident periods for the purpose of calculating tax due (See ESC A11).
- More factors can be found in Appendix A
– Ordinarily Resident
- Whether or not you are ordinarily resident in the UK is only relevant if you have foreign income during a tax year.
- The word ‘ordinary’ indicates that your residence in the UK is typical for you, and not casual.
- If you have always lived in the UK, you are considered ordinarily resident at the moment.
- If you come to the UK, you do not have to intend to remain permanently or indefinitely in order to be ordinarily resident. It is enough that you satisfy all of the criteria found in Appendix B
- You can be ordinarily resident in more than one country at a time.
- It is possible to be resident, but not ordinarily resident.
- Similarly, it is possible to be ordinarily resident, but not resident (though this is unusual).
- Domicile is a matter of general law, not just tax law.
- The main points you should consider regarding UK domicile
- You cannot be without a domicile
- You can only have one domicile at a time, unlike residence or ordinary residence.
- You are normally domiciled in the country where you have your permanent home
- Domicile is distinct from nationality and residence
- There are three types of domicile;
- Domicile of origin: normally acquired from your father when you are born. The fact that you were born in the UK does not automatically mean that you are domiciled here.
- Domicile of choice: to acquire a domicile of choice, you must leave your current country of domicile and settle in another country, or if you are already living in another country, you will acquire it if you intend to remain permanently or indefinitely.
- Domicile of dependence: Until you have the legal capacity to change it, your domicile will follow that of the person on whom you are dependent. This applies to children before the age of 16, women married before 1974, and those lacking sufficient mental capacity
- The attached flowcharts will help you to determine this.
How does this affect what tax I pay?
As stated above, if you are resident in the UK, you will normally be taxed on your worldwide income and gains, at UK tax rates. If you are resident, but not a) domiciled, or b) ordinarily resident in the UK, then there is an alternative tax option available, called the remittance basis. This is only relevant if you have foreign income or gains.
The Remittance Basis, how does it work?
If you are eligible and use the remittance basis, you will have to pay UK tax on all of your UK income and gains; however you will only be liable on your foreign income and gains if and when you bring them (remit them) to the UK.
You are not obliged to use the remittance basis, even if you are eligible – you must choose to use it, otherwise it is assumed that you use the arising basis. The examples below illustrate some typical situations:
1. If you are employed in the UK, but non-domiciled, and have small amounts of foreign income, you can benefit for an exemption on UK tax on foreign income. The criteria can be found in Appendix C.
2. If your unremitted foreign income & gains are greater than £2,000 in any tax year, you have to claim to use the remittance basis.
If you do claim, then in most cases you will lose you entitlement to UK personal allowance (£8,105) and Annual Exempt Amount for Capital Gains Tax (CGT), (£10,600). However, if you are “dual resident” you may not lose your personal allowance.
Depending on how long you have been resident in the UK, you may have to pay the £30,000 remittance basis charge (RBC).
3. If your unremitted foreign income & gains are less than £2,000 in the tax year, you can use the remittance basis without having to make a claim or complete a Self Assessment.
You will not have to pay the RBC.
You will be automatically taxed on the remittance basis
You won’t lose your entitlement to UK personal allowances or Annual exempt amount for CGT.
For example: if you have £5,500 total foreign income & gains in the tax year, and you bring (remit) £4,000 into the UK, your unremitted foreign income & gains would be £1,500.
The Remittance Basis Charge (RBC)
The RBC is an annual charge of £30,000, a tax on part of the income you leave outside the UK. It is basically the ‘rent’ you pay for residing in the UK.
You must pay the RBC if; 1) your unremitted income & gains are greater than £2,000, 2) you are claiming to use the remittance basis, 3) you are aged 18 or over at the end of the tax year, and 4) you are a ‘long-term’ resident of the UK. To be a ‘long-term’ resident, you must have been present for the whole tax year for 7 out of the past 9 years.
Dual residence = dual tax?!
Imagine for a minute that you are resident in the UK only, but receive income from a different country. Since you are a UK resident, you have to pay tax on any income you receive, no matter where you receive it. However, since the income is arising in a different country, you could be liable for tax in that country as well. You could be taxed twice!
To avoid this, and determine which country you owe tax to, there exist double tax agreements (DTA) between countries. They usually operate in one of three ways:
- You pay tax in your country of residence, and get exemptions in the country you made the income.
- You pay tax in the country where you made the income, and get the exemption in your country of residence.
- Tax is deducted in the country where you made the income, and you declare this as already paid in your country of residence.
However, if you have dual-residence, how do you decide where you pay tax?
To determine your residence in this situation, there are various ‘tie-breaker’ rules, which are applied successively until residence is allocated to one state or another. The detailed rules can be found here, but the tests are generally applied in the following order; 1) Permanent home, 2) Centre of vital interests, 3) Habitual abode, 4) Nationality.
If no tax treaty exists between the UK and the other country, you pay tax at the higher of the two countries tax rates.
Other examples/cases/information (ESC A11, Mixed Funds, Form P85, NRL1 – Non-resident landlord)
There are several pieces of information that don’t fit in the sections above, but are quite important to consider.
ESC A11– The split year treatment can be applied if you are entering or leaving the country on a permanent basis part-way through the UK tax year. By splitting the year into periods where you are resident and non-resident, it clarifies the total tax liability. The tax liability will either be pro-rated (you will only pay tax on a proportion of your income based on how much of the year you were resident for, e.g. rental income), or calculated based on whether you were resident when you receive it (e.g. bonuses, dividends).
Mixed Funds – A mixed fund is an overseas fund of money and/or property which contains more than one type of income or gains and/or income from more than one tax year. At its simplest, a mixed fund could be a bank account that contains your savings, as well as the account you receive your salary into, but it also includes assets purchased or derived from foreign income or mixed funds, such as property, shares or artwork.
This is important if you are a UK resident, but not domiciled. For example, if you have a bank account with a balance of £5,000 of savings, and you deposit into the same account £5,000 of foreign income, if you then remit £5,000 from that account into the UK, you will be taxed on the whole amount. It is assumed that you are remitting the income, not the savings. However, if you had kept the money in different accounts, and just remitted the balance from the savings account, you would not have to pay UK tax on that amount.
Basically, keep your accounts separate, or you will suffer!
Form P85 – If you are leaving the UK either indefinitely or to work abroad for at least a complete tax year, you must fill out a P85 form in order to claim tax relief or repayment, or to inform HMRC of any further UK income you will receive. If you are required to fill out a Self Assessment form, you do not need to submit a P85.
NRL1 – Non-resident landlord scheme–The purpose of the scheme is to tax rental income of non-resident landlords. It works by having the letting agents used by the landlord deduct basic rate (20%) tax from any rent they collect. This can be offset against their own tax bill at the end of the year. If the landlord does not have an agent working for them, and the rent is greater than £100/week, their tenants must deduct the tax.
APPENDIX A – Residency criteria
The following is a list of factors that are considered when determining residency.
- Family location – do you have significant family connections with a country.
- Business & Property locations – do you own property or a business in the country?
- Social links – are you member of any clubs, such as sports clubs etc.?
- If the nature and degree of the above show that it is usual for you to live in the UK, you are resident.
APPENDIX B – Ordinary Residency criteria
- You are in the UK for a reason – you have a job here, or a settled family here.
- Living here is typical for you – you are based in the UK.
- You have come to the UK voluntarily. The fact that you chose to come here at the request of your employer does not make your presence involuntary.
APPENDIX C – Minor foreign income UK tax exemption criteria – all conditions must be met.
- UK resident
- Not UK domiciled
- Employed in the UK
- Basic rate taxpayer
- Income from overseas employment for the tax year is less than £10,000
- Overseas bank interest for the tax year is less than £100
- All overseas employment income is subject to foreign tax
- Not otherwise required to complete the Self Assessment tax return