The taxation of monies earned overseas has for decades been a contentious issue for Ex-Pats and overseas residents wishing to transfer money into the UK.
Bona Fide tax planning can create bespoke structures which take advantages of the legal options available under the Finance Act 2013 which received Royal Assent on 27th of July 2013. From 6 April 2013 the rules that determine if someone is resident in the UK for tax purposes have been put on a statutory basis. These rules are known as the Statutory Residence Test (SRT). For the majority of people whether or not they are resident for tax purposes is quite straightforward under the test and their position will not change. For those with complex circumstances the SRT will provide more certainty about their residence status.
To help you understand your tax residence status HM Revenue & Customs (HMRC) have launched an on-line tax residence indicator. This residence indicator will give you an indication of your tax residence status after answering a few straightforward questions such as how many days you spent in the UK, where you have a home and if you have family ties.
How ‘residence’ and ‘domicile’ affect your tax
Understanding ‘residence’ and ‘domicile’
You are probably ‘resident in the UK for tax purposes’ but ‘domiciled abroad’ if all of the following apply:
- you live most of the time in the UK
- you and your parents were born abroad
- your permanent home is abroad
- you intend to return to your home abroad
Before 6 April 2013, you may be treated as ‘not ordinarily resident’ if all of the following apply:
- you have only recently arrived in the UK
- you did not intend to live here for three years or more when you first arrived in the UK
- you are not in the UK for three months or more in any one year on average
The new rules are intended to simplify an area notorious for taxpayers to inadvertently place themselves in precarious positions and incur tax liabilities and in extreme cases even tax penalties. Macintosh Heywood Ltd are able to introduce clients wishing to maximize their legitimate allowances in planning their tax status and in particular the repatriation of capital from overseas in the most tax efficient manner.
For further information on Residency, Domicile and Non Domicile status HMRC offer clear concise advice and guidance on their website. The title of the relevant advice is “RDRI” which is a guide for residents and non-residents alike on the residence domicile and remittance basis rules for tax years 2012-2013 onwards For advice on tax matters and rules affecting your tax liabilities in the uk up to tax year 2012 2013 please refer to HMRC6 Residence, Domicile and the Remittance Basis.
How you pay tax
If you are living in the UK and are ‘domiciled abroad’ in the UK, you can choose how you want to pay tax on your foreign income and gains (a ‘gain’ is when something which you own is sold for a profit).
- either pay tax on the ‘arising basis’ – which means you pay tax in the UK on all of your UK and foreign income and gains
- or you can pay tax on the ‘remittance basis’ – which means that you pay tax in the UK on your UK income and gains. You also pay tax on your foreign income and gains but only if they are brought into the UK
Up to 5 April 2013, you could also choose to be taxed on the remittance basis if you were resident but not ordinarily resident in the UK. Where you did so, the remittance basis will only apply to your foreign income. Your foreign gains will be taxed on the arising basis, whether or not you decide to be taxed on the remittance basis.
Tax allowances if you choose the remittance basis
If the amount of foreign income and/or gains that you leave abroad is £2,000 or more in any year, and you decide to be taxed on the remittance basis, you will lose your annual UK tax-free Personal Allowances and Capital Gains Tax annual exempt amount.