One of the main features of taxation of private individuals in the UK is the specific approach to determination of tax relationship of an individual with the state. The regime of taxation of incomes of individuals who are resident in the UK for tax purposes depends on whether such individuals are domiciled in the UK or not along with their tax resident status.
Tax residency of private individuals
The status of tax residency in the UK for individuals is determined by the number of days when they are physically present in the territory of the UK during the tax period, or have their permanent home in the territory of the UK. The income tax period does not equal calendar year: it is 12-months period starting 6 April each year and ending 5 April of the following year.
Main criteria of tax resident status
There are several criteria of determination of tax residency of an individual in the UK known as the UK automatic tests, which are stated below in the order of priority:
- Physical presence in the territory of the UK for not less than 183 days during the tax period. This rule does not have any exceptions: if an individual is present in the UK for 183 or more days, he will become UK tax resident automatically in all cases.
- Ownership, rental or other title to occupy living premises located in the UK if all of the following conditions are met:
- Such living premises are available to the individual for at least 91 consecutive days, 30 days (not necessarily consecutive) of which fall in the tax period in question;
- The individual is present in his living premises in the UK for at least 30 days, not necessarily consecutive;
- The individual does not have other living premises situated abroad or is not present in such premises for more than 30 days during tax period.
- Working in the UK if all of the following conditions are met:
- The employment lasts 365 days during the tax period;
- More than 75% of the total number of days in the 365 days period are days when an individual does more than 3 hours work in the UK;
- At least one day of such working days must include more than 3 working hours in the UK.
Main criteria of non-resident status
The individual may be deemed non-resident in the UK if he meets the following criteria of automatic overseas test:
- The individual has been resident in the UK for one or more of the 3 tax periods before the current tax period, and he spends fewer than 16 days in the UK in the current tax period;
- The individual has not been resident in the UK for 3 tax periods before the current tax period, and he spends fewer than 46 days in the UK in the current tax period;
- The individual works full-time abroad and:
- Is present in the UK for less than 91 days during the tax period;
- The number of working days in the UK consisting of more than 3 working hours is less than 31;
- There are no breaks in working which last 31 or more days.
Sufficient ties test
If none of sets of criteria mentioned above allows to determine individuals’ tax residency status in the UK precisely, the sufficient ties test is to be applied. This set of criteria includes 4 ties:
- Family tie: spouse (including not officially married) or children younger 18 are tax resident in the UK;
- Accommodation tie: a person or his relative holds a house in the UK by which is available for staying in for 91 or more days during the tax period;
- Work tie: working in the UK during the tax period for at least 40 days which consist of at least 3 working hours;
- 90 days tie: the person is physically present in the territory of the UK for at least 90 days during one or two tax periods before the current tax period.
The number of ties required to obtain tax resident status in the UK depends on the number of days of presence of person in the territory of the UK during tax period.
|Number of days||Required number of ties|
|The person has been tax resident in the UK in at least 1 of 3 preceding tax periods*|
|More than 120||1|
|The person has not been tax resident in the UK in 3 preceding tax periods|
|More than 120||2|
*In addition to 4 sufficient ties mentioned above the country tie may be applicable in this case: the person is tax resident in the UK if the number of days when he is present in the UK in midnight (24:00) exceeds the number of the same days abroad.
If the profits of an individual are foreign sourced mainly, it may be important to evaluate the circumstances of his presence in the UK in order to become aware if such individual is ordinary resident or casual resident. Ordinary residents are the following:
- Individuals who have a particular purpose of their staying in the UK, such as business, employment, family or other purposes;
- Individuals whose presence in the UK is of regular and systematic character, which is in line with such individuals’ common lifestyle;
- Individuals who move to live in the UK voluntarily.
R. is an Italian citizen employed by Italian company. He has been sent to a business trip to the UK in order to implement a project and stayed there for approximately 9 months, from June 2018 to March 2019. The family of R. was staying in Italy and he visited them twice a month in his weekends. During his business trip R. also took 2 annual leaves of 14 days each one, first time travelling to Maldives, and second time staying in Italy with his family.
The first 2 months in the UK R. was staying in the hotel, and the remaining 7 months – in a rented flat. In March 2019 R. has completed the project and left UK to came back to Italy. As a result, in total R. has spent more than 183 days in the UK during tax period from April 2018 to April 2019. He is UK tax resident in that tax period, but taking into account all circumstances R. is not ordinary resident.
It is necessary to mention that if Double Tax Avoidance Agreements (DTAAs) concluded by the UK provide for other rules of tax residency determination for private individuals, the rules established by DTAAs must be applied as a priority to national UK rules. Generally, DTAAs are applicable in cases of dual residency of an individual in two jurisdictions at the same time according to their national rules.
Concept of domicile
Usually, domicile is understood as a relation of an individual to a place where he lives. This legal concept is formed by common law and does not have any statutory definition, so that the disputable questions of domicile are to be resolved on the basis of judicial practice. There are three types of domicile:
- Domicile of origin. Individual is considered to be domiciled in a country where his father was domiciled at the date of birth of an individual. Frequently, an individual is domiciled in a country where his place of birth is situated. Exceptions from this rule are situations when the father is not domiciled in a country where his children are born. Also, domicile may be changed if an individual leaves his country of origin to live abroad.
The country in which an individual is domiciled is the same country as of his father’s domicile in case of officially registered marriage of individual’s parents. If the marriage is not registered, the domicile of an individual must be the same as his mother’s domicile.
Origin is one of the most commonly used and clearly defined criteria of domicile determination for purposes of UK tax law. Domicile of origin can be changed in relatively few cases, e.g. when adoption takes place.
M. was born in the UK, his parents were married foreign citizens temporarily staying in the UK during their business trip. His father is domiciled in a foreign country, so that M. himself is also domiciled in the same foreign country as his father, but not in the UK.
The parents of N. are foreign married citizens not domiciled in the UK, but soon after his birth N. was adopted by a citizen of the UK whose domicile is also in the UK. As from the date of the adoption, N’s domicile changes from foreign country to the UK.
- Domicile of choice. If an individual leaves his country of origin to live permanently in a foreign country, he is entitled to change his domicile to such foreign country. In the UK the right to choose domicile may be given to persons who reach the age of 16.
At the moment of application to change domicile the applicant must reside in a foreign country which is not one of his origin, and must have the intention to reside there permanently or indefinitely.
S. was born in the UK, but his parents were staying in the UK temporarily being domiciled in a foreign country. Later, parents of S. came back to their foreign country to live there permanently. S. has decided to stay in the UK, he has obtained a university degree, became employed, got married and acquired real estate in the UK. As S. has no intention to leave the UK and live in a foreign country, he has a right to choose UK domicile instead of being domiciled in the country of his father’s domicile.
- Domicile of dependence. If an individual lacks legal capacity, his domicile corresponds to domicile of person on whom he is legally dependent, e.g. a parent or a custodian. If the domicile of such person changes from one country to another, the domicile of his dependent is to be changed automatically to the same country.
The person lacks legal capacity if he has not reach the age of 16, or in cases if the UK authorities restrict its legal capacity for some reasons (e.g. mental diseases). Also, domicile of dependence is applicable to marriages registered before 1 January 1974: in such marriages the domicile of wife depends on the domicile of her husband and can be changed accordingly, e.g. if woman who is citizen of a foreign country gets married to the UK domiciled man.
On 6 April 2017 the definition of deemed domicile has been given: the individual who has been tax resident in the UK for at least 15 of 20 previous tax periods may be considered domiciled in the UK in current tax period. This may lead to change of taxation system of such individual’s foreign income and gains which is described below.
Income tax: taxable incomes
The essential difference between tax regimes of domiciled and non-domiciled individuals resident in the UK is that in case of UK domiciled residents their worldwide incomes and gains are taxable, and non-domiciled residents are taxed on their UK sourced incomes and gains and foreign incomes (gains) remitted to the UK. In the same manner, individuals who are not ordinary resident in the UK may apply to be taxed only on remitted foreign incomes (except gains).
Generally, non-domiciled residents are not obliged to pay tax on their foreign incomes and gains which are not qualified as remitted to the UK. The concept of remittance may be notionally described as deferral of foreign incomes and gains taxation until the moment when such incomes and gains are brought to the UK (i.e. remitted to the UK). In contrast with UK sourced incomes and gains which must be fully taxed only because they arise, foreign incomes and gains may be taxed only in those parts that were brought to the UK.
The regime of taxation of remitted foreign incomes differs for some types of taxpayers: non-domiciled individual who is ordinary resident in the UK may use the remittance basis of taxation of both foreign incomes and gains. Domiciled individual who is not ordinary resident in the UK may also apply for taxation of foreign incomes on a remittance basis, however his foreign gains are to be taxed on the arising basis. Basically, gains (or capital gains) are profits which arise as a result of disposal of property (sale of real estate, assignment of securities, etc.). Thus, the taxable incomes and gains for individuals with different taxpayer’s status are as follows:
|Resident and domiciled in the UK||Non-domiciled UK resident|
|Ordinary resident||Worldwide incomes and gains (both UK sourced and foreign) are taxed on the arising basis||— UK sourced incomes and gains are taxed on the arising basis|
— Foreign incomes and gains are taxed on the remittance basis
|Casual resident||— UK sourced incomes are taxed on the arising basis|
— Foreign gains are taxed on the arising basis
— Foreign incomes are taxed on a remittance basis
|— UK sourced incomes and gains are taxed on the arising basis|
— Foreign incomes and gains are taxed on the remittance basis
Examples of remitted incomes and gains
Her Majesty’s Revenue and Customs (HMRC) issued a Guidance providing examples of remittance of foreign incomes and gains and/or sources of such incomes and gains to the UK, when foreign incomes and gains are to be included into the tax base of non-domiciled individual resident (or casual resident) after he obtains such status:
- Transfers of foreign income from foreign bank account to bank account in the UK;
- Withdrawal of cash from foreign bank account while staying abroad and bringing cash to the UK;
- Transfers of foreign income to the spouse (including not officially married) who brings it to the UK;
- Transfers of foreign income to UK bank account of registered Charity;
- Transfers of foreign income from rent of real estate situated abroad directly to UK bank account;
- Repayment of the loan granted to a company controlled by the individual or return of funds previously transferred to a foreign trust controlled by the individual to his UK bank account;
- Transfer of interest accrued on inherited money which is deposited on foreign savings account to the UK bank account.
- Other assets:
- The assets acquired with foreign income and physically brought to the UK;
- Foreign gains from sale of real estate situated abroad which was previously acquired with foreign incomes, if transferred to the UK bank account;
- Real estate or other assets situated in the UK acquired with foreign income even if the payment is made to foreign bank accounts of the seller;
- Shares or bonds of UK companies acquired with foreign incomes from foreign broker.
- Services provided in the UK:
- Transfer of foreign income from a foreign bank account to foreign bank account of provider for services rendered in the UK;
- Purchase of air tickets for flights from foreign countries to the UK using foreign income;
- Booking of international tours which start in the UK with foreign travel agents using foreign income;
- Transfer of foreign income to friends as payment for use of their property situated in the UK.
- Using of credit cards:
- Use of foreign banks’ credit cards in the UK for payment of expenditures and repayment of debt with a foreign income;
- Use of UK issued credit cards abroad for payment of expenditures and repayment of debt with a foreign income.
- Foreign loans:
- Repayment of mortgage taken with foreign bank for buying real estate in the UK;
- Taking a loan in a foreign bank secured by foreign incomes of individual who use the loan to move to the UK. If loan agreement does not provide for regular repayments (e.g. if the loan and interest are to be fully repaid in the end of loan’s term) the loan is also considered as remitted to the UK.
- Gifts to third parties:
- Transfer of foreign income to a business partner who resides abroad and then brings it back to the UK;
- Gifting the foreign income or assets acquired with foreign income to adult children who reside abroad. If the same income is transferred from children to grandchildren who spend it in the UK, the original gift is considered as a remittance to the UK.
- Other cases:
- If foreign source of income has ceased before the rules on remittance entered into force, that is before 6 April 2008, then the income which arose before said date, but was remitted to the UK after 6 April 2008, is taxable;
- If a transfer from foreign savings account closed before 6 April 2008 to UK bank account takes place, then the amounts of interest accrued are considered to be remitted to the UK;
- If a friend of a person lives in premises situated outside the UK which was acquired with such person’s foreign income, and friend allows this person to live in friend’s premises located in the UK in exchange, then the remittance also takes place;
- If one type of income has been nominated as remitted to the UK in income tax return and then the remittance charge was paid, there may be a situation when HMRC will deem that it was other type of income, in fact unremitted, instead of nominated one. The need to arrange individual consultation in order to clarify which income was deemed as remitted may arise;
- If a termination of life insurance agreement or life annuity or capital redemption policy takes place, or rights under such agreements are assigned to other persons, so that the proceeds of those operations are transferred to foreign bank account, the gains which arise are not taxable in the UK. However, such gains are to be reflected in income tax return even if not remitted;
- Incomes and gains of non-domiciled resident which arise before such person became resident in the UK for the first time are not subject to tax in the UK even if remitted to the UK after becoming a resident.
For purposes of this exemption it is possible to split the first tax period of residency into two parts, first one before the date the person arrived to the UK, and the second one after this date, so that the foreign incomes and gains which arise before the date of arrival are not taxable in the UK. This rule is applicable if the person has not been tax resident in the UK in 5 previous tax periods.
D. has moved to the UK to live there permanently on 1 August 2017. As of the end of tax period 2017-2018 he became tax resident in the UK for the first time, being physically present there for more than 183 days. Before his arrival D. has sold his flat situated abroad at 10 June 2017.
Despite the fact that this date falls within tax period starting 6 April 2017 and ending 5 April 2018, D. is entitled to split this period onto two parts, one from 6 April 2017 to 31 July 2017, another from 1 August 2017 to 5 April 2018. Thus, the exemption of foreign gains received in the first part of tax period (i.e. between the date of commencement of tax period and the date of arrival to the UK) from capital gains tax in the UK will be applicable.
The list of examples mentioned above is not exhaustive, it only provides some practically known or possible situations of remittance of foreign incomes and gains to the UK. Remittance may be determined in some other circumstances of receiving and using of foreign incomes and gains.
The use of remittance basis must be applied for by the taxpayer if his foreign incomes and gains exceed 2 000 pounds sterling in tax period. Otherwise, the arising basis will be used by default as a main taxation system. Incomes and gains which do not exceed 2 000 pounds sterling in total during tax period are not required to be reported.
The remittance basis of taxation is not applicable if a person is deemed to be domiciled in the UK as a result of being tax resident in the UK in at least 15 of 20 previous tax periods. This will lead to automatic change of basis of taxation so that arising basis will be applicable to all worldwide incomes and gains of an individual.
This concept is important for persons who move to the UK to live there permanently and who have their capital formed before the arrival to the UK, and, consequently, before becoming tax resident in the UK. In such case it is presumed that during the period of tax residency in other country money and other assets of an individual were taxed in accordance with the laws of foreign country. The concept of clean capital arises from said presumption.
Clean capital is not subject to taxation even if remitted to the UK by non-domiciled individuals who become tax resident in the UK in dates which fall within the periods of their tax residency in the UK. There is also a definition of mixed funds, formation of which takes place in case of keeping incomes of different tax periods and different sources in one account.
If a person has mixed funds, tax exemption for clean capital remitted to the UK may be complicated by the need to provide evidence that remitted incomes and gains or their parts belong to certain tax periods and are generated from certain sources to tax authorities. This is the reason why HMRC makes recommendation to keep money earned before and after becoming UK tax resident in separate bank accounts in order to prevent mixture.
Besides this, it is also recommended to keep incomes of different types (salary, dividends, capital gains) in separate accounts to ensure that correct tax rates will be applied after remittance to the UK, as there are different tax rates scales.
Income tax rates
There is a progressive income tax rates scale in the UK with reference to the total amount of individual’s income:
|Income per period (pounds sterling)||Tax rate|
|Personal allowance||Up to 12 500||0%|
|Basic rate||From 12 501 to 50 000||20%|
|Higher rate||From 50 001 to 150 000||40%|
|Additional rate||Over 150 000||45%|
The attention must be paid that the appropriate tax rate is applicable not to all taxable income, but to the amounts which exceed the corresponding threshold for the rate.
D. has earned 60 000 pounds sterling in his tax period from 6 April 2018 to 5 April 2019 as an income from employment (salary). 12 500 pounds sterling out of them are not subject to taxation at all, 37 500 pounds sterling are taxable at 20%, and 10 000 pounds sterling are taxable at 40%. The amount of tax payable is (37 500 х 20%) + (10 000 х 40%) = 11 500 pounds sterling.
There is also a different income tax rates scale for dividends, the personal allowance in which is established each year. For tax periods 2018/2019 и 2019/2020 the dividends personal allowance is 2 000 pounds sterling.
|Income per period (pounds sterling)||Dividends tax rate|
|Personal allowance||Up to 2 000||0%|
|Basic rate||From 12 501 to 50 000||7,5%|
|Higher rate||From 50 001 to 150 000||32,5%|
|Additional rate||Over 150 000||38,1%|
It is required to add amounts of dividends to the rest amounts of taxable income in order to determine tax rates, and then apply special dividends rates to their amounts and general income tax rates to the rest income.
D. has earned the same 60 000 pounds sterling during his tax period from 6 April 2019 to 5 April 2020 as an income from employment (salary). Earlier he has acquired shares of UK company which has paid dividends in the amount of 5 000 pounds to him in the same tax period. The total amount of income is 65 000 pounds, which relates to a higher rate (50 001 to 150 000 pounds).
The amount of salary has not changed and it still is required to pay 11 500 pounds sterling of tax on salary. In addition to this, the tax on dividend income is payable in the amount of (5 000 – 2 000) х 32,5% = 975 pounds. The total amount of tax payable is 12 475 pounds.
If a person chooses remittance basis, he will not be entitled to personal allowances prescribed for domiciled UK residents.
In particular cases the fixed remittance charge is to be paid for using of remittance basis of taxation of foreign incomes and gains by non-domiciled individuals resident in the UK. Remittance charge is applied since 2008 and currently is:
- 30 000 pounds for individuals who have been tax resident in the UK at least 7 of 9 previous tax periods;
- 60 000 pounds for individuals who have been tax resident in the UK at least 12 of 14 previous tax periods.
Time limits of taxes for individuals
Time limit for request of income tax returns from an individual who was notified previously by HMRC but has not filed the return is 3 years from the date specified in the request. If tax return was filed in timeframes specified in the request, the time limit for assessment is 3 years from the filing date.
Standard time limit of assessment of individuals who are taxpayers of income tax and capital gains tax (as well as other taxes) is 4 years from the end of tax period.
In some cases time limits may be extended to:
- 6 years from the end of tax period if non-payment of tax occurred because of careless behavior of taxpayer or his representative;
- 12 years from the end of tax period if non-payment of tax is related to offshore activities or offshore operations of taxpayer;
- 20 years from the end of tax period if non-payment of tax occurred because of deliberate behavior of taxpayer or his representative.