The frequently asked questions about UK tax resident status.
According to a report produced by the UK government, about 1% of UK income tax was derived from overseas people.
As property accountants, we are regularly asked about tax when moving out of the UK or investing in the UK buy to let market whilst living abroad. We will look to answer the below questions in this article.
– What is a non-resident for tax purposes?
– What is the difference between a UK resident and UK domiciled?
– How many days can a non-resident stay in the UK?
– Can you be a resident in 2 countries?
– Am I still a UK resident if I live abroad?
– Do non-UK residents pay tax?
– Do I need to complete a UK tax return if I am non-resident?
– Is UK state pension taxable for non-residents?
Why you may be paying too much tax when moving to or from the UK
Our property tax specialists help over 1,000 of monthly retained UK landlords and property investors to minimise tax whilst building their wealth.
There are many reasons why people pay far more tax than they need. This is because
– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what available tax reliefs are available to them.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware
– They have moved to the UK but become resident in two countries, meaning that they could pay tax in both countries.
– Tax reliefs are not taken into account when submitting a self-assessment tax return in the UK and another country such as America or Hong Kong.
Understanding the basics of UK residence tax
As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that moving home is stressful. This is certainly increased when your home is going to be in another country like Hong Kong, America or the Middle East etc.
The levels of stress can be enhanced when you talk about moving countries and having to work out the different elements of tax.
I appreciate we are discussing the subject of UK tax when someone is leaving the UK. However, it does not hurt to remember the UK personal income tax that needs to be considered in the UK.
We need to think about people that are moving out of the UK to another country and for those that live outside the UK but still invest in UK buy to let properties.
It is important to note that the UK tax system is based on a fiscal year. A fiscal year runs from 6th April to the following April. Many countries use a calendar tax system like the IRS in the United States. This can cause confusion when looking at the two tax systems.
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What is the difference between UK resident and UK domiciled?
There are a few tax statuses that we need to consider for the UK
– Non-UK resident
– UK resident
– UK Domicile
A non-UK resident is not subject to income tax on their foreign earned income. They will pay UK tax to HMRC based on the money that they earn on their UK investments.
A UK resident will pay tax on their UK income and may have to pay tax on their worldwide income too. There is a way to avoid paying tax on the non-UK earned income using the remittance basis. We will look into this in more detail later.
UK Domiciled means that the person has either lived in the UK for 15 out of the last 20 tax years or is someone that was born and raised in the UK. Either way, a person that is the UK domiciled will pay income tax on their worldwide income.
Someone that is domiciled in the UK is also subject to inheritance tax on their worldwide assets. Again, we will investigate this later.
It is possible to be domiciled in another country even though you live in the UK. That is because you have a desire to return home in the future. You may already have a home in a country in which you wish to spend the rest of your days or have a business that you will return to work.
Statutory Residence Test – Automatic UK residence test
There are many ways in which HMRC will class you to be a UK resident for taxation purposes. They are as follows:
– The number of days that you have lived in the UK
– If you have a UK home and the number of nights that you have stayed there
– If you have a job in the UK and the number of days that you work
We will now go through each of these conditions in more detail.
Statutory Residence Test – 1st Automatic UK residence test – Days lived in the UK
What is the UK Statutory Residence Test? The Statutory Residence Test is also known as the SRT test which came into force from 6th April 2013. It is designed to help you and the HMRC work out if you should pay UK tax. It is based on
– The amount of time that you live in the UK
– The amount of time that you work in the UK
– The number of connections you have in the UK, be it assets or people.
You are deemed domiciled if you have lived in the UK for more than 183 days. This means that you will pay tax on your UK income. You may also need to pay tax on your worldwide income if you have lived in the UK for more than 15 years. We will talk about this later.
If you have lived in the UK for more than 183 days, then you do not need to consider anything else. You may need to register for self-assessment if you have taxable earnings that is not taxed at source. Income such as employment is taxed at source. You would not need to file a self-assessment tax return if
– Your employment income is less than £100,000
– You did not receive any other form of benefits in kind such as company car, medical insurance etc
– You have no other form of untaxed income such as rental income from buy to let properties, dividends from UK companies etc
What if you have not lived in the UK for more than 183 days?
Statutory Residence Test – 2nd Automatic UK residence test – Your home
You may still be considered a UK tax resident if:
– You had a home in the UK for more than 90 days
– You lived in the UK home for more than 30 days in a tax year
– You do not have an overseas home for more than 30 days in the same tax year
Statutory Residence Test – 3rd Automatic UK residence test – Working days
You may still be considered a UK tax resident if:
– You work full time in the UK for the entire tax year
– 75% of your work time is spent in the UK whereby you work for more than 3 hours in any given workday.
There are more considerations such as the ties test that we need to consider for you to be UK tax resident if the above three tests are not met
What is a non-resident for tax purposes?
A person who is a non-resident for tax purposes is someone that does not meet the conditions outlined above, which would suggest that you are a UK tax resident.
To become a non UK tax resident, further tests need to be performed as we shall outline here
UK Statutory Residence Test – Automatic overseas residence test
Suppose you have not lived in the UK for more than 183 days we still have to take into account other matters. This is otherwise known as automatic overseas tests.
You are automatically deemed to be a non-UK resident if you meet the three below criterion
– You spend less than 16 days in the UK, in the current year and 16 days on average in the three preceding tax years.
– You spend less than 46 days in the UK, in the current tax year but did not stay in the UK in the last few tax years
– You work overseas and
– You spend less than 91 days in the UK and
– You work in the UK for less than 31 days, in which you work three hours each day.
This applies for UK landlords that lived in the UK and now live abroad. This also applies to people that invest in the buy to let market but do not live in the UK for more than 16 days in the said tax years.
This means that you are not a UK resident for tax purposes. You will still need to submit a UK self-assessment tax return if you have income from UK investments such as buy to let property income or earnings from furnished holiday lets.
All other forms of income will be free from UK tax. You will need to think about the countries that you move to and their tax residence status. For example:
– People moving to the US need to think about US tax status, known as a foreign resident alien. You are subject to worldwide income if you live in the United States for more than 183 days in the last three tax years. The tax year from the IRS runs from 1st January to 31st
– People moving to Hong Kong will be a HK tax resident when they spend more than 180 days in a given tax year. Their tax year runs from 6th April to the following 5th
– There are many other countries that we cannot cover here, but the above gives you thoughts as to what to consider.
Statutory Residence Test – Sufficient ties test
You may need to do further tests if you have not met the above tests:
– Automatic Uk tests or
– Automatic overseas test
If you have been a UK tax resident in the last three tax years, you will need to consider whether or not you are a UK tax resident because of the sufficient ties test. A sufficient ties test will consider:
– Family ties that live in the UK
– An accommodation that you have and use in the UK
– Work that you perform in the UK
– The 90-day tie to the UK
If you were in the UK in the past three tax years, you would be considered a UK tax resident if
– You have 4 ties and spent between 16 and 45 days in the UK
– You have 3 ties and spent between 46 and 90 days in the UK
– You have 2 ties and spent between 91 and 120 days in the UK
– You have 1 tie and spent over 120 days in the UK.
You will be a UK tax resident if you were a UK tax resident in the last three tax years and meet the below criterion:
– You have 4 ties and spent between 46 and 90 days in the UK
– You have 3 ties and spent between 91 and 120 days in the UK
– You have 2 ties and spent over 120 days in the UK.
If you do not meet the above criterion, then you will not be a UK tax resident.
UK tax resident and worldwide income V remittance basis
UK tax residents that are not domiciled in the UK for tax purposes have a choice of how their worldwide income is to be taxed.
– Have worldwide income subject to UK income tax
– Only have UK income subject to UK income tax law
One of the benefits of having your worldwide income subject to income tax is that you obtain a personal allowance. A personal allowance for tax purposes is the tax-free money that you can earn before HMRC charge you income tax or Capital Gains Tax.
The downsides to the above are that you are taxed on your worldwide income. You will need to perform some calculations to compare
– the personal tax-free allowances against;
– the UK income tax that you will be charged on your worldwide income.
We have written an extensive article for people that move to the UK and unsure what remittance basis is or how to choose between the two above options.
If you use the remittance basis, you will lose the entitlement to the UK tax-free personal allowance. Any money that you bring into the country is subject to UK tax. There are exceptions to the rule as we explore these in more detail in the aforementioned article.
Please note that your worldwide income is subject to UK income tax if you have lived in the Uk for more than 15 years of the last 20-year period. This is automatic, and there is no way around this.
UK tax resident split year
There are times when you move into or from the UK within the fiscal year (6th April to following 5th April). This is known as a split year treatment for UK residence tax purposes. If you are moving to the UK or moving from the UK within the tax year be sure to read our other dedicated article.
Capital Gains Tax for non UK residents
A capital gains may be taxed in the UK when you sell an asset such as a buy to let property investment. There have been many Capital Gains Tax changes since 2015 for people leaving the UK and making a taxable gain.
You will still be subject to UK Capital Gains irrespective of where you live if the asset in question is in the UK.
UK tax residence and Inheritance Tax
Please note that you also need to consider UK Inheritance Tax if you are deemed to be domiciled in the UK. Someone that lives in the UK for more than 15 years of the last 20 years will be deemed domiciled for inheritance tax purposes.
This means that your world wide assets would be subject to UK inheritance tax law. You need to take tax advice from Optimise Accountants if you are not sure how Inheritance Tax (IHT) could affect your global assets.
We have written another article about basic tax planning tips when it comes to IHT. This is certainly worth a read if you are unsure what IHT is.
How does this affect our American readers.
You may be an American moving from the United States to the United Kingdom. I hope the above has helped you understand a little more about the UK tax system.
You may be an American that is moving out of the UK. It is important for you to understand how long it takes you to become a Non Uk tax resident. Do not forget that you will still need to file a UK tax return to HMRC for the rental income that you derive from UK buy to let properties.
You may be a British citizen that is looking to move to the United States. Purser Tax has some useful articles to help you understand if you are to become a US tax resident. You will need to obtain an ITIN number which is the same as a UTR but for the IRS tax system.
To learn more, make sure you head over to our sister company Purser Tax that helps British people save tax in the US and Americans save tax in the UK. It is one thing to be tax efficient in the UK or the US; it is another thing to be tax efficient across the Atlantic. This is why you need to get a tax advisor that truly understand international tax.