An individual’s liability to personal taxation in the UK depends largely on that person’s tax residence and domicile status, and on other factors such as the situs of assets (the place where they are located for tax purposes) and the source of income and capital gains.
Why is my residence status important for UK tax purposes?
A UK resident is potentially liable to UK Income Tax and Capital Gains Tax on worldwide income/gains. However, if you are not UK resident special rules apply.
The basic tax rule is that non-residents are only chargeable to tax on income arising from a source in the UK.
Therefore, as a non-resident person, you are chargeable on the profits of a trade (or profession or vocation) if it is carried on in the UK, the profits of a UK property business if the land or property generating these profits is situated in the UK, employment income relating to UK duties, UK partnership income and UK pension income.
Dividend income, interest, and other savings income is taxable if the source of that income is in the UK, although please see below regarding disregarded income.
This income is chargeable in the UK at both basic and higher rate tax unless there are specific relieving provisions.
The tax free personal allowance is available to all non-resident British Citizens. It should be noted that the availability of a tax free personal allowance for non-residents is currently under review.
Should a non-resident reside in a country with which the UK has concluded a double tax treaty, the treaty normally restricts the UK's taxing rights to certain income i.e. income from property will always remains taxable in the UK and government pensions remain taxable here.
The UK does have an extensive network of double taxation agreements and providing they are considered carefully they should reduce the risk of a taxpayer being doubly taxed.
The basic rule is that non-residents are fully liable to UK tax in respect of their UK income. However, this is displaced in the case of what is called 'disregarded income'.
Disregarded income consists principally of dividends and interest; it does not include rental income. The significance of disregarded income is that a non-resident's tax liability cannot exceed the combined sum of the withheld tax on disregarded income together with what the non-resident's liability to tax would have been if disregarded income and certain reliefs and allowances were ignored.
Capital Gains Tax for Expats
In general non-residents are not subject to UK tax in respect of capital gains realised on the disposal of UK assets. There are, however, three exceptions to this general rule.
A non-resident individual or trust trading in the UK through a branch or agency is chargeable in respect of UK assets used or held in or for the purposes of the trade or the branch or agency. The same applies to companies trading in the UK through a permanent establishment.
Certain anti-avoidance legislation deems capital gains to be income and, as such, taxable even if accruing to a non-resident..
An individual who is non-resident for less than five complete tax years is assessed in the year of his return on gains realised during his absence on assets he held on the date of departure.
This does not apply to those individuals who were resident in the UK in less than four of the seven tax years preceding the year of departure.
Gains realised on assets acquired during the absence are not caught, and the charge is subject to any applicable Treaty.
Split year treatment
Under the Statutory Residence Test, you are either UK resident or non-UK resident for a full tax year and at all times for that tax year.
However, if during a year you either leave the UK to live or work abroad you may be eligible for the tax year to be split into two parts:
A UK part in which you are charged to UK tax as a UK resident; and
An overseas part in which, for most purposes, you are charged to UK tax as a non-UK resident.
What if I am resident in more than one country?
It is possible to be resident in the UK and another country at the same time, which amounts to “dual residence”.
In many cases there will be a double tax treaty between the two countries of residence which should ensure that you generally don't pay full tax twice on the same income or capital gains.
If you are dual resident it is important that you seek specialist advice in order to ensure you are not taxed unfavourably.
Where the UK does not have a treaty with another country, “unilateral relief” typically applies to grant a credit in the UK for foreign taxes paid.