UK Tax for Expats. 0 31,865 Basic rate 20% 10% 18% 31, ,000 Higher rate 40% 32.5% 28% Over 150,000 Additional rate 45% 37.

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1 UK Tax for Expats When planning a move to the UK, it is important expats optimise the opportunities available to them to reduce their UK income tax bill. Whether coming to the UK on secondment or a more permanent basis, some careful pre-arrival tax planning would often be helpful. It is important this pre-arrival planning is considered by expats and HR professionals. In particular, if you are an expat with UK taxable employment duties there are UK tax reliefs/claims that could be made in order to ensure you pay the correct amount of tax and reduce your UK tax bill. The major considerations are outlined below: Overseas workday relief If you moved to the UK and provided you meet specific criteria your foreign workdays could be exempted from UK tax. Relief for qualifying travel expenses If you have been seconded to work in the UK you may be entitled to valuable tax reliefs which could compensate you for costs associated with attending a temporary workplace in the UK. Are you UK resident If you are not permanently based in the UK and only travel here for short term business visits you may be a non-resident and subject to UK tax on UK source earnings only. Double tax relief If you have income arising from overseas (e.g. a foreign rental property) it is important to take steps to ensure you are not double taxed and mitigate tax exposure in accordance with any applicable tax treaty. The above list is not exhaustive and all points are considered in more detail later in this article. What follows is a summary only of what can be a complex regime. It therefore aims to provide general guidance only, and employers and individuals should each seek specific advice on their circumstances as appropriate THE BASICS The UK tax year runs from 6 April to 5 April, and the regime relies heavily on the concepts of residence and domicile (see below) to establish the extent to which an individual s worldwide income and gains are taxable in the UK. The main direct personal taxes in the UK are Income Tax, Capital Gains Tax and Inheritance Tax, and each of these are considered in turn below. Generally, tax and National Insurance contributions on employment income are collected via the Pay As You Earn (PAYE) system and paid over to HMRC by your employer, though often this will not take into account any reliefs/allowances that may be due to you in the year. Whether or not you need to file a tax return depends on personal circumstances, but generally UK residents with overseas aspects to their affairs and those with UK taxable income in excess of 100,000 are required to file. An individual who has reason to submit a tax return should notify HMRC of this obligation by 6 October following the tax year for which the return is required. A UK tax return is due on 31 January following the tax year, e.g. a 2014/15 tax return is due by 31 January 2016, assuming that the return is filed electronically. Most taxpayers now file their returns online, but it is still possible to submit a paper return; the deadline for paper returns is 31 October following the end of the tax year. RATES AND ALLOWANCES For the 2014/15 tax year, the following rates and allowances will apply in the UK: Earned, Savings Dividend Capital and Other income (2) gains income (1), (3) 0 31,865 Basic rate 20% 10% 18% 31, ,000 Higher rate 40% 32.5% 28% Over 150,000 Additional rate 45% 37.5% 28% 43

2 Notes: (1) Subject to other taxable income, a starting rate of 10% may apply to the first 2,880 of savings income (other than dividend income) otherwise falling in the basic rate tax bracket. (2) Due to a 10% notional tax credit, most dividends are taxed at lower effective rates, being 0% basic rate, 25% higher rate, and 30.55% additional rate. (3) Foreign source dividends which are taxable on account of having been remitted to the UK (see below) are taxed at these rates as opposed to dividend rates. TAX-FREE ALLOWANCES The following are thresholds for the 2014/15 tax year, before which no tax liability arises: Income tax ( Personal Allowance ) 10,000 Capital gains ( Annual Exemption ) 10,900 NATIONAL INSURANCE CONTRIBUTIONS (NIC) National Insurance is the UK s system of social security. These contributions build up your entitlement to state benefits such as a state pension, job seekers allowance, and other categories of state aid. Employees pay NIC alongside their income tax each month via PAYE, at rates of 12% (income of 7,956-41,865) and 2% ( 41,865+) in the 2014/15 tax year. The employer is also obliged to pay contributions of 13.8% of an individual s total pay in excess of 7,956 per year to HMRC. Those arriving from other countries may be able to claim exemption from NIC due to a social security agreement, or as a result of EU legislation. Those working regularly in one or more EU country should also have particular regard to the EU rules for multi-state workers. RESIDENCE AND DOMICILE 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 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: you will only be subject to UK tax on UK source income, e.g. employment income relating to UK duties, rental profits from UK property interests, UK bank interest and dividend income; your foreign income will not be liable to UK tax; and you will not be liable to UK Capital Gains Tax, subject to certain anti-avoidance rules. WHEN DO I BECOME UK RESIDENT? The UK apply a Statutory Residence Test to determine whether an individual is resident in the UK or not. For the purposes of the test, a distinction is to be made between three classes of taxpayer: arrivers, leavers and those working full-time outside the UK. These rules are complex and prescribed with many potential permutations which are outside the scope of this article. HMRC have published a useful residence status indicator and supporting guidance which can be found here: For the purposes of this article, if you are an expat starting full-time work in the UK then you are likely to become UK tax resident from the date of arrival. If you are leaving the UK to take up full-time employment overseas then it is likely you will become non-resident from the date of your departure. CAN I BE RESIDENT IN MORE THAN ONE COUNTRY AT THE SAME TIME? 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 taxation treaty between the two countries of 44

3 residence which should ensure that you generally don't pay full tax twice on the same income or capital gains. Broadly speaking, where an individual is dual resident, a treaty divides the taxing rights and provides for a foreign tax credit to be claimed in one jurisdiction to avoid double taxation. 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. HOW IS MY DOMICILE RELEVANT FOR UK TAX PURPOSES? Non-UK domicile or non-dom status is generally favourable from a UK tax perspective, particularly as it allows you to opt into the remittance basis of taxation. In essence, rather than paying tax on a worldwide basis as a UK resident, your overseas income and gains are then only taxed in the UK if they are remitted to the UK. INCOME TAX AND CAPITAL GAINS TAX Your domicile status may affect what Income Tax and Capital Gains Tax you pay in the UK if both of the following apply: You are a UK resident and are not domiciled in the UK. You have foreign income* or foreign capital gains. *In certain circumstances this could include a portion of UK employment income if you travel to work outside of the UK during the first three tax years of UK residence. If the above applies, you will have the ability to choose whether your foreign income and capital gains will be taxed on either the arising basis or on the remittance basis. Arising basis By default, a UK resident is subject to tax on the arising basis, meaning that they are subject to tax on worldwide income and gains in the tax year in which they arise. Any non-uk tax paid in respect of foreign source income or gains is generally deductible against the UK tax payable, however. Remittance basis The remittance basis gives non-uk domiciled individuals the opportunity to shelter their foreign source income and gains from UK tax on the proviso that they do not remit the funds to the UK, at which point a UK tax charge would arise based on the nature and amount of income or gains remitted. The terms remit, remittance etc. are very broad and effectively include most ways in which cash or other assets are used or enjoyed in the UK. Importantly, income and gains that arose prior to UK residence are regarded as clean capital and can generally be remitted with no UK tax consequence although careful planning is required to avoid tainting clean capital funds. However, there is a potential cost associated with claiming the remittance basis as it results in the loss of the tax-free income and capital gains allowances as above. Additionally, for those non-doms who have been resident in the UK for some part of at least 7 out of the last 9 tax years, there is a 30,000 remittance basis charge payable to access the remittance basis. This charge increases to 50,000 for non-doms who have been UK resident in some part of 12 or more of the last 14 tax years. Whether or not to claim the remittance basis 45

4 is therefore an annual decision, and it may not make economic sense in some circumstances. It is worth noting, however, that an individual whose unremitted foreign income and capital gains are less than 2,000 for a tax year is automatically taxed on the remittance basis and retains entitlement to the Personal Allowance and the Annual Exemption referred to above. INHERITANCE TAX ( IHT ) A non-uk domiciled individual is only be liable to IHT in respect of UK assets, and a home in the UK is therefore often the most significant cause of IHT exposure for a non-dom. Each individual is entitled to a nil rate band (currently 325,000) which is taxed at 0%, with the remainder of the estate taxable at 40%. Non-UK assets in a non-dom s estate should be outside the scope of IHT. Individuals who are otherwise not domiciled in the UK are treated as UK domiciled ( deemed domiciled ) for IHT purposes if they have been resident in the UK for 17 out of the last 20 tax years. Their worldwide estate is then liable to IHT. Careful planning can usually mitigate, if not eradicate, any potential IHT exposure and specialist advice should be sought. OKAY, SO HOW DO I KNOW WHAT MY DOMICILE IS? Questions of domicile can be complex, but broadly an individual is domiciled in the jurisdiction which he regards as his homeland and many foreign nationals living in the UK will have a good case for claiming to be non-uk domiciled. It is important to note that domicile is not the same as nationality or residence. There are three types of domicile: domicile of origin domicile of dependence domicile of choice An individual cannot at any time be without a domicile, nor can he have more than one domicile at the same time. An exception to this arises where an individual is deemed domiciled in the UK for inheritance tax purposes, as their actual domicile can be elsewhere. If you are uncertain of your domicile you should seek specialist advice. SOME FREQUENTLY ASKED QUESTIONS... My employer is sending me to the UK for a couple of years to work in their London office, but I will also be travelling for work a lot; are there any tax breaks available for me? The answer is, yes, depending on how the move is structured and your personal circumstances. One particularly valuable tax-break for expatriates is overseas workdays relief. This relief allows certain individuals tax relief in the UK where, during the tax year in question: i) they are not domiciled in the UK; ii) they claim the remittance basis; iii) they work partly overseas and it is either the first tax year immediately following three consecutive tax years of non-residence, or one of the next two years after such a year. The relief allows them to shelter employment income which corresponds to the days they have worked overseas in the year from UK tax, providing that this amount is not remitted to the UK. You will need to complete a tax return and to claim this relief. Careful bank account structuring and record keeping will also be required to ensure you have a valid claim. But what if I won t be travelling much for work, or I need access to all of my salary here? If you are assigned to the UK by a foreign employer for 2 years or less, you may be able to claim a deduction for your housing costs and other expenses of living in the UK under what is known as Detached Duty Relief. It is worth considering the length of your assignment before you arrive with this in mind i.e. a 24 months or less may be more attractive than a longer term. Again, you will need to claim this relief via your tax return for the relevant period. I am a US citizen moving to the UK. Is there anything I need to be aware of? The US is one of the few countries to tax individuals based not only on their US residency status but on their citizenship. This means that US citizens (and Green Card holders) living outside of the US are 46

5 still required to file an annual US tax return with the IRS, and a US person moving to the UK will typically have considerably more to think about than other expatriates. The annual filing obligation persists even if a US citizen has little or no US source income and whether or not there is ultimately a US tax liability after credit is claimed for non-us taxes. The requirement to file a tax returncan therefore be an administrative requirement that comes with US citizenship as much as anything, but heavy penalties can apply for non-compliance nonetheless. Alongside the tax return obligation, there are other non tax based potential reporting requirements for the US citizen. One of the most common of these is the Report of Foreign Bank Accounts, or FBAR (Form TD F ). WHAT IS AN FBAR? If you have an interest in or signatory authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the US Bank Secrecy Act may require you to report the account each year. In very general terms, a US person who has: 1. a financial interest in one or more non-us bank accounts or; 2. signatory authority over one or more non-us bank accounts will have a requirement to file an FBAR if the aggregate balance of all foreign financial accounts was in excess of $10,000 at any point during the calendar year. The form is filed with the US Department of Treasury directly, and does not form part of your tax return. The form is due to be filed by 30 June annually. BUT IF I AM PAYING TAX IN THE UK AND IN THE US, AM I NOT BEING DOUBLE TAXED? The interaction of the UK and US tax systems also needs careful handling, and the application of the UK/US tax treaty is often important. There may even be a third jurisdiction to bear in mind in terms of establishing taxing rights and claiming appropriate foreign tax credits, where the source of income arises outside both the UK and the US UK Tax for Expats.indd 47 27/3/14 09:06:33

6 Having your US and your UK returns prepared by the same preparer can help to keep compliance costs down as well as well as being less time consuming for you. OK, SO WHEN DO I FILE MY TAXES? In almost all cases, US Individual Federal income tax returns (Forms 1040) are due for filing by 15 April following the tax year, e.g. 15 April 2015 for 2014 returns. Those who are tax resident in a foreign country have an automatic extension of time for filing until 15 June; but interest on underpayment of tax accrues from 15 April. Filing your return or an extension request (with any outstanding tax payment) by 15 April avoids such interest being charged. Extended tax returns are then due on 15 October, with an additional two month extension potentially available for those with their tax residence in a foreign country. However, certain non-resident alien returns have a due date, both for filing and payment of tax, of 15 June. This will depend on your particular circumstances. Note: U.S. Treasury Circular 230 Disclosure: Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. IS THERE ANYTHING ELSE I NEED TO KNOW? The UK tax regime is broad, complex, and at times, a bit of a minefield! Good planning in this area should avoid the various pitfalls and make the most of what can be a very attractive tax regime for expatriates in the UK. Ideally, steps should be taken before you arrive, though it is never too late to put your tax affairs in order and make the most of the available tax breaks. For more information please contact Jamie Favell, Partner, Tax Advisory Partnership Telephone:

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