1 The Expatriate Financial Guide to the UK UK Tax Facts Introduction Tax Year Assessment Basis Taxation in the UK is mostly at a national level with property taxes (Council Tax and Business Rates) being raised by local authorities at a regional level. The national UK tax system is administered by Her Majesty s Revenue & Customs (HMRC). 6 April to 5 April. Individuals who are UK resident, ordinarily UK resident and domiciled in the UK are taxed on their worldwide income and capital gains. The UK requires taxpayers to file a tax return and operates a self-assessment regime. Individuals with simple tax affairs, for example those who are only in receipt of employment and savings income, are not usually required to file a return. Married couples are treated separately for taxation purposes and are responsible for completing their own tax returns. For employed persons, tax is mainly withheld at source through the pay as you earn system (PAYE). Self-employed persons are required to complete a tax return and tax is generally paid half in advance and half in arrears on 31 January and 31 July. With the UK government focused on increasing tax revenues from many forms of tax evasion and tax avoidance, a new General Anti Abuse Rule (GAAR) came into effect on 17 July 2013 for tax arrangements arising on or after that date, with the objective of counteracting tax advantages arising from tax arrangements which are abusive. Changes to the anti-avoidance legislation affecting the taxation of gains and income arising in offshore structures have also been introduced to ensure compatibility with EU law. Income Tax Individuals are subject to income tax on all their taxable income. Individuals benefit from tax free allowances, dependent upon their age and marital status. In addition, certain deductions are allowable against taxable income, for example pension contributions and charitable donations. Income of married couples is not aggregated, with each being taxed on an individual basis. An additional tax free allowance is available for couples and individual taxpayers over 65. A progressive tax scale is applied to bands of taxable income over the personal tax free allowance of 9440 (2013/14), rising to 10,000 in 2014/15 and then 10,500 in 2015/16, with income tax rates of 20%, 40% and 45% (2013/14 and ) applied to income from employment. The progressive tax scale is applied to three income bands, namely the basic rate band (up to 32,010 in 2013/14, 31,865 in 2014/15 and 31,785 in 2015/16), the higher rate band ( 32, ,000 in 2013/14, with the higher rate threshold rising by 1% rather than inflation in and to 41,865 and 42,285 respectively) and the additional rate band (over 150,000, ). Different rates may apply to other types of income (e.g. dividends, savings income and capital gains), as detailed below. From April 2010 the UK Chancellor introduced an additional tax rate on income over 150,000, and a sliding scale reduction by 1 for every 2 of income above the 100,000 limit in the basic personal allowance down to nil for those with adjusted net incomes over 100,000 also took effect. In 2013/14 and 2014/15 the additional rate is 45%, reduced from 50% previously. A cap on certain currently unlimited income tax reliefs that may be deducted from an individual s taxable income was introduced from 6 April 2013 for individuals with annual taxable incomes over 50,000. The cap is set at the greater of 50,000 or 25% of the individual s taxable income. The cap does not apply to charitable reliefs. From married couples and civil partners will be able to transfer 1,050 of their income tax personal allowance to their spouse or civil partner. Couples where neither partner is a higher or additional rate tax payer will be eligible to transfer. Taxation of Investment Income In general, investment income is taxable and is included with other income when calculating an individual s income tax liability. However, the rate of tax applied to investment income depends upon the type of income and into which tax band it falls. In determining which band investment income falls into, different types of income are layered with employment and other non-savings income being considered first, then non-dividend savings income and, finally, dividend income. Dividends are taxed at 10% in respect of the basic rate band, with 32.5% applicable to higher rate band dividend income and 37.5% applicable where dividend income represents the top slice of taxable income over 150,000 (2013/14 and ). UK company dividends are paid net of notional 10% tax with an attaching tax credit. The tax credit may be used to offset any tax due, but cannot be reclaimed by non-taxpayers. The starting rate for savings income tax will be 0% and the band to which it applies will be extended from 2,880 (2014/15) to 5,000 (2015/16). All other savings income is liable to income tax rates of 20%, 40% and 45% in respect of the three taxation bands ( ). Interest credited by UK banks and building societies is paid net of 20% withholding tax. Tax on Property Rental Income Rental income is charged to income tax, with tax being applied to the rental income received, less any allowable expenses incurred. In determining into which tax band rental income falls it is considered after employment income, but before savings income and dividends.
2 Wealth Taxes Capital gains tax There are no wealth taxes in the UK. Capital gains tax is only payable whenever a gain is realised over the annual exemption limit of 10,900 (2013/14), increasing annually to 11,000 (2014/15) and 11,100 (2015/16). The capital gains tax rates are 18% and 28% (to 2015-/16), with the tax rate applicable depending on the total amount of taxable income. The 28% rate applies when total taxable income and gains are above the upper limit of the basic rate band of 32,010 (2013/14; 31,865 in 2014/15). A special entrepreneurs relief rate of 10% is available to the owners of businesses in respect of gains made on the disposal of all or part of a business and on disposals of assets following the cessation of a business. The first 10 million (2014/15) of gains that qualify for relief are charged at a rate of 10%. Gains in excess of 10 million are charged at the normal 18% and 28% rates. An individual can make claims for relief on more than one occasion, up to a lifetime total of 10 million of gains qualifying for relief. Principal private residence relief is still available, but business use, periods of absence and rental of the property may affect this. A capital gains charge of 28% applies to the gain on disposal of UK residential properties worth more than 2 million by a non-resident, non-natural person or the disposal of shares or securities in a company holding such property by a non-resident person from April The scope of capital gains tax will be extended to the disposal of UK residential property by nonresidents from April 2015, with final rules published in Inheritance Tax Inheritance tax is a cumulative levy on the value of lifetime gifts and assets (including the principal residence) passing between owners on death. Cumulative transfers are taxed at 40% on death, although the first 325,000 (2014/15, frozen until 2017/18) is free from inheritance tax. From April 2012, a reduced inheritance tax rate of 36% was introduced where 10% or more of the net estate is left to charity. Since October 2007, UK domiciled and deemed domiciled spouses and civil partners have been able to transfer their unused nil-rate-band allowances, in effect doubling the amount that can be passed on tax free. Any part of the nil-rate band not used when the first spouse or civil partner died can be transferred to the individual s surviving spouse or civil partner for use on their death. This change was applied retrospectively for any living widow or widower. Lifetime gifts to individuals are generally included in the value of the estate on death for inheritance tax purposes, although they are generally subject to a decreasing tax charge if the donor survives for three years and will generally be exempt if the donor survives for seven years following the date of the gift. Special rules apply to lifetime and death transfers to or from trusts. Transfers between spouses and civil partners are generally exempt. Certain lifetime gifts are also exempt, up to 3,000 per annum. Other exemptions may apply, for example wedding gifts. In certain circumstances lifetime gifts may be subject to inheritance tax and/or capital gains tax. The transfer of value by a UK domiciled individual to their non-uk domiciled spouse/civil partner was increased to the prevailing nil-rate band (currently 325,000) from April 2013 and non-uk domiciled individuals given the option to elect to be treated as UK domiciled for IHT purposes only. Regional and Municipal Taxes Property Taxes There are no regional taxes in the UK. Council Tax on residential property and Business Rates on non-residential property are charged by the local authorities. Rates vary according to the region. Stamp Duty Stamp duty is charged in the UK on the execution of documents transferring property. In 2003 Stamp Duty on real property was replaced by the Stamp Duty Land Tax (SDLT). SDLT is not dependent upon documents being stamped, but is directly enforceable on an acquisition of land. The purchaser is liable to pay SDLT. The rate of SDLT varies between nil and 15%, depending upon the value of the property. Residential property valued at less than 125,000 (2014/15), or 150,000 in respect of non-residential property (where the annual rent is under 1,000), is taxable at the nil rate, with a 5% rate applying on properties valued at between 1,000,000 and 2,000,000. A 15% SDLT charge is made on the acquisition by non-natural persons of UK residential properties costing more than 2 million plus a progressive Annual Tax on Enveloped Dwellings of between 15, ,000 (2014/15) applies to non-natural persons who own UK residential property worth over 2 million. Value Added Tax The standard rate of VAT is 20%. VAT is generally added to the sale price of goods and services. Sales of some goods and services are outside the scope of VAT, or are taxed at a lower rate.
3 National Insurance Contributions In the UK, social security contributions are known as National Insurance Contributions (NICs). Employees are liable to pay NICs based upon their earnings through the PAYE system. Social security rates on successive bands of earnings for employees are 0% (up to 153 weekly earnings), 12% (between 154 and 805 weekly earnings) and an additional 2% (over 805 weekly earnings) (2013/14). Employers pay 13.8% on earnings above 153 per week ( ). Self employed individuals pay NICs either directly at a flat rate, or with their income tax payments based on profits. Unlike a number of other countries, NICs in the UK are not deductible from taxable income. Taxation of Expatriates Living in the UK The scope of UK taxes affecting an expatriate individual living and working in the UK depends upon the individual s residence and domicile status. Residence In April 2013 the UK government introduced a statutory residence test (SRT) intended to provide greater clarity and certainty to individuals when determining their residence status for tax purposes in the UK. The previous rules for determining tax residence depended to a large extent on cases decided by the courts, with many of these cases decided some time ago and not reflective of modern work or travel patterns. Under the new rules most individuals will be able to determine their residence status to a high degree of probability but the complexity of the rules mean that a significant minority will be unable to do so with certainty. The SRT replicates as far as possible the residency outcomes delivered by the previous rules. The test takes into consideration the days spent in the UK and connections to the UK and is structured into three parts: firstly, the automatic overseas test will determine if an individual is automatically non-resident secondly, the automatic UK test will determine if an individual is automatically resident thirdly, the sufficient ties test will determine the residency position if an individual meets neither the automatic overseas nor the automatic UK test. The sufficient ties test determines residency based on a combination of the amount of time spent in the UK with the number of ties a person has Automatic Overseas Test An individual is not resident for a tax year if they: were not UK resident in any of the previous three tax years and spends fewer than 46 days in the UK in the relevant year; or were UK resident in one or more of the previous three tax years and spends fewer than 16 days in the UK in the relevant tax year; or carry out full-time work abroad (which includes self-employed work). Automatic Residence Test An individual who does not meet the Automatic Overseas Test will be resident for a tax year if they: spend 183 days or more in the UK in the relevant year; or have a UK home; or work full-time in the UK (which includes self-employed work). Sufficient Ties Test If an individual's residence status has not been ascertained under either of the above tests, this third test, which considers both the number of days spent in the UK as well as an individual's UK ties, will be applied. The test is structured so that the more UK ties that a person has, the fewer days he can spend in the UK without becoming resident. Examples of ties are family, accommodation and work. The test has been designed so that it is more difficult to relinquish UK residence status than to acquire it in the first place. Therefore, there are separate tests for: arrivers - defined as individuals not resident in any of the three previous tax years; and leavers - defined as individuals resident in one or more of the three previous tax years. In addition to dealing with residence status, the SRT provides definitions of areas such as home and working full-time abroad and new anti-avoidance rules for people leaving the UK for less than five years. Implementation of the SRT also abolished the concept of ordinary residence for tax purposes, but overseas workday relief will be retained for non-uk domiciled individuals. Domicile Domicile is a concept of general law. An individual s domicile indicates the country which an individual considers to be their permanent home. Under UK law every individual has a country of domicile and this will impact upon their liability to certain taxes, such as inheritance tax. Domicile is different from residence and rarely changes. An individual usually acquires their father s domicile at birth and then retains this for life, unless they sever their ties with their original country of domicile and establish a permanent home in another country.
4 An expatriate working in the UK for a limited period, with no intention to settle in the UK, will generally be regarded as non- UK domiciled. An individual may, however, be deemed to be domiciled in the UK for inheritance tax purposes only if they are UK tax resident for 17 out of the last 20 tax years, including the year of assessment in which the taxable event takes place. Taxation Basis The taxation basis applicable to the different types of income and gains depends upon the individual s residence and domicile status. An individual who is UK resident and UK domiciled will be taxed on worldwide income and gains, as well as inheritance tax being based upon the value of their worldwide assets. The previous concept of ordinary residence was abolished in April 2013 in order to simplify the residence rules. In particular, the withdrawal of ordinary residence status means that: in future the remittance basis will be available only for non-uk domiciles; and the transfer of assets abroad rules may become relevant for individuals who are not affected by these provisions at present because they are resident but not ordinarily resident. The tax treatment of the employment income and investment gains of an expatriate non-uk domiciled person living and working in the UK will depend upon their UK tax residence status and whether the income is generated by UK or non-uk employment duties. The UK Finance Act 2008 introduced changes to the taxation of non-domiciles living in the UK. These changes mean that non-domiciles resident in the UK for fewer than seven out of the previous nine tax years can continue to access the remittance basis of taxation, only paying UK income or capital gains tax when they remit overseas income or investment gains to the UK, but they have no personal allowances for income tax and no annual exempt amount for capital gains tax, unless their unremitted foreign income or gains are less than 2,000. In addition, any non-uk domiciled individuals who have been UK resident for seven of the past nine years will have two choices: become liable to UK tax on all overseas earnings, irrespective of whether this income is remitted to the UK; or continue to be taxed on the remittance basis and pay an annual flat rate tax charge of 30,000 (in addition to UK tax due on remitted income) Non-domiciled individuals who have been UK resident for 12 or more years who wish to continue to be taxed on the remittance basis must pay a higher annual flat rate tax charge of 50,000 (2014/15). Non-UK domicile expatriates living in the UK are taxed upon all of their UK sourced income. Non-UK sourced income and capital gains will be subject to the rules as detailed above and will become liable to UK taxation, subject to any relief which may be due in respect of foreign tax paid. Split year treatment (which allows an individual to be treated as non-uk resident for part of the tax year) will be restricted, broadly, to where an individual: starts to work full-time overseas (or accompanies a spouse or partner who is working full-time overseas); or leaves the UK to live abroad, moving his home there within six months of his departure and not returning to the UK for more than 15 days for the rest of the relevant tax year; or comes to the UK to live here and his only home is in the UK, or comes to work full-time in the UK; or acquires a home in the UK and continues to be resident in the UK in the next tax year. The application of overseas workday relief was extended from April Previously, overseas workday relief allowed individuals who are resident but not ordinarily resident in the UK and who carry out employment duties partly in the UK and partly overseas, to benefit from the remittance basis on foreign earnings. This relief was placed on a statutory footing in April 2013 for non-uk domiciled individuals arriving in the UK who have been non-uk resident for the previous three tax years. This new relief will apply for a fixed period of up to the first three years of residence, but only applies to individuals coming to the UK from 6 April Those who are already here will be subject to existing treatment. An expatriate s liability to UK inheritance tax depends on their domicile. An individual who is UK domiciled will be liable to inheritance tax on their worldwide assets, whilst a non-uk domicile expatriate living in the UK will only be liable to UK inheritance tax on their UK situated assets. The UK has negotiated over 100 comprehensive double taxation agreements. However, only around 10 of these cover inheritance tax. An expatriate s liability to pay National Insurance Contributions (social security) generally depends upon the expatriate s country of origin and length of stay in the UK. The countries of origin are split into the following groups: EEA/EU generally an expatriate may continue to pay social security contributions in their home state if they only expect to stay in the UK for less than 12 months. Under certain circumstances this period may be extended up to a maximum of five years. Countries with a social security treaty with the UK the situation will be dependent upon the terms of the treaty, but in general an expatriate will not pay UK National Insurance Contributions if they are continuing to contribute in their home country.
5 Expatriate Financial Planning The 2008 UK Budget changes have had a significant impact on the tax position of long-term non-domiciled UK residents and have put the regime on a more equal footing with the UK resident regime from a financial planning perspective. Where nondomiciled individuals have been UK resident for seven out of the preceding nine years they are now automatically subject to tax on their worldwide income and capital gains regardless of whether this income is remitted to the UK unless the total income is less than 2,000. A non-domiciled individual may still opt to be taxed under the remittance basis by paying an annual tax charge of 30,000 if resident in the UK for seven out of the last nine years, or 50,000 per annum if UK resident for 12 years, but will sacrifice their UK income tax personal allowance and capital gains tax relief if they choose to do this. In addition, the introduction of the 45% (2013/14 and 2014/15) additional rate of income tax on income over 150,000, the reduction in basic personal allowances applicable to income and the higher rate of tax on dividends have had a significant impact on the earnings of high net worth expatriate individuals choosing to reside in the UK. Now, more than ever, an expatriate should take care to plan when they move to the UK and also consider carefully the number of days they spend in the UK in a tax year. Tax advice should be sought during the planning stage. If you are an expatriate currently living in the UK, you should review your finances with a suitably qualified financial adviser who is either authorised directly by the UK regulator or is based in another EU market and recognised by the UK regulator following prior notification by the adviser under the Insurance Mediation Directive. If you are planning a move to the UK, you should review your finances with a suitably qualified and experienced financial adviser and/or tax adviser who is familiar with UK tax matters before making the move. You may wish to consider cross-border investments, including cross-border life products, in order to manage your tax liability and/or control when tax charges are made, as well as considering options available to you for estate planning (inheritance tax). Expatriate Financial Planning Cross-border Bond Benefits Cross-border bonds can play an important role in helping UK non-domiciles to manage their investments whilst minimising their UK taxation. Another important consideration for a non-domicile in that any assets they own in the UK are subject to IHT on death. Helpfully a cross-border bond is not a UK-situated asset. In addition to this important IHT planning aspect, a key consideration for your non-domiciled clients choosing the remittance basis is that they have no income tax or capital gains tax allowances available against which to offset any UK tax liabilities. A cross-border bond investment does not create any liability to UK income tax or capital gains tax, provided that no withdrawals are made in excess of the cumulative 5% per year tax deferred allowance, and provided that no other chargeable events occur, such as the death of the last life assured or changes made to the lives assured. Non-domiciles can also use the 5% a year tax deferred withdrawal facility to remit an income to the UK without triggering an immediate tax charge. It is important to note that for non-domiciles in the UK to benefit from the 5% deferred tax withdrawal facility, the funds paid into the bond must be regarded as clean capital by HMRC. Clean capital is defined as the taxed assets and amounts that an individual held on account before taking up residence in the UK for the first time and subsequent foreign income or foreign gains that were taxed when they arose. The clean capital requirement applies to both the original premium and any subsequent additional premiums (if any) paid into the bond. The funds used as premiums will retain their original characteristics even though they are held within the bond. If a 5% withdrawal is made from a bond where the premium was paid using the non-domicile s foreign income or foreign gains that were untaxed when they arose (i.e. not clean capital) when the non-domicile was a remittance basis user in that year, then any and all of the 5% withdrawal will be considered a chargeable event /taxable remittance if the money is brought to, or received or used in, the UK. If a non-uk domicile chooses not to use the remittance basis of taxation, they can effectively be regarded as a normal UK resident for tax purposes and access a similar range of cross-border bond benefits which can help to mitigate income tax, capital gains tax and inheritance tax. Creating a chargeable event for a cross-border bond is not advisable for foreign nationals residing in the UK. Whilst the specific benefits of a cross-border life product will depend upon an individual s circumstances, they do offer a number of potential benefits to expatriates living in the UK, as outlined in the table below. Tax-efficient Investments Investments in a cross-border life product grow virtually free of tax throughout the time the product is held, suffering only a small amount of irrecoverable withholding tax on investment funds located in certain countries Cross-border life products can therefore be useful in managing tax liabilities and controlling when tax charges are made, whether an individual lives in the UK or moves to another country, allowing them, in general, to manage when they take benefits and potentially to defer the benefits to a period that may be more advantageous from a taxation perspective. Please note that tax may need to be paid on an arising basis in the individual s country of residence if this is not the UK. A cross-border bond provides a particularly effective way of housing and switching multiple collective investments in a tax efficient manner as this shelters switches in investments from capital gains tax charges, while switches between directly held collectively investments will suffer a charge to tax on an arising basis.
6 Expatriate Financial Planning Cross-border Bond Benefits (cont.) Generating Income Non-UK Situs Assets Cross-border life products generally qualify for the 5% per annum tax-deferred withdrawal allowance in the UK. For expatriate electing for the remittance basis of taxation, where funds are withdrawn from the policy they will retain the character of the funds paid into the policy. If a policy is purchased with pure capital (i.e. not made up of foreign income or gains), the withdrawal can be remitted to the UK without tax implications. Expatriates who are resident in the UK and elect for the remittance basis of taxation may be advised to use cross-border investments, including cross-border life products, rather than domestic investments in the UK or in their country of residence, to keep their assets outside of the UK to avoid creating investment income which may have UK income or capital gains tax liabilities. Cross-border life products can also be a useful tool for expatriates who do not elect for the remittance basis of taxation as they can be used to shelter worldwide assets to avoid generating an annual income tax or capital gains tax liability. Estate Planning Expatriates resident in the UK are liable to UK inheritance tax on their UK situs assets, and may wish to consider estate planning options, such as a cross-border bond held in an appropriate trust or fiduciary arrangement, to ensure that potential charges to UK inheritance tax for your beneficiaries are minimised. Investment Choice Designed for Expatriates Cross-border bonds generally feature a wide range of offshore funds specifically tailored to fit with expatriate clients preferences and attitude to risk. They also offer access to international and specialist fund managers which may not be available in domestic fund and insurance markets. Specialist investment advisers and discretionary asset managers can be appointed to manage the investments held in a bond. Most companies offering cross-border life products are subsidiaries of global financial services companies specialising in dealing with expatriates on a multi-lingual, multicurrency basis. Cross-border products can offer significant benefits over and above what might be available in the domestic market in countries including the UK, particularly in relation to product features, investment flexibility and investment choice. A cross-border product has the flexibility to adapt to changes in individual circumstances, including changes to residency status such as moving away from the UK. The cross-border life companies are regulated in first class home jurisdictions which benefit from strong regulatory controls. Your financial adviser can help you ensure that you maximise the financial benefits of your expatriate status and help you to assess if cross-border life products are right for your individual circumstances. Further information about cross-border life products and their use in financial planning can be found on AILO s website at This document has been prepared on behalf of the members of the Association of International Life Offices ( AILO ) and relies on information and technical analysis provided by third party professionally qualified tax advisers. Whilst AILO has used its best endeavours in selecting its advisers to ensure the accuracy of the information contained in this document, AILO cannot be held responsible for any errors and omissions. This document has been prepared for general information purposes only. The information contained in this document is a summary of the law relating to taxation that is generally applicable in the UK and is intended for guidance only. The information contained in this document reflects the law as at March Tax legislation is complex and subject to frequent change. This document cannot be relied upon as a specific analysis of the current law as it applies to each individual. Individuals should seek detailed tax advice from a suitably qualified professional adviser in their country of origin as well as eventual residence before making any decision in relation to their tax planning. The information contained in this document does not, and is not intended to, amount to investment advice and anyone reading it should consult their professional adviser before making an investment into any investment product of a type mentioned in this document. March 2014