Only two things are certain in this life: death and tax. Not everyone loves paying tax and wants to learn special rules for UK residents whose permanent home or domicile is abroad. A tax makes your earned income less because a particular share is going into some other pocket. Likewise, if you have any property abroad a certain capital gains tax is also applicable on it. Suppose you have rented that property and a certain income is being earned so what will be the tax issues?
“A tax makes your earned income less because a particular share is going into some other pocket.”
If you are living in the United Kingdom but you are not tax a resident here, you only pay tax on your United Kingdom Income, and you will not have to pay tax on foreign income. However, if you become a UK resident for tax purposes, spend more than 183 days in the UK in a tax year. Then you pay UK tax on all of your income, whether from the UK or abroad. To achieve permanent residence in the UK, you need to spend 185 days in the UK in any 12 months to be eligible for indefinite leave to remain.
So the main question is, do you need to pay UK tax on your foreign income and gains? As a UK resident, if you have your permanent home or domicile outside of the UK, you can choose to be taxed on the remittance basis of taxation. This means that you are not liable to UK tax on your foreign income unless it’s brought into the UK or you remitted to the UK. The same applies to foreign capital gains.
“To achieve permanent residence in the UK, you need to spend 185 days in the UK in any 12 months to be eligible for indefinite leave to remain.”
Now, what is the test for residence? The first question is whether you are a tax resident? So, non-residents only pay tax on their UK income. They do not pay UK tax on their foreign income. You are likely to be resident for UK tax purposes if you spend 183 days or more in the UK and the tax year if you have a home in the UK and don’t have a home overseas or work full-time in the UK over 365 days.
Most people will be tax residents at least in the first five to six years because they need to spend 185 days in the UK to qualify for indefinite leave to remain and then naturalize as British citizens. So, each year the person will need to spend 185 days in the UK because they are only allowed 180 days absence in each rolling 12-month period. The person will remain a tax resident for five to six years as a general rule.
If you are domiciled in the UK, and you are resident here, you tax on the arising basis of taxation. This means worldwide incomes and gains will be taxable in the UK. Therefore even if your foreign income and profits have already been taxed in another country, they will still be taxable in the UK, and you must declare all of your foreign income and gains on your tax return. So, in some cases, tax relief can be given in the UK for foreign tax paid. If there’s a double taxation agreement on foreign income and gains, this could be a less safe approach depending on the jurisdictions involved.
“If you are domiciles in the UK then you are taxed on rising basis of taxation”
So, how do you work out your domicile? The fact that you were born in the UK and you are permanently living here. It would give a good indication that you might be domiciled in the UK. If any of these elements do not apply, then you should look at whether there is an arguable case that you are not on the salt.
Your domicile is usually the country your father considered his permanent home when you were born, and you need to be able to show that you intended to return home. You still intend to return home, as it were, but this could be intended after a long period in the UK. It’s relatively easy for you that you are domiciled in the UK.
HMRC will be asking specific questions to declare whether you are a UK resident or not. A particular series of questions will help to figure out the real scenario related to your domicile issue, and either you intend to come back or not? You might even have to answer some questions pertaining to links with your father’s birthplace.
It’s relatively easy to show that your domicile is abroad, which is the case even if you have been in the UK. So, there are three ways to show that you are not domiciled in the UK in broad terms. But each of them contains potential traps for someone looking to get permanent residence or citizenship in the UK.
- Firstly you can rely on your domicile of origin.
- Secondly, show your domicile of choice;
- Thirdly, you may either rely on a domicile of dependence.
The one that is most relevant over here is the domicile of origin. So, you usually acquire a domicile of origin from your father when you are born. So your domicile of origin will often be referred to as a country in which you were born. However, if you were born in the country and your father was not domiciled there when you were born, your domicile of origin may be your father’s country domicile!
You can be British and still have your domicile in another country, but you have to declare your main home on papers because this will be a deciding factor in taxation terms. Tax on foreign income can be avoided if you acquire a UK indefinite remain leave. After neutralizing as a British citizen, you must consider other potential approaches, either the cease being resident for UK tax purposes. So you are automatically classed as UK non-resident either you spend fewer than 16 days. Or you work abroad full – time that’s 35 hours a week on average.
“Tax on foreign income can be avoided if you acquire a UK indefinite remain leave”
If you spend 91 days in the UK, of which no more than 30 was spent working, the second approach is to remain tax resident but non-domiciled and then opt for the remittance basis of taxation. To do this, you need to navigate your applications for indefinite leave to stay naturalized to avoid tax. So, it’s a legal choice to make the UK domicile. If you have additional questions that were not covered in this article, you can send a message or book an appointment at Legend Financial.