PLANNING TO MOVE TO THE UK

PLANNING TO MOVE TO THE UK

Award Winning
London-Based
Immigration Tax Advisors

Individuals moving to the UK should have a basic understanding of the UK tax system before they move and consider pre-arrival planning to optimise their tax and minimise their tax bill. The top rate of UK tax and National Insurance is 47% when combined, so successful planning can lead to large savings. For British expatriates, or those spending a significant period of time overseas, residence and domicile will become rather important terms. Your residence and domicile status will ultimately determine how much UK tax you will pay.

Your residence status in the UK  will affect how you are treated when it comes to Income and Capital Gains Tax, whilst generally your domicile determines your exposure to Inheritance Tax. Generally, and in its simplest form, residence relates to where you live and domicile relates to where you were born. 

RESIDENCE 

Your residence status defines how much UK Income and Capital Gains Tax you pay. The UK tax authorities are very strict about how you qualify for resident and non-resident status. The Statutory Residence Test lays out the necessary rules, which must be worked through to determine your residence status. You should also keep good records of how long you spend in the UK and overseas to help with any tax planning. This can be a very complex area of tax planning, and specialist help is usually very useful to guide you through the rules and exceptions. 

DOMICILES

The effect of being UK resident in a tax year and deemed domiciled in the UK for income tax and capital gains tax purposes is that you are chargeable to UK tax on your worldwide income and gains on the arising basis in the same way as individuals who are actually UK resident and UK domiciled. 

Working out which country you are domiciled in can be complicated and there are many factors which need to be considered. There are three main types of domiciles – domicile of origin, domicile of dependence and domicile of choice. 

Domicile usually relates to where you were born. This is known as your Domicile of Origin. 

You may establish a domicile of choice if you move to a country where you have decided to settle permanently.   

There is also the concept of deemed domicile whereby individuals who have been UK resident for at least 15 out of the previous 20 tax years are deemed domiciled.   

Those who are UK domicile and chose to go with an alternative domicile, may still be “deemed” UK domiciled and will have to pay inheritance tax on their state for at least 3 years 

Determining domicile status in the UK can be complex, especially if you want to change your domicile of origin and establish a domicile of choice 

Specialist advice is always needed.  

REMITTANCE

A remittance is any money or other property which is, or which derives from, an individual’s offshore income and gains which are bought, either directly or indirectly, into the UK for their own benefit or for the benefit of any other relevant person. 

Individuals claiming the remittance basis will only be taxed on foreign income or gains remitted to or enjoyed in the UK. Note that the definition of a remittance, for tax purposes, is wide ranging and so advice may well be required here. 

THE REMITTANCE BASIS OF TAXATION:

Non-domiciled (non-dom) individuals who are resident in the UK can elect to be taxed on the remittance basis of taxation, as opposed to the usual arising basis. Those claiming the remittance basis will be subject to UK tax only on UK sourced income and gains, together with foreign income and gains which are remitted to the UK.  

If no claim for the remittance basis is made, taxation on the arising basis is the default position.   

Claiming the remittance basis

A decision on whether to make a claim for the remittance basis can be made on a year-by-year basis. The claim is usually made via the individual’s self-assessment tax return.  

A consequence of claiming the remittance basis is that the individual will lose their entitlement to the personal allowance and capital gains annual exempt amount (£12,500 and £12,300 respectively in 2022-23) for the tax year in respect of which the remittance basis claim is made.  

In most cases, taxpayers with foreign income exceeding the personal allowance will benefit from claiming the remittance basis. However, each case needs to be reviewed on its merits. It should also be remembered that individuals with income of more than £100,000 will suffer a reduction in the personal allowance of £1 for every £2 of income above that figure, irrespective of whether a claim for the remittance basis has been made.  

RATES OF TAX ON REMITTED INCOME:

Income and gains remitted to the UK by an individual claiming the remittance basis will be subject to UK tax. ‘Clean capital’ (offshore monies that do not represent non-UK income or gains arising after the commencement of UK residency) can be brought to the UK without a tax charge, and it is therefore important for remittance basis users to segregate their offshore income and gains from any clean capital funds. At a minimum, at least three separate bank accounts should be maintained – one each for clean capital, income and capital gains.  

Foreign income remitted to the UK will be taxed at non-savings income rates (currently 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for those with taxable incomes exceeding £150,000). This is the case even where the income remitted is dividend income, which if taxable on the arising basis would be charged at lower rates of 7.5%, 32.5% and 38.1% respectively.  

If a remittance to the UK is made from an account containing a single source of income for a single year (or only clean capital), the composition of the remitted funds will be easily identified. However, in many cases, remittances are made from mixed funds, namely accounts containing a combination of income, capital gains and clean capital. Where a remittance is made from a mixed fund, the tax legislation stipulates specific ordering rules for the purpose of matching the remittance with monies comprised within the account. These rules can be complicated to apply and so advice should be sought here.  

LONG-TERM RESIDENTS:

Long-term UK residents who wish to continue claiming the remittance basis are required to pay an annual remittance basis charge.   

Non-doms who have been resident for at least seven of the previous nine tax years must pay £30,000 per tax year, and for those who have been resident for at least 12 of the previous 14 tax years the charge is £60,000.   

Given the level of the remittance basis charge, many non-doms can be better off foregoing a claim, opting instead to pay tax on the arising basis.  

Where a non-dom moves from the remittance basis of taxation to the arising basis, any foreign income or gains which originally arose in a year for which the remittance basis was claimed remain taxable if remitted in a later year.