Individuals who are not domiciled in the UK but are residents there have the option to choose the remittance basis of taxation instead of the regular arising basis.
Those opting for the remittance basis will be liable for UK tax only on income and gains sourced in the UK, as well as on foreign income and gains that are brought into the UK.
1. DETERMINATION OF UK TAX RESIDENCY
The basic rule under the Statutory Residency Test (SRT) is that an individual (P) is resident in the UK for a tax year (year X) if:
- the automatic residence test is met for that year; or
- the sufficient ties test is met for that year.
If neither of those tests is met for the year, P is not resident in the UK for that year.
As regards 1 above, the ‘automatic residence test’ is met for year X if P meets:
1. at least one of the automatic UK tests; and
2. none of the automatic overseas tests.
It might be noted, first, that an individual who spends at least 183 days in the UK in a tax year will in any event be UK resident for that year. Subject to that, in practice these rules can best be applied in the following order:
- consider whether any of the ‘automatic overseas tests’ are met for the year – if so, then P is not resident for the year;
- if none of the automatic overseas tests are met, consider whether any of the ‘automatic UK tests’ are met for the year – if so, then P is UK resident for the year;
- if none of the automatic overseas tests, and none of the automatic UK tests, are met for the year, move to consider whether the ‘sufficient ties’ test is met for the year – if so, P is resident for the year; if not, P is not resident.
The above tests are taken in turn.
- The automatic overseas test
There are five automatic overseas tests and if an individual (P) meets the conditions of any one of these tests, they are automatically non-resident. The tests are:
- that P was resident in the UK for one or more of the three previous tax years and spends fewer than 16 days in the UK in the current tax year;
- that P was not resident in the UK for any of the previous three tax years and spends fewer than 46 days in the UK in the current tax year;
- that P worked full-time overseas over the tax year without any significant breaks during the tax year from overseas work, and:
- spent fewer than 91 days in the UK in the tax year, and
- the number of days in the tax year on which P worked for more than three hours in the UK is less than 31;
- that P died in the current year having spent fewer than 46 days in the UK during that year and:
- P was not resident in the UK in the two preceding tax years, or
- P was not resident in the UK in the preceding tax year and the tax year before that was a split year by virtue of Case 1, 2 or 3;
- that P died in the current year and would meet the third automatic overseas test for the current year considering only the period until P’s death and:
- P was not resident in the UK for the two preceding tax years because P met the third automatic overseas test for each of those years, or
- P was not resident in the UK in the preceding tax year because P met the third automatic overseas test for that year and the tax year before that was a split year by virtue of Case 1 (leaves UK for full-time work overseas).
- The automatic UK test
An individual (P) who does not meet any of the automatic overseas tests will be automatically UK resident if they meet any of the four automatic UK tests. The tests are:
- P spends at least 183 days in the UK during the tax year;
- that there is a period of more than 90 days, at least 30 of which fall within the tax year, when P has a home in the UK, and no home overseas (disregarding any home at which they are present for fewer than 30 days in the tax year);
- that P works full-time in the UK over a period of 365 days, without any significant break, all or part of which period falls within the tax year – and more than 75% of those days on which P does more than three hours work are days on which P does more than three hours work in the UK; or
- that P dies in the current year having been UK resident for each of the three preceding tax years by virtue of meeting the automatic residence test, and:
- the tax year before P died was not a split year (assuming the year in which P died was a year of non-residence);
- when P died, P had his/her home in the UK, or if P had more than one home, at least one of them was in the UK; and
- if P had a home or homes overseas during all or part of the tax year, P did not spend a sufficient amount of time (at least 30 days) in the overseas home(s) in the tax year.
- The sufficient ties test
An individual (P) who meets none of the automatic overseas tests and none of the automatic UK tests will need to look at the sufficient ties test. If the sufficient ties test is met for the tax year, P is UK resident for that year.
The test compares the number of days spent in the UK against a small number of connection factors (ties) as follows:
- UK resident family;
- substantive UK employment (including self-employment);
- available accommodation in the UK;
- more than 90 days spent in the UK in either or both of the previous two tax years;
- a country tie (but only if individual resident in one or more three previous tax years).
The flowchart and the results under the sufficient ties test for each relevant combination of days spent and ties satisfied are set out in the table below.
Liability to tax, in the UK, on income and gains can also depend on an individual’s ‘domicile’ (domicile is also particularly relevant in connection with the UK’s taxation of wealth, in the shape of inheritance tax).
2. DETERMINATION OF UK DOMICILE
The test of domicile is essentially a ‘common law’ concept, derived from case law. However, from 6 April 2017, a new statutory rule applied which deems certain individuals (who are not UK domiciled under general law) to be UK domiciled for most tax purposes.
- Domicile of Origin
Domicile of origin follows that of the father or, if illegitimate, that of the mother and will, in the case of adults, apply in the absence of a domicile of choice.
This ‘dependent domicile’ of a child below the age of 16 years will change according to whether the parent acquires a new domicile of choice.
- Domicile of Choice
At the age of 16, an individual acquires the right to establish a domicile of choice (to replace their domicile of origin).
To establish a domicile of choice, there must be evidence of fact and intention. The required fact would be habitual residence (being sole or chief residence) in the country where it is alleged that the domicile is established, and the required intention would be the intention to abandon the domicile of origin and establish a permanent home in the country of choice. In one case, the taxpayer, with a domicile of origin in the UK, failed to establish a domicile of choice in Guernsey when she remained in the UK during school and university terms to complete her education. Guernsey had not become her chief place of residence.
Until a domicile of choice is established, the domicile of origin continues. Once a domicile of choice is abandoned, the domicile of origin is revived and continues until another domicile of choice is established.
- Deemed Domicile
From 6 April 2017, an individual not domiciled in the UK at a time in a tax year (‘the relevant year’) is to be regarded as domiciled in the UK at that time, for most tax purposes:
- A) if:
- the individual was born in the UK,
- the individual’s domicile of origin was in the UK, and
- the individual is resident in the UK for the relevant tax year;
- B) if the individual has been UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year.
REMITTANCE BASIS TAXATION
Non-domiciled individuals can elect to pay income tax and capital gains tax on the remittance basis so that UK tax is paid on foreign income or gains only to the extent that (and when) they are remitted to the UK. This normally involves the making of a claim.
The meaning of ‘remitted to the UK’ is defined in detail by the statute.
A charge – the ‘remittance basis charge’ – for claiming the remittance basis applies where the individual satisfies one of the two residence tests (is a ‘long-term UK resident’), as shown in the table below.
|No. of years UK resident||Remittance basis charge|
|2017–18 to 2023–24|
|(7 out of past 9 tax years)||30,000|
|(12 out of past 14 tax years)||60,000|
- Where the remittance basis is claimed, the individual is not entitled to any personal allowance, blind person’s allowance, tax reductions for married couples or civil partners, life assurance payments relief or capital gains tax annual exempt amount
- The remittance basis applies automatically (without a claim) to:
(a) Non-domiciled individuals whose unremitted foreign income or gains for the year are less than £2,000 (unless they satisfy the conditions for the exemption from income tax for non-domiciliaries on foreign income, or give notice that the remittance basis is not to apply);
(b) Non-domiciled (and non-deemed domiciled – see below) individuals who:
– do not have UK source income or gains (other than taxed investment income not exceeding £100) for the tax year concerned,
– do not remit in that year any foreign income or gains which arose in a year in which the remittance basis has applied, and
– have been UK resident for not more than six of the immediately preceding nine tax years, or are under the age of 18 throughout the tax year concerned).
- Where a claim for the remittance basis is made, the claimant is required to ‘nominate’ all or part of his unremitted foreign income or gains for the year of claim, to be taxed on the arising basis. That amount must be such as would produce a ‘relevant tax increase’ of not more than the amount of the charge that applies (depending on which of the residence tests is satisfied).
There are certain exemptions or reliefs available, in particular ‘Business investment relief’ which was introduced in 2012. This permits monies to be brought into the UK for the purposes of acquiring qualifying business assets, without such amounts counting as ‘remittances’ for tax purposes.
A special rule applies to certain earnings from employment (known as ‘Overseas workday relief’). Where a now resident, but non-UK domiciled, individual has been non-UK resident in previous tax years (or, if UK resident, has been resident for no more than the previous two tax years), general earnings arising in the current tax year which are not in respect of UK duties of the employment, are taxed on the remittance basis only.