Any income received from anywhere outside of England, Scotland, Wales and Northern Ireland (know together as United Kingdom) will be treated as foreign income.
This will include any income, such as wages from working abroad; any investments form foreign companies or interest on overseas savings; any rental income you receive from foreign property as well as income from overseas pension.
Domiciled is the country which a person officially has as their permanent home or has a substantial connection with.
Domicile of origin – country in which you are born in. Usually, the same as your fathers at the time of birth.
Domicile of choice can be made if the following is demonstrated:
- They have settled permanently in the country in which they then consider themselves domiciled
- They intend to stay there for the rest of their lives
- Them must break ties with the country of domicile of origin
Deemed domicile – individual who is not actually UK domiciled but will be deemed to be domiciled if they have been resident for at least 15 out of the 20 tax years immediately before the current tax year.
If you are non-domiciled in the UK you won’t have to pay UK tax on your foreign income or capital gains as long as both of the following apply:
- Your foreign income or gains are less than £2,000
- You don’t bring them into the UK in any way, for example, they aren’t transferred into a UK bank account.
Residency in the UK
Residency is primarily determined by how much time is spend in the UK by the taxpayer in a tax year. Since 5.4.2013 there has been a Statutory Resident Test, which must be applied to work out residence status for each individual tax year.
Automatic overseas test:
- Resident in UK for 1 or more of 3 previous tax years and spend less than 16 days in the tax year being tested
- Resident in the UK for none of the previous 3 tax years and spend less than 46 days in the tax year being tested
- Working full-time overseas for the tax year being tested with no significant break and spending less than 91 days in the UK and you work for more than three hours in the UK on fewer than 31 days in the tax year.
Automatic UK test:
- They are in the UK for at least 183 days in the tax year
- They have a home in the UK for more than 91 days and are present in the home on at least 30 separate days at any time during the tax year
- They work full time in the UK for 365 days or more with no significant break form UK work
- At least one day which has to be both in the 365-day period and the tax year is a day on which you worked more than 3 hours in the UK
- The fourth test is only relevant to death within the tax year
Where an individual has overseas income (e.g. from a property in another country), they would potentially have suffer double taxation, this means the income could be taxed by the country where they property is, as well as by the UK government.
Because different countries have their own tax laws, an individual may have to pay tax on the same income in two countries. The UK has “double taxation agreement with many countries to ensure that people do not pay tax twice on the same income.
Most double taxation agreements allow the UK to tax UK employment income. This means that the individual would still be entitled to the personal allowance in the UK.
To apply for tax relief before getting taxed on foreign income will require you applying in the country the income is form. Proof of residency will be required which will need to be sent to the foreign tax authority.
If tax has already been paid on foreign income, then this can usually be reclaimed as Foreign Tax Credit Relief (FTCR) when reporting foreign income in your tax return. You can claim the lesser amount of:
- Foreign tax paid
- UK tax due
Foreign Tax Credit Relief can be claimed if a double taxation agreement allows both countries to tax the same income
Foreign Tax Credit Relief would not be available if there is no UK tax liability due.
Deduction Relief is an alternative arrangement to FTCR and applies to both income and gains. Rather than using a credit (FTCR) to reduce tax liability the foreign tax incurred can be used to reduce the foreign income or capital gains chargeable in the UK.
Domiciled and Resident in the UK
Income and gains will be taxed in the UK under the “arising basis”, whether or not the money is brought into the UK. You will be required to complete Self-Assessment tax returns and may also have to deal with double taxation. However, using the arising basis allows you to keep your personal tax allowance and the Annual Exempt Amount for capital gains, where if you opt for “remittance basis” you would lose your allowances and could be faced with an annual charge for very large foreign income or gains.
Not Domiciled in the UK
You can choose to pay tax in either of the 2 ways:
- Arising Basis – this is where you pay tax and gains when they arise, regardless of if you bring the foreign income/gains to the UK
- Remittance Basis – (alternative basis), this is where income from the UK is taxed as they arise, foreign income and gains will be taxed but only if they are remitted to the UK. This option is not available to a UK domiciled resident person.
Paying Tax on the Remittance Basis
A remittance is where you have foreign income and bring that income to the UK, for example:
- Foreign income or foreign gains are brought into the UK
- Where a service is received in the UK but paid for using income or gains that arose outside of the UK
- Where an asset is bought in the UK and paid for using foreign income or gains
- Where an asset is bought overseas using foreign income or gains, and then subsequently brought into the UK
The following transactions are exempt and do not create a remittance:
- Items of clothing, footwear, jewellery or watches that are brought to the UK for personal use (unless these items are then subsequently sold in the UK)
- Property with a value of less than £1000
An individual resident in the UK would not normally pay tax on their UK pension income, as long as the income from the pensions they receive is below the UK personal tax allowance, which you don’t have to pay tax on. Anything above the personal allowance would be subject to the normal UK tax rules.
If you are domiciled and resident in the UK and receive overseas pension income, you may have to pay UK tak under the “Arising Basis” depending on the level of foreign income. It does not matter whether or not you bring the foreign income back to the UK. Being taxed on the arising basis means you will usually benefit form the personal allowance for income tax and the annual exempt amount for capital gains tax.
If you are resident and not domiciled in the UK, you pay UK tax on your UK income and gains on the arising basis. You can, however, choose to pay UK tax on foreign income including pension income on either the arising or remittance basis.
If you claim the remittance basis you only pay UK tax on overseas pension income when they are remitted to the UK.
Overseas Property Income
If you rent out property overseas you will pay tax on any income in the same way as you would in the UK. You must keep the income and expenses on overseas property separate to the income and expenses on property you rent in the UK. If you make any losses on overseas property, you will not be able to set these losses against any UK property or set any losses on UK property against income from overseas property.