Becoming tax resident in the UK
The extent to which an individual is subject to UK tax depends on whether they are resident or domiciled in the UK. The underlying principle is that those who are resident and domiciled in the UK should pay more tax than those who are:
- resident in the UK but not domiciled in the UK
- not resident or domiciled in the UK.
An individual’s domicile is not necessarily the same as their nationality, or the country in which they live. A person can be resident in the UK for many years and yet be domiciled elsewhere. If you were born in France to French parents, you are likely to remain French domiciled even if you become tax resident in the UK.
Case law on residence – applicable to 2012-2013 and earlier tax years
Your residence status for the current tax year and previous ones generally relies on a combination of case law principles and HM Revenue & Customs (HMRC) guidance. Case law principles state that whether or not you are UK tax resident is determined by a number of different factors, including how much time you spend in the UK, whether or not you have available accommodation in the UK, how often you come to the UK and why you are coming to the UK. It also considers your family, social and business links with the UK and whether you intend to become resident in the UK.
HMRC guidance on residence – applicable to 2012-2013 and earlier tax years
Under current HMRC guidance, if an individual comes to the UK permanently or for at least three years, HMRC will treat the individual as UK tax resident.
Otherwise HMRC apply the “183 day” and “91 day” tests to determine whether or not you are UK tax resident. You must keep your visits to the UK each tax year below 183 days and your average visits below 91 days where that average is taken over a four-year period in order to avoid becoming tax resident in the UK.
Statutory residence test for tax years 2013-2014 and later
From 6 April 2013 the statutory residence test applies. This uses the number of days you have spent in the UK to determine whether or not you are resident in the UK for tax purposes.
You start by counting the number of ‘midnights’ you are present in the UK during the tax year. This will determine whether you meet the high day count threshold for automatic UK tax residence or whether you have a sufficiently low day count to conclude that you are definitely not resident in the UK. In all other cases certain UK ties are looked at to determine whether you are resident or not. Broadly, the more UK ties you have, the fewer the number of days you can spend in the UK without becoming resident.
UK income tax and capital gains tax
If you become tax resident in the UK, all of your UK-source income and gains will be taxable in the UK. Any foreign income and gains you may have will not be taxable unless they are brought into the UK. Once you have been resident in the UK for broadly seven tax years, you will have to pay an annual charge to continue to benefit from this tax treatment.
Clean capital can be brought to the UK with no UK tax liability. It is therefore important to arrange your overseas affairs as soon as possible before you arrive in the UK so that you can demonstrate separate offshore capital, income and capital gains.
UK inheritance tax
In most cases you will be able to retain your foreign domicile after you become a UK tax resident. If you are not UK domiciled, only assets you own that are physically situated in the UK will be subject to inheritance tax on your death. Foreign assets will not be liable to UK inheritance tax until you have been resident in the UK for 17 tax years, at which point you become deemed domiciled for UK inheritance tax purposes and your worldwide estate becomes liable to UK inheritance tax.
It may be that foreign taxes remain payable while you are tax resident in the UK. However, double tax treaties may apply to stop you being taxed twice on the same assets, capital gains or income. Mishcon de Reya is very well placed to co-ordinate advice required in other jurisdictions if necessary.