Tax Implications of being UK Tax Resident vs Non UK Resident

Non UK residence – What is it and how could it affect you?

The default position is that UK Tax residence results in UK tax exposure on worldwide income and gains, no matter where they are held.

UK Tax Residents, who are also non UK Domiciled (Domicile has a common law application and completely separate from tax residence) can, in some cases, limit their overseas sources from UK tax. This is a particularly complex subject area.

Non-UK residents will only pay tax on UK sourced income, or gains from sales of UK land and property (directly or indirectly). Non UK tax residents therefore escape UK tax on overseas income or gains.

It follows that to correctly understand your tax position, you firstly need to establish if you are indeed tax resident in the UK.

UK tax residence is essentially based on days of presence in the UK in any one UK tax year (6^th April to 5^th April), but the number of days you can spend here before being considered UK tax resident, varies significantly according to the application of HMRC prescriptive ‘tests’.

This inevitably leads to very different day counts, depending on bespoke circumstances.

HMRC Statutory Residence Tests (SRT)

HMRC has applied the Statutory Residence Tests (SRT) since April 2013, to work out an individual’s residency status for any one tax year. The tests must be applied in a particular order as outlined below, exhausting each test option, until one test is finally met.

• 1^st – Automatic Overseas Tests (AOT) – anyone who meets this test will be seen as ‘Automatically non UK tax resident’
• 2^nd – Automatic UK Tests (AUKT) – assuming you don’t meet the AOT, this test would determine if you are instead seen as ‘Automatically UK tax resident’
• 3^rd – Sufficient Ties Tests (STT) – if neither the AOT or the AUKT tests are met, this test would finally determine the residence position and focuses on UK connections, for example UK home availability, or a UK resident partner. This final test will conclude the residence, or non residence position

The AOT and AUKT are themselves made up of several different tests. Some just count days spent in the UK, whilst others, for example the third AOT, insist on full time overseas employment (> 35 hours pw on average), with no more than 90 days spent in the UK. In addition, of these 90 days, no more than 30 can be spent working here, nor must a 30 day break from overseas work take place. This latter condition, especially with the growth in remote working, has led to many unexpectedly failing this test in recent years.

An individual is either resident or non UK resident for an entire tax year, however, here is a facility to split the tax year between an overseas and UK part when arriving/leaving the UK. This allows for the removal of foreign sourced income and gains from the UK tax charge relative to the ‘overseas’ part of the tax year in question. Just like the SRT’s, there are various conditions to be met and so needs careful planning well ahead of any relocation.

For those who wish to achieve and then maintain, non UK tax residence, it is crucial they have a good understanding of these tests, carefully monitor UK days and have an awareness that any changes in personal circumstances could affect the number of days allowed.

The consequences of getting this wrong cannot be underestimated in terms of exposing global income and gains to UK tax, particularly given current UK progressive tax rates are some of the highest in the world right now.

Non UK Tax Residence – how will income be taxed in the UK?

Even if you’re non-resident, you should expect to pay tax on your UK sourced income. For example, UK pension, UK dividends, or bank interest. If you are resident in another jurisdiction that also has a Double Tax Agreement with the UK, this could dictate taxing rights to the country of residence, instead of the UK, particularly pension income. The purpose of these Double Tax Treaties is largely to avoid double taxation, i.e. no income or gains should be taxed twice. This ‘Treaty Relief’ should always be checked and must be formally claimed.

if you are a British or EEA citizen, you will be entitled to a tax-free Personal Allowance of £12,570 for 2023/24 which can still be set against UK taxable income before paying any tax here. You might also be entitled to this allowance according to the double-taxation agreement between the UK and your country of residence.

The generous ‘disregarded income’ rules also apply to UK investment income, which effectively limits the amount of UK tax paid for those who are non UK tax resident for a whole tax year. It can mean that interest and dividend receipts are removed from the UK tax charge altogether, but care must be taken, given that claiming this basis of assessment will result in the exclusion of the personal tax allowance.

Non Resident Landlords Scheme

HMRC also operates the Non-Resident Landlord Scheme, to ensure that UK income tax is paid on UK rental income. Each month the tenant, or letting agent, must deduct basic rate tax before paying the rent to the overseas landlord, then report and pay the tax to HMRC every three months. Landlords are obligated to file a Self Assessment tax return to report the rental income, but the tax already paid by the tenant or agent is deducted from their overall UK tax liability.

You can instead separately apply to receive the rent without any tax deducted, but this firstly requires your tax affairs to be completely up to date, plus a formal and specific application to HMRC.

Capital Gains Tax (CGT) Considerations?

Normally non-residents do not pay UK tax when selling an asset, but an important exception is UK property or land, which still remains subject to UK CGT. If you are non-resident and dispose of any UK land and property (directly or indirectly, e.g. shares in a property investment company), the sale must be reported to HMRC within 60 days. This applies even if there is no gain, or a loss and there is no tax to pay.

There are however advantages of selling land and property when non UK resident. Despite paying the same CGT tax rates as UK residents, non UK tax residents can substitute the market value of their residential property (if held @ April 2015) or commercial property or land (if held @ April 2019) and use these respective values instead of cost, to calculate the gain on sale. This can result in significant tax savings assuming original costs are far less than the substituted April 2015/2019 values.

Does it matter how many tax years I am not UK resident ?

If you previously left the UK and are thinking about returning, you should also consider the temporary non-residence rules.

Essentially this is anti avoidance legislation, introduced to stop individuals becoming non tax resident for short periods to realise significant income or gains free from UK tax.

Broadly, these rules apply to tax certain UK income sources and gains realised when non UK tax resident.  The associated UK tax liability would become payable in the year you resume UK residence. To briefly summarise, you will be temporarily non-resident in the UK if:

• you have been resident in the UK for at least four tax years (out of the seven tax years prior to departure); and
• you leave the UK and become non-resident; and
• you then return to the UK after a period of non-residence lasting five years or less.

Income sources such as close company distributions, chargeable event gains and lump sum pension distributions would be included in this definition.

However, from a CGT perspective, only disposals of assets held prior to leaving the UK fall under these rules – if you acquire an asset and sell it again during the same period of temporary non-residence, no tax charge arises.

Completing a UK Self Assessment Tax Return

If you are not UK Tax Resident, but continue to receive UK sourced income on which there is UK tax due, HMRC will expect you to file a Self Assessment tax return each year. This will include a requirement to claim that you are non UK tax resident, clearly reporting the days you have spent in the UK and if you are tax resident elsewhere.

Currently, there is no ability for non UK tax residents to electronically file their Tax Returns online via the HMRC website. It is therefore necessary to either submit a paper return ahead of 31 October following the end of the tax year, or alternatively seek professional help. Given the complexities associated with any claim for non UK tax residence and the significant tax implications of getting this wrong, we would always recommend that professional advice and support is obtained re same.

If you would like advice relating to your residency position or help with completing your Self-Assessment Tax Return, please get in touch with our tax team or your usual FPM contact.