Director Tax Residency In UK – 3 Steps To Know Your Status Quickly

Tony Dhanjal

Tax Residency In UK

This Article Contains

If you have interests in the UK then it is important to understand your status for tax residency in UK. Whether or not you are considered a UK tax resident can determine whether it’s your worldwide income or just your UK income that will be subject to tax in the UK. As you can imagine determining your status is not always straightforward so HMRC have developed the statutory residence test to assist. In this article we will explore tax residency in UK in more detail.

Resident v Non Resident

Before you try to determine your own status of tax residency in UK it is important to understand that this is not always a straightforward status to determine and is one that often requires assistance from a professional.

It is also important to know what the tax consequences are of each potential outcome:

  • Tax Resident in UK – Will usually pay UK tax on their worldwide income (this may not apply to non domiciled residents which we will explore later)
  • Non resident – Only pays tax on their UK income but not their foreign income
An individuals tax residency in UK status is reviewed each tax year and due to the criteria can result in differing treatment from one year to the next.
 

The Statutory Residence Test

The statutory residence test is HMRC’s way of determining your tax residency in UK based on the number of days you spent in the UK in a particular tax year. The test can be extremely simple to use or extremely complicated depending on your individual circumstances. If any of the statements below apply to you then your status of tax residency in UK should be straightforward (please note that this is not the full test but rather a simplified version).

You are automatically a tax residency in UK if either of the following statements apply to you:

  • You spent 183 days or more in the UK within the last tax year
  • Your only home was in the UK – you must have owned, rented or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year
You are automatically non resident if either of the following apply:
 
  • You spent fewer than 16 days in the UK (or 46 days if you have not been considered tax resident in the 3 previous tax years)
  • You work abroad full-time (averaging at least 35 hours per week) and spent fewer than 91 days in the UK of which no more than 30 were spent working
Where your situation is more complicated and the above tests do not give you a clear answer to your tax residency in UK, you should refer to HMRC’s detailed guidance on the statutory residence test or speak to a professional who will assist. The next steps for the more complicated situations would be to complete the full statutory residence test which includes further automatic residence tests and sufficient ties tests which will consider whether your connections to the UK combined with the number of days spent in the country will make you a UK resident. The sufficient ties test will consider whether family, accommodation, work or time previously spent in the UK will reduce the amount of days needed to be considered automatic UK resident for that particular tax year.
 

3 Step Process To Know Your Status Of Tax Residency in UK

Remember that the above is a slightly simplified version of the statutory residence test which will usually provide an answer to the majority of situations. For those that it does not provide a clear answer they are advised to review the full statutory residence test on the HMRC website and take the following steps:
 
  1. If you’ve been in the UK for less than 183 days in the tax year then go to step 2.
  2.  If you meet any of the automatic overseas tests you will not be resident in the UK for that tax year. If you do not meet any of these tests go to step 3.
  3. If you meet any of the automatic UK tests or the sufficient ties test, you will be UK resident for that tax year. If you do not meet any of these tests you will not be resident for that tax year

Example

 Samantha was born in the UK but now spends most of her time living overseas. During the 19/20 tax year she only returned to the UK for 2 weeks to visit family before returning overseas. Her total time spent in the UK was 14 days in the 19/20 tax year. As this is less than 183 days (step 1) Samantha will progress to step 2 and apply the automatic non residence tests. As Samantha spent less than 16 days in the UK during the tax year she meets the requirements of the first test and is considered a non-resident.
 

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Non Domiciled Residents

A non domiciled resident is a UK tax resident who has their permanent home outside the UK. This may sound confusing at first but the most common example is a foreign national temporarily living in the UK. Those who qualify for “non dom” status will not pay tax on the first £2,000 of foreign income or gains they make, providing they do not bring it into the UK. Following this they can choose between 2 options to tax their foreign income:

  1.  The arising basis – Individuals will pay tax on their worldwide income as it arises.
  2. The remittance basis – Individuals will pay UK tax on their UK income plus foreign income that they bring to the UK. Opting for this remittance basis usually results in the loss of personal allowances and capital gains allowances. It may also be necessary to pay an annual charge of up to £60,000 if you have been resident of the UK for longer than 6 years. Since April 2017 those born in the UK and long term residents who have been resident in the UK for 15 of the last 20 tax years can no longer claim the remittance basis.
You can switch between the two options each tax year depending on what will be more favourable for your circumstances. The above is the absolute basics of the tax treatment for non domiciled individuals and anyone who finds themselves in this position should always seek professional assistance and refer to HMRC’s guidance.
 

Double Taxation

 You may find yourself in a situation where your income was already taxed in the country of origin and then is subjected to UK tax as well. In this scenario you can claim foreign tax credit relief to get some or all of the tax back. This is usually done when declaring your foreign income on your self assessment. The amount of tax credit you get depends on whether the income originates from a country with whom the UK has a double taxation agreement but even where this is not the case you will often get some relief anyway. This is known as unilateral relief. The tax relief you receive is usually the lower of the actual tax already paid and the UK tax that would be applicable.
 

Reporting Foreign Income 

If you have foreign income or capital gains you will usually report them on a self assessment tax return which needs to be submitted by 31 January following the end of the tax year the income relates to. To learn more about who might need to submit a tax return, check out our article do you need to register for and complete a self assessment.
 

What Counts As Foreign Income?

Foreign income is any income that originates from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign. Some common examples of foreign income include:

  • Wages when you work abroad
  • Foreign investment income such as dividends or bank interest
  • Rental income on overseas property
  • Income from pensions held overseas
Most income is taxed when it is declared on a self assessment tax return but HMRC also identify some sources of income on their website that are taxed differently.
 

Split Year Treatment

When you leave the UK to live abroad you may be able to apply for split year treatment. This is a process that splits the tax year in two parts. A part where you are considered resident and another where you are considered non resident. The result is that you only pay tax on your foreign income and gains whilst resident of the UK. The split year treatment can only be applied when you leave the UK for at least a full tax year as well as meeting other criteria that are detailed in chapter 5 of HMRC’s guidance note on the statutory residence test.
 

What About Capital Gains

 The way you determine your status of tax residency in UK for capital gains is the same as for income however there is a slight difference with how the tax is potentially applied.
 
As with income a resident would pay UK tax on their worldwide capital gains. So if a resident sells some shares in a US listed company then any gain would be subject to UK capital gains tax.
 
A non resident would usually only pay capital gains tax on UK land and property disposals but must also be careful when returning to live in the UK after a short period away. If the individual has been overseas for less than 5 years then this may be considered temporary non residence and they may be required to pay tax on certain income and gains made whilst non resident.

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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