Tax residents and domicile status: Who pays foreign income tax in the UK?

When do I need to pay foreign income tax in the UK?

Whether you need to pay foreign income tax in the UK largely depends on two factors: Your tax residency status and your domicile status.

Simply put, If you are UK tax resident, you’ll normally pay tax on your foreign income. But you may not have to if your domicile is abroad.

If you're not UK tax resident, you only pay tax on your UK income. You will not have to pay UK tax on your foreign income.

See also: Our tax and accounting services for your UK SME.

What is tax residency and domicile status?

The meaning of tax residency status

Your residency status is not a fixed status. It can easily change depending on how much time you spend in a country. For tax purposes, your residency status is reviewed for each individual tax year.

Whether you’re UK resident usually depends on how many days you spend in the UK during the tax year (which runs from 6 April to 5 April of the following year). To determine whether you are tax resident in the UK, a statutory residence test (SRT) was introduced in 2013. The statutory residence test is made up of three tests that must be taken in turn.

Automatic overseas tests

The first part of the SRT is the automatic overseas tests. There are three to consider

The first automatic overseas test

You’ll be non-UK resident for the tax year if you were resident in the UK for one or more of the 3 tax years before the current tax year, and you spend fewer than 16 days in the UK in the tax year.

The second automatic overseas test

You’ll be non-UK resident for the tax year if you were resident in the UK for none of the 3 tax years before the current tax year, and spend fewer than 46 days in the UK in the tax year.

The third automatic overseas test

To pass this test, all three must apply:

• You worked full-time overseas
• You spent less than 91 days in the UK
• You worked in the UK for fewer than 31 days in total

Qualifying under this part means that you are automatically non-UK resident for the relevant tax year.

Automatic UK resident test

If the automatic overseas test criteria do not apply, it is necessary to check the automatic UK resident criteria. There are also three tests to consider here.

The first automatic UK test

You’ll be UK resident for the tax year if you spend 183 days or more in the UK in the tax year.

The second automatic UK test

You had a home in the UK for all or part of the tax year and the following all apply:

• You had that home for at least 91 consecutive days
• At least 30 of those 91 days fell in the tax year in question and you were present in the home for at least 30 days at any time during the year
• You either had no overseas home or you were present in your overseas home for fewer than 30 days in the tax year

The third automatic UK test

If all the following apply:

• You work full-time in the UK for any period of 365 days, which fall in the tax year
• In that 365-day period, more than 75% of the total number of workdays (days when you do more than three hours of work), are days when you do that work in the UK
• You spent at least one such workday (in the 365-day period and in the tax year) in the UK

Sufficient ties test

If you are neither automatically non-resident nor automatically resident, it is necessary to consider the third part of the test, which is known as the sufficient ties test. Under this test, an individual's status depends on the number of ties that they have to the UK.

The number of ties will affect the number of days you can spend in the UK before being considered a UK tax resident – the more UK ties you have, the fewer days you can spend here before you become UK resident.

The tests and number of days vary slightly depending on whether you have been resident in the UK in any of the three preceding tax years and are classified as a “leaver”, or are new to the UK and therefore an “arriver”.

The relevant ties to the UK for an arriver are:

1. A family (spouse and minor children) who are resident in the UK
2. Having available accommodation in the UK
3. Working in the UK for at least 40 days
4. Spending more than 90 days (that is, at least 91 days) in the UK in either of the preceding two tax years

See also: A complete guide to understanding the UK tax system.

Domicile status and non-domicile tax statuses

Domicile is a complex UK common law concept. The basic rule is that a person is domiciled in the country in which they have their permanent home – the country regarded as your ‘homeland’. However, you can remain UK-domiciled even after living abroad for many years.

There are three types of domicile under English law:

• Domicile of origin – where a child takes their father’s (or single/unmarried mother’s) domicile (not necessarily their country of birth).
• Domicile of dependence – applies to women married before 1974 (whose domicile will mirror their husband’s) as well as minors and other legal dependents.
• Domicile of choice – acquired by moving permanently to another country.

While changing your domicile is possible, this needs to be a carefully considered and planned process as there are no set rules – much depends on your particular circumstances and intentions. If challenged by HM Revenue and Customs (HMRC), the onus is on you to prove you are non-UK domiciled.

While it is highly unlikely that your domicile will change when you move abroad, if you live abroad for a short to medium period of time, your tax residence status is likely to change.

See also: Taxation in the UK – Our guide to tax residency and domiciled status.

What is considered foreign income for tax purposes?

Foreign income is classed as anything from outside England, Scotland, Wales and Northern Ireland.

There are several sources of potential foreign income and gains that can be acquired outside of the UK but are subject to UK tax:

• Earnings from employment abroad
• Profits from running a business overseas
• Income from renting out property in another country
• Gains from selling assets or giving away assets overseas such as property or shares
• Interest on international bank accounts
• Overseas pension income
• Selling an overseas business

See also: South African exit tax: A tale of four brothers

How to report foreign income and gains

Where you are a UK tax resident and a UK domicile, or a UK tax resident but a non-UK domicile that brings in foreign income to the UK, you must report any foreign income and gains to HMRC. This is done through completing a self-assessment tax return.

Depending on the combination of your tax residence status and your domicile status, you’ll have to pay this tax on either an arising basis or remittance basis.

Arising basis: You pay tax on your worldwide income and gains in the year these arise 

Remittance basis: You are only taxed on his foreign income and gains if and when these are brought into or enjoyed in the UK. However, you pay tax on your UK income and gains on the arising basis.

It should be noted that if you are a long-term UK resident and you choose to be taxed on the remittance basis, you may also be liable to pay the remittance basis charge.

From 6 April 2017 there are two levels of charge:

• £30,000 if you’ve been UK resident in at least seven out of the preceding nine UK tax years
• £60,000 if you’ve been UK resident in at least 12 out of the preceding 14 UK tax years

An exception

An exception to this rule is where your unremitted foreign income and/or gains arising or accruing in the tax year are less than £2,000, you can use the remittance basis without needing to make a claim to use the remittance basis.

Summary of the tax positions for individuals based on their residence and domicile statuses

Status	Income and Capital Gains
UK resident / UK domicile	Arising basis on worldwide income and capital gains
Non-UK resident / UK domicile	Arising basis on any UK income and capital gains
UK resident / non-UK domicile	Choice between arising and remittance bases
Non-UK resident / non-UK domicile	Arising basis on any UK income and capital gains

 

What happens if you’re taxed twice?

You may be taxed on your foreign income by the UK and by the country where your income is from. You can usually claim tax relief to get some or all of this tax back. How you claim depends on whether your foreign income has already been taxed.

Tax treaties, also known as Double Taxation Agreements (DTAs), help to prevent an individual being taxed by two countries on the same income, gains or assets. The UK has a number of bilateral tax treaties in place with various countries for taxes on estates, gifts and inheritances. These treaties may contain deeming provisions in respect of domicile, which will override domestic legislation.

How we can help you with paying UK tax

This can be a very complex situation to figure out and everyone’s situation is different. We can advise you about your tax status, your tax return and help you to file your tax return. Our process is quick, secure and simple as we lodge all our returns electronically. Our fees depend on the type and number of income streams you have and the complexity of the return . We also quote in advance of the work so that you don’t get any surprises once your return is done. 

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We offer specialist outsourced bookkeeping, accounting and financial management to businesses, private individuals and contractors in the UK. Our accountants listen and learn about your particular circumstances to enable us to design an accounting solution tailored to your specific needs. Get in touch with us at accounting@sableinternational.com or call +44 (0) 20 7759 7553.