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Where do you Live? – Residence and UK Taxation

Where do you Live? – Residence and UK Taxation

I have just heard that HM Revenue and Customs have won a case against Barclays Bank before the Special Commissioners (a tribunal that adjudicates between HMRC and taxpayers when there is a dispute about the tax legislation).

 

As a result, Barclays are going to have to turn over to HMRC full details on hundreds of thousands of their clients’ bank accounts in offshore tax havens such as the Channel Islands.HMRC (who are feeling very pleased with themselves about the win), say that they expect that UK income tax will be due on the interest from these accounts in about 20% of cases, and they estimate that they will collect extra tax of over £1.5 billion.

 

All of this set me thinking about the rules for UK tax liability on income from outside the UK. There is a common misconception that if you put money in an offshore bank account, you are not liable for UK tax on the interest – you may remember the trouble the comedian Ken Dodd got into as a result of this very mistake!

 

I think the misunderstanding arises because offshore accounts pay interest without deducting income tax from it, whereas if you have a deposit account in a UK bank or building society, they deduct tax from your interest before crediting it to your account.

 

If you are a resident of the UK, you are liable to UK income tax on all your income, wherever it comes from – with certain important exceptions, which we will look at in a minute.

 

What does “UK Resident” Mean?

 

The detailed rules are complicated, but a good rule of thumb is that you are UK resident for a tax year (year to 5 April), if:

 

  • You are physically present in the UK for 183 days or more during that year, OR
  • Over several successive tax years, you are in the UK for an average of more than 90 days per tax year

 

If you are within either of those two categories, then you are UK resident, and you are liable to UK income tax on all your income, wherever it comes from, unless any of the following apply to you:

 

Tax Treaties

A tax treaty is an agreement between two countries on how people who are taxable on the same income in both countries should be taxed. The UK has a wide network of such treaties, so if you are also a resident of another country, it may be that there are special rules in the relevant tax treaty that will apply to you. For example:

 

William Bonney is a US citizen, and has a permanent home in the USA. He also visits the UK every year, and sometimes spends more than 183 days here in a tax year – he averages more than 90 days in the UK each year, so under UK law he is definitely UK resident. However, as a US citizen with a “substantial presence” (his home) in the US, he is also treated as resident in the US. Under Article 11 of the US/UK Tax Treaty, Billy is exempt from UK income tax on interest, even if it is from a deposit in a UK bank.

 

Domicile

A person is “domiciled” in the country which is their “home”. The detailed rules are complicated again, but broadly, when you are born, you acquire your father’s domicile – this is your “domicile of origin”. Once you become an adult, you can change this domicile of origin to a new “domicile of choice”, if you move to another country and put down permanent roots there.

 

If you are UK resident, but domiciled in another country, you are not liable to UK income tax on income that arises outside the UK unless you bring the income into the UK. For example, if you have a deposit account in the Channel Islands, provided you do not bring the interest from that account into the UK, you will not have to pay UK income tax on it.

 

Anyone who is not UK domiciled but is resident in the UK should take expert advice on the tax planning opportunities available to them – with careful planning it is possible to enjoy your offshore income in the UK without paying UK Income tax.

 

There are also pitfalls – the definition of “remittance” (that is, bringing income into the UK) is very wide and includes some unexpected traps. For example, if you borrow money or use a credit card in the UK, then pay off the account using money from your offshore account, you will have “remitted” that money to the UK and income tax will be due.

 

Tax Free Investments

You can invest up to £7,000 per tax year in an “Individual Investment Plan” (also known as an “Individual Savings Account” or ISA), and the income from this investment will be tax free.

 

Certain investment products from National Savings and Investments also produce tax free income, though again there are limits on how much you can invest.

 

Don’t Wait for the Knock on your Door!

Finally, if you have not declared income from an offshore account and you do not qualify for any of the exemptions described above, ask a Tax Adviser to help you disclose this to HMRC – having won their case against Barclays Bank, they will be moving on to other banks as well. If you wait until HMRC approach you it will cost you more in penalties than if you own up before they challenge you!