U.S. Expats Living in the UK
Five Key Expat Tax Principles and Addendum on UK Income Tax Law
Introduction – Living in the United Kingdom and Completing Your U.K. Income Tax Return
The United Kingdom is one of the most popular destinations for first-time expats. According to HSBC’s Expat Explorer Global Report for 2015, 58% of expats in the U.K. report being on their first adventure living abroad. Expats moving to the U.K. more often than not decide to stay in large part due to the welcoming atmosphere afforded to people regardless of their faith, race, gender or sexual orientation. According to HSBC’s report, the U.K. scored in the top 5 of all countries surveyed in this regard. Also according to the report, nearly three in five expats in the U.K. said they were confident it is a good place to progress their career and acquire new skills.
The U.K. income tax system is fundamentally similar to the U.S. federal income tax system although there are significant differences. For instance, similar to the U.S. system, the U.K. taxes its residents on their worldwide income (i.e., whether the income is earned within our without the United Kingdom). Non-resident individuals are generally only required to pay tax on U.K. source income, although there a number of exceptions (e.g., the sale of U.K. residential real estate property). Unlike the U.S., another factor that is relevant in determining income taxability in the U.K. is one’s “domicile” status. In general, individuals who are resident in the U.K. for tax purposes but are considered domiciled outside the U.K. can elect to pay tax on overseas investment income, capital gains, and certain offshore earnings only to the extent that these are remitted to the U.K. (e.g., transferred to a U.K. bank account). This is referred to as the remittance basis of taxation.
Like the U.S., the United Kingdom employs a marginal tax rate based on a progressive tax system, where tax rates for an individual increase as income rises. The ordinary income tax rate ranges from 20% to 45% (the top rate applies if the owner’s annual U.K. income exceeds £150,000). Unlike the U.S., income taxes in the U.K. are imposed at the federal but generally not at the state or local level.
A further significant difference between the U.K. and U.S. tax systems relates to tax reporting. In the U.S., nearly all working individuals file income tax returns, because in the U.S., if you earn a certain threshold income amount, you are required to file an income tax return annually. In contrast, many taxpayers in the U.K. do not have to complete a tax return, because the U.K. employs the Pay As You Earn (“PAYE”) system on your wages or salary, whereby the employer withholds, remits, and reports on your behalf. However, there are a number of circumstances under which a U.K. resident will be required to complete a tax return, including the earning of taxable income from sources outside the U.K.
Unlike the U.S., the U.K. tax year is not based on the calendar year ending December 31, but rather on a tax year end of April 5. If a tax return is due, then a paper return must be received by October 31 following the end of the U.K. tax year or, alternatively, an online tax return must be received by January 31 following the end of the tax year. Also unlike the U.S., a husband and wife in the U.K. cannot file a joint income tax return, but rather must file their returns separately.
For a more thorough overview of UK income tax law, please see our Addendum on UK Income Tax Law at the end of the five principles.
Key Principle #1 – Your U.S. Tax Obligations Endure Even After Moving Abroad
Our first principle is of particular importance because U.S. expats so often mistakenly believe that once they have moved abroad their U.S. tax obligations cease to exist.
In fact, as a basic rule, U.S. citizens, even those residing outside the United States, are considered to be U.S. residents for tax purposes and are therefore subject to U.S. tax reporting on their worldwide income. Expats must annually report all of their income to the IRS, just as they did prior to moving to abroad, whether the income is U.S. source or foreign source, and whether that foreign source is the United Kingdom (e.g., employment in the U.K.) or any other foreign country.
Key Principle #2 – You’re Likely Subject to New Information Reporting Obligations
U.S. expats who hold accounts or other assets overseas are subject to a number of specific filing requirements in the form of informational forms. Some of these forms are submitted to the IRS as attachments to the personal income tax return (Form 1040), while others are submitted to other governmental departments. The failure to file any of these forms can result in severe civil penalties, such as a $10,000 penalty per form per year. Additionally, in certain extreme cases, criminal penalties, including fines and incarceration, may apply if the reporting delinquency is shown to be willful.
Some of the more common forms include:
- Foreign Bank and Financial Account Report (FBAR)
The FBAR is not a tax form and it is not filed with the IRS. Instead, it is an informational form that is submitted with the U.S. Treasury Department. A U.S. account holder (person or entity) with a financial interest in or signature authority over one or more foreign financial accounts, with more than $10,000 in aggregate value in a calendar year, must file the FBAR annually with the Treasury Department.
If you reside outside the U.S. and have a bank account or investment account in a foreign financial institution, you are generally required to include Form 8938 with your U.S. federal income tax return if you meet certain monetary thresholds.
- Form 8965, Health Coverage Exemptions
The Affordable Care Act now requires most Americans to have health insurance or pay a penalty unless an exemption applies. In this regard, U.S. expats should be aware of the important need to attach a completed Form 8965 to their federal income tax return. Form 8965 allows you to describe your status as an overseas resident, which indicates to the IRS that you benefit from “deemed covered” status by a foreign health plan and do not need to participate in a U.S. healthcare plan.
Key Principle #3 – Your Activities in the U.K. Have Important U.S. Tax Implications
With each item of income that an expat earns and with each foreign asset that is owned or acquired, special considerations need to be addressed. The following are examples of common activities in the U.K. and their potential U.S. tax implications.
U.K. Limited Companies
Many business in the U.K. are operated via limited companies. This entity structure can be a very efficient way to run a business from a U.K. tax perspective, because the corporate income tax rates in the U.K. are significantly lower than the individual rates. Company directors can opt to take their earnings as a combination of salary (up to the National Insurance Contributions threshold) and dividends, thus minimizing their personal tax liability.
While often tax efficient from a U.K. tax perspective, limited companies do raise issues from a U.S. tax perspective. For instance, these entities may be considered controlled foreign corporations (“CFCs”) for U.S. federal income tax purposes, a classification that can potentially have significant U.S. tax implications. For instance, a 10% or more U.S. shareholder of a CFC must include currently in his or her gross income the CFC’s so-called “subpart F income,” which generally includes passive-type income, such as interest, dividends and rental income (meaning, for tax purposes, a CFC’s subpart F income is considered to be earned directly by the shareholder prior to an actual distribution to the shareholder). Under the CFC regime, company loans to an expat owner can trigger a so-called “Section 956 inclusion,” i.e., current inclusion of the loan amount in a 10% or more U.S. shareholder’s gross income.
U.K. Investment Products / ISAs
A number of U.K. investment products may be classified as passive foreign investment companies (“PFICs”) for U.S. federal tax purposes. Technically, a PFIC is a foreign corporation that has one of the following attributes: (i) At least 75% of its income is considered “passive” (e.g., interest, dividends, royalties), or (ii) At least 50% of its assets are passive-income producing assets.
Examples of common U.K. investment products that may trigger adverse PFIC implications include U.K. corporate bond funds as well as certain insurance products with significant investment components (e.g., Scottish Widows). Additionally, most foreign mutual funds fall within the definition of a PFIC. This can be the case even if such funds are held through a tax-deferred savings account, such as a U.K. individual savings account (“ISA”).
Careful planning is often needed to ensure that the CFC and PFIC regimes do not subject your income to highly punitive U.S. federal tax rates or unnecessary current inclusions of income at the shareholder level.
U.K. Pension Plans
Another common activity in the U.K. with important U.S. tax implications is participation in a U.K. pension plan. According to the latest Family Resources Survey from the UK Department for Work and Pensions, 29% of all adults in the U.K. participates in a pension plan in one form or another. 25% participate in employer-sponsored pensions, while 4% participate in personal pensions or stakeholder pensions.
In general, non-U.S. pension plans do not qualify for the beneficial tax-deferral treatment afforded to certain U.S. pension plans under Section 401 of the U.S. Internal Revenue Code (e.g., a 401(k) plan). As such, employer contributions and plan earnings may be subject to U.S. tax on a current basis and required to be reported on the individual’s U.S. income tax return, even though these items may not be currently subject to U.K. tax. In the case of a foreign pension plan that qualifies as an “employees’ trust” within the meaning of Section 402(b) of the Internal Revenue Code, employer contributions are taxed currently but plan earnings may be tax deferred until retirement assuming certain conditions are met.
Fortunately for U.S. expats living in the U.K., the U.S.-U.K. income tax treaty will often exempt U.K. pension plan contributions and earnings, assuming that the plan qualifies for beneficial treatment under the treaty. Examples of plans that generally qualify include occupational pensions and stakeholder pensions. With respect to pension distributions, benefits may vary under the treaty depending on whether the payments are periodic or paid as a lump sum.
It is important to note, however, that in certain situations, the utilization of treaty benefits may not be as advantageous as utilizing foreign tax credits, discussed further below, to reduce or eliminate U.S. tax on income associated with a U.K. pension. In this regard, the best strategy will depend greatly on the specific circumstances of the taxpayer.
Aside from the substantive tax consequences associated with U.K. pension plans, plan participation can also have important tax reporting implications. In some instances, a self-funded plan, such as a self-invested personal pension (“SIPP”), may be viewed as a “foreign grantor trust” for U.S. tax purposes, which may trigger additional reporting obligations, such as the requirement to file a foreign trust form (IRS Form 3520).
Because of the U.S. tax complexities associated with foreign pension plans, it is essential that U.S. expats participating in a U.K. pension plan understand the full U.S. tax and reporting implications associated with plan participation.
U.S. Tax Reporting Considerations
It is important to keep in mind that in addition to the substantive U.S. tax implications associated with the above activities, additional tax reporting obligations may also arise as a result of such activities. Some of the common forms associated with investment or other financial activities abroad include:
- Form 5471: must be filed by certain shareholders of foreign corporations
- Form 8621: must be filed by certain shareholders of passive foreign investment companies (such as foreign mutual funds)
- Form 3520: must be filed to report transactions with foreign trusts (including foreign pension plans treated as foreign grantor trusts) and receipt of certain foreign gifts
- Form 8865: must be filed for each controlled foreign partnership in which the taxpayer is a 10% or more partner
Key Principle #4 – U.S. Tax Benefits Are Available to You
The good news for expats living in the U.K. is that both U.S. domestic tax law and U.S.-U.K. bilateral agreements contain a number of provisions that are designed to prevent “double taxation,” or taxation on the same income in both countries.
These provisions, in many cases, can reduce or even eliminate the U.S. federal income tax that would otherwise be due by the expat taxpayer. Keep in mind, however, that even if no U.S. tax is owed, a U.S. tax return still generally must be filed and the failure to do so can result in severe penalties.
Domestic law provisions, such as the foreign earned income exclusion (“FEIE”), foreign housing exclusion (“FHE”), and foreign tax credit (“FTC”) are designed specifically for taxpayers living abroad.
Foreign Earned Income Exclusion
Provided an individual is able to establish that his tax home is outside the U.S. (by satisfying either the “bona fide residence” test or the “physical presence” test), such individual can exclude from income a portion of their income earned overseas. The FEIE amount is adjusted annually for inflation. For tax year 2016, the maximum foreign earned income exclusion is $101,300 ($202,600 for a married expat couple).
In order to claim this exclusion, an individual must file a U.S. federal income tax return (Form 1040). To claim the FEIE, an individual must file Form 2555 with their U.S. federal income tax return.
Foreign Housing Exclusion/Deduction
In addition to the FEIE, U.S. expats can also exclude or deduct from their gross income their housing cost amount in a foreign country provided they qualify under the bona fide residence or physical presence tests. The exclusion is applicable whenever an individual has wages. The deduction is applicable whenever the individual is self-employed. In order to claim the foreign house exclusion/deduction, an individual must file Form 2555.
However, the housing cost amount is subject to certain limitations that are adjusted based on geographical location. Without any adjustments to the limitations, the maximum foreign housing exclusion for 2016 is $14,182. Adjustments vary from city to city and are based on the cost of living in each city. Such adjustments apply specifically to a number of cities in the United Kingdom.
Housing costs generally qualify regardless of whether an employee directly pays his or her costs or the employer directly pays (or reimburses the employee). Employees should bear this in mind when negotiating their employment agreements, so as to maximize the available exclusion, especially in high cost of living areas in the UK.
Foreign Tax Credits
As an alternative to (and for higher income earners, in complement to) the FEIE and foreign housing exclusion/deduction, a U.S. expat can claim a foreign tax credit (“FTC”) for foreign income taxes paid. The amount of foreign tax credits that may be taken is limited to the amount of foreign source taxable income and cannot be used to offset U.S. source income.
Since the U.K. tax rate on an expat’s income will generally be higher than the U.S. tax rate, it will often be the case that there is no residual income tax to pay in the U.S. after claiming a foreign tax credit for the U.K. tax paid. However, a foreign tax credit cannot be used to reduce the U.S net investment income tax and, as such, residual U.S. tax may result even if the foreign tax credit can otherwise be fully utilized against the earned income tax. The foreign tax credit rules are particularly complex and, as such, require a thorough analysis by a tax expert.
Aside from specific situations, in order to claim a foreign tax credit, an individual must file Form 1116 with their U.S. federal income tax return.
Many countries have signed treaties and other international agreements with the U.S. whereby certain benefits are available to U.S. expats residing in a particular foreign country, for instance in order to protect them from double taxation, both in the U.S. and in their country of residence. U.S.-U.K. bilateral agreements include:
- U.S.-U.K. Income Tax Treaty – This treaty is designed to mitigate the effects of double income taxation. Generally, under an income tax treaty with the U.S., U.S. expats may be entitled to certain credits, deductions, exemptions and reductions in the rate of income taxes of the foreign country in which they reside. The U.S.-U.K. Treaty is one of the few U.S. tax treaties that has two robust pension articles that offer beneficial treatment with respect to pension plan employer contributions, plan earnings, and pension distributions.
- U.S.-U.K. Totalization Agreement – This agreement affects tax payments and benefits under the respective social security systems. It is designed to eliminate dual social security taxation, the situation that occurs when a worker from one country works in another country and is required to pay social security taxes to both countries on the same earnings. It also helps fill gaps in benefit protection for workers who have divided their careers between the United States and the United Kingdom.
Key Principle #5 – Due to FATCA and its Supporting International Agreements, the U.S. Income Tax Reach Has Become Wider Than Ever Before
FATCA stands for the “Foreign Account Tax Compliance Act.” FATCA is a relatively new law that was enacted in 2010 as part of the HIRE Act. The objective behind FATCA is to combat offshore tax evasion by requiring U.S. citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, starting with the 2011 tax season, the IRS requires certain U.S. citizens to report (on Form 8938) the total value of their “foreign financial assets.”
In order to further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) became required to report the balances in the accounts held by customers who are U.S. citizens. To date, we have seen several large foreign banks require that all U.S. citizens who maintain accounts with them provide a Form W-9 (declaring their status as U.S. citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of U.S. expats who refuse to cooperate with these requests.
It is this renewed effort by the U.S. government to combat offshore tax evasion through FATCA that has led to a recent surge in tax compliance efforts by U.S. expats.
On September 24th, 2015, the IRS announced that the United States had signed a so-called competent authority arrangement (“CAA”) with the United Kingdom in furtherance of a previously signed intergovernmental agreement (“IGA”), an agreement which is designed to promote the implementation of the FATCA law requiring financial institutions (mainly banks and investment houses) outside the U.S. to report information on financial accounts held by their U.S. customers to the IRS.
The CAA with the U.K., along with a simultaneously signed CAA with the Australia, are the very first of their kind. These arrangements contain specific provisions regarding exchange of information protocols. For example, under the arrangements, financial institutions and host country tax authorities are required to utilize the International Data Exchange Service (IDES) to exchange FATCA data with the IRS.
These latest developments further signify that efforts by the U.S. to combat offshore tax evasion are being met with support and cooperation by the U.K. as well as other jurisdictions. We believe this will lead to a further surge in tax compliance efforts by U.S. expats.
If you are a U.S. expat living in the U.K., it is essential that you remain compliant with your continuing U.S. tax obligations. Our experts at Expat Tax Professionals are available to help you understand your U.S. tax filing requirements and to assist you with all of your U.S. tax compliance needs.
Addendum on UK Income Tax Law
1. Who needs to complete a tax return?
Most U.K. taxpayers do not complete a tax return, but rather pay and report income tax through the Pay As You Earn (PAYE) system. This is the system an employer or pension provider uses to collect income tax and national insurance contributions before they pay wages or make pension payments.
In a number of circumstances, however, a Self-Assessment Tax Return is required to be filed with the U.K. taxing authority, the HM Revenue & Customs (HMRC). The following is a list of common situations, which can be broken down by type of taxpayer and type of income/expense:
Tax Return Required – Based on Type of Taxpayer
- Self-employed individual (including being a member of a partnership)
- A company director (unless you’re a director of a non-profit organization, for example a charity, and don’t receive any payments or benefits)
- A minister of religion (any faith)
- A name or member of Lloyd’s
Tax Return Required – Based on Type of Income/Expense
- Income of £100,000 or more
- Income from savings and investments of £10,000 or more
- Income from untaxed savings and investments of £2,500 or more
- Income from property (before deducting allowable expenses) of £10,000 or more
- Income from property (after deducting allowable expenses) of £2,500 or more
- Annual trust or settlement income on which tax is still due (even if you’re only treated as receiving this income)
- Income from the estate of a deceased person on which tax is still due
- Any foreign income that’s liable to UK tax
- You’re employed and want to claim for expenses or professional subscriptions of £2,500 or more, you’ll need to complete a tax return.
- You want to claim less common reliefs, such as Enterprise Investment Scheme relief or relief on Venture Capital Trusts
If you pay tax through PAYE and owe tax at the end of the year, you’ll need a tax return if either of the following applies:
HMRC can’t collect the tax due by making a change to your tax code (they’ll tell you if this is the case); or
If you have Capital Gains Tax to pay, for example you’ve sold, given away or otherwise disposed of an asset such as a holiday home or shares, you’ll need to complete a tax return and the Capital Gains Tax pages.
In addition to the above, if HMRC asks you to complete a tax return for any other reason (this will normally to be to make sure that you’re paying the right tax and getting the right allowances) you must always do so.
2. How to get a tax return?
If you’ve not received a tax return (or a letter telling you to file online) by the end of April, but think you should complete one, you need to get in touch with HMRC.
If you’re self-employed, you need to register as self-employed first – you’ll then also be registered for Self Assessment and will get a tax return.
If you’re not self-employed, you need to use form SA1 to register for Self Assessment before you can get a tax return.
3. UK residence and tax
The tax rules for UK residents and non-residents are very different, and one of your first responsibilities is to determine your tax residency status in the UK. It is important to remember that even if you are officially a resident in another country, you may still be a tax resident in the UK. Non-residents generally only pay tax on their UK income – they don’t pay UK tax on their foreign income.
Residents normally pay UK tax on all of their income, whether it’s from the UK or abroad. But there are special rules for UK residents whose permanent home (‘domicile’) is abroad.
1. Work out your residence status
On the 6th April 2013, the Statutory Residence Test was introduced by HMRC to determine the residence status of individuals with connections to the UK. Ultimately, the purpose of the Statutory Residence Test is to determine whether an individual is a resident of the UK for tax purposes. The Statutory Residence Test, while complex, is extremely useful when it comes to understanding the residence status
It is important to note that even if you were or were not considered a non-UK resident before the Statutory Residence Test was introduced in 2013, your status may have changed since its introduction.
Under the test, tax residency is determined based on how many days you spend in the UK during the tax year (6 April to 5 April the following year).
You’re automatically resident if either:
- You spent 183 or more days in the UK during the tax year; or
- 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 during the tax year
You’re automatically non-resident if either:
- you spent less than 16 days in the UK (or 46 days if you haven’t been classed as UK resident for the 3 previous tax years)
- you work abroad full-time (averaging at least 35 hours a week) and spent less than 91 days in the UK, of which less than 31 days were spent working
Due to the complexity of the Statutory Residence Test, it is always advisable to seek professional advice from a tax expert with experience in correctly determining your residence status for tax purposes.
2. Your residence status when you move
When you move in or out of the UK, the tax year can be split into 2 – a non-resident part and a resident part, assuming your move falls under a set of specified circumstances. This means you only pay UK tax on foreign income based on the time you were living in the UK. This is called split-year treatment.
Advice should be taken for you specific circumstances, because there are additional relevant issues such as entitlement to the UK personal allowance, remittance-basis income, and anti-avoidance provisions to consider.
3. If your situation changes
Your status can change from one tax year to the next. Check your status if your situation changes, for example:
- you spend more or less time in the UK
- you buy or sell a home in the UK
- you change your job
- you retire
- your family moves in or out of the UK, or you get married, separate or have children
4. ‘Non-domiciled’ residents
UK residents who have their permanent home (‘domicile’) outside the UK may not have to pay UK tax on foreign income.
The same rules apply if you make any foreign capital gains, e.g. you sell shares of a foreign company or a second home located outside the UK.
4.1. Working out your domicile
Your domicile’s usually the country your father considered his permanent home when you were born. It may have changed if you moved abroad and you don’t intend to return.
4.2. Tax if you’re non-domiciled
You don’t pay UK tax on your foreign income or gains if both:
- they’re less than £2,000 in the aggregate in the tax year
- you don’t bring them into the UK, e.g., transfer them to a UK bank account
If this applies to you, you don’t need to do anything (i.e., no tax payment or reporting obligations apply).
If your income or gains is £2,000 or more, or if you bring any earned income to the UK, you must report your foreign income or gains in a Self Assessment tax return.
You can either:
- pay UK tax on them – you may able to claim it back
- claim the ‘remittance basis’
Claiming the remittance basis means you only pay UK tax on the income or gains you bring to the UK, but you:
- lose tax-free allowances for income tax and capital gains tax (some ‘dual residents’ may keep them)
- pay an annual charge of £30,000 if you’ve been resident of the UK for at least 7 of the previous 9 tax years (this rises to £50,000 once you’ve been here 12 of the previous 14 years)
4.3. If you work in the UK and abroad
There are special rules if you work both in the UK and abroad.
You don’t have to pay tax on foreign income or gains (even those you bring into the UK) if you get the ‘foreign workers exemption’.
You qualify if:
- your income from your overseas job is less than £10,000
- your other foreign income (e.g. bank interest) is less than £100
- all your foreign income has been subject to foreign tax (even if you didn’t have to pay, e.g. because of a tax-free allowance)
- your combined UK and foreign income is within the band for basic rate income tax
- you don’t need to fill in a tax return for any other reason
If you qualify, you don’t need to do anything to claim the exemption.
5. If you’re seconded to the UK
You may be able to claim Overseas Workday Relief if your employer sends you to work in the UK on secondment.
If you qualify you:
- pay UK tax on UK employment income based on the number of days you’ve worked here
- don’t pay tax on income from days you work abroad (as long as you don’t bring it into the UK)
6. Paying tax on foreign income
You usually need to fill in a Self Assessment tax return if you’re a UK domiciled resident with foreign income or capital gains.
You don’t need to fill in a tax return if your only foreign income is dividends under £300 in total and you don’t have anything else to report.
6.1. Filling in your tax return
Use the ‘foreign’ section of the tax return to record your overseas income or gains.
Include income that’s already been taxed abroad to get Foreign Tax Credit Relief, if you’re eligible.
HM Revenue and Customs (HMRC) has guidance on how to report your foreign income or gains in your tax return in ‘Foreign notes (2014)’.
6.2. Foreign income that’s taxed differently
Most foreign income is taxed in the same way as UK income, but there are special rules for:
- rent from property
- certain types of employment income
You have to pay tax on foreign pension income if you’re tax resident in the UK in the year of the payment, or were resident in any of the 5 previous tax years.
You’ll usually only pay tax on 90% of your foreign pension payments (10% is exempt from tax). Check with your pension provider to find out how you’ll be taxed.
You pay UK tax on unauthorized payments from your foreign pension, e.g. some lump sums and early payments.
6.2.2. Rent from property
You pay tax in the normal way on rental income from overseas property. But if you rent out more than one property, you can offset losses only against other overseas properties.
6.2.3. Certain types of employment income
You usually pay tax in the normal way, as described above, if you work both in the UK and abroad. There are special rules if you work:
7. If you’re taxed twice
You may be taxed on your foreign income by the UK and by the country where your income is generated 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.
There’s a different way to claim relief if you’re a non-resident with UK income.
7.1. If you’ve already paid tax on your foreign income
You can usually claim Foreign Tax Credit Relief when you report your overseas income on your tax return.
How much relief you get depends on the UK’s ‘double-taxation agreement’ with the source country.
You usually still get relief even if there isn’t an agreement, unless the foreign tax doesn’t correspond to UK income tax or capital gains tax.
7.1.1. What you’ll get back
You may not get back the full amount of foreign tax you paid. You get back less if either:
- a smaller amount is set by the country’s double-taxation agreement
- the income would have been taxed at a lower rate in the UK
HMRC has guidance on how Foreign Tax Credit Relief is calculated, including the special rules for interest and dividends in ‘Foreign notes (2014)’.
You can’t claim this relief if the UK’s double-taxation agreement requires you to claim tax back from the country your income was from.
7.2. If you haven’t paid tax on the foreign income
You have to apply for tax relief in the country your income’s from if:
- the income is exempt from foreign tax but is taxed in the UK, e.g. most pensions
- it is required by that country’s double-taxation agreement
Ask the foreign tax authority for a form, or apply by letter if they don’t have one.
You’ll then need to prove you’re eligible for tax relief by either:
7.3. Capital Gains Tax
You’ll usually pay tax in the country where you’re resident and be exempt from tax in the country where you make the capital gain. You won’t usually need to make a claim.
However, you do have to pay capital gains tax on UK residential property even if you’re not a UK tax resident.
7.3.1. When to claim relief
There are different rules if your gain comes from an asset that either:
- can’t be taken out of the country, e.g. land or a house
- you’re using for business in that country
You’ll need to pay tax in both countries and get relief from the UK.
8. UK Real Estate Taxes
The following is a high-level overview of UK taxes on an individual neither resident nor domiciled in the UK who acquires, holds and/or disposes of UK real estate.
8.1. Taxes on Acquisition
On the purchase of residential real estate in the UK (other than Scotland), stamp duty land tax (SDLT) is payable at rates up to 12%. The SDLT rates apply to ‘slabs’ of the consideration. There is no SDLT on the first £125,000, 2% on the next £125,000, 5% on the next £675,000, 10% on the next £575,000 and 12% on any amount over £1.5 million. There is no value added tax (VAT) chargeable on a supply of residential property.
8.2. Taxes on Disposal
If the UK real estate is held as a passive investment (not held for property development, etc.) by an individual not resident in the UK, there was no UK tax on a gain realised on a disposal before 6 April 2015. But gains over market value on 5 April 2015 (or subsequent cost) realised on disposal of UK residential real estate are now subject to capital gains tax (CGT). The CGT charge is at 18% for basic rate taxpayers and at 28% for higher and additional rate taxpayers. The applicable rate will be determined by reference to the non-UK resident individual’s UK income levels for the relevant tax year. They will be entitled to the CGT annual exemption.
Any rental income is taxable in the UK irrespective of where the owner of the property lives. Income tax on the rents, net of deductible expenses, is subject to income tax at from 20% to 45% (that top rate being reached if the owner’s annual UK income exceeds £150,000). The expenses deductible in arriving at the profit include local property taxes, insurance, repairs, rental agents’ commission, etc., but not depreciation or capital expenditure. If the property business is financed by a loan, the interest on that loan is also deductible as an expense. In certain cases, if the loan is secured from an overseas lender, UK tax must be deducted at source in paying the interest.
9. Penalties for non-compliance
9.1. Late Filing Penalties
The following penalties apply if a tax return is due but is not submitted by the return due date.
- Day one:
You will be charged an initial penalty of £100, even if you have no tax to pay or you have already paid all the tax you owe
- Three months late:
You will be charged an automatic daily penalty of £10 per day, up to a maximum of £900
- Six months late:
You will be charged further penalties, which are the greater of 5 per cent of tax due or £300
- Twelve months late:
You will be charged yet more penalties, which are the greatest of 5 per cent of tax due or £300. In serious cases, you face a higher penalty of up to 100 per cent of the tax due
9.2. Penalties for paying your tax late
- Thirty days late:
You will be charged an initial penalty of 5 per cent of the tax unpaid at that date
- Six months late:
You will be charged a further penalty of 5 per cent of the tax that is still unpaid
- Twelve months late:
You will be charged a further penalty of 5 per cent of the tax that is still unpaid
These penalties are on top of the interest that HMRC will charge on all outstanding amounts, including unpaid penalties, until your payment is received.