HMRC Guidance: Tax on income and gains outside the UK
Are you working as a contractor in the UK but have your permanent home in another country? Then you may have to decide how you want to pay tax on the income and 'gains' (such as taxable profits from the sale of property or investments) that you earn abroad.
HMRC tell us that there are two choices available:
1. Tax Residence Indicator
On 6 April 2013 the rules changed on how to determine if someone is resident in the UK for tax purposes, this is known as the Statutory Residence Test (SRT). For the majority of people whether or not they are resident for tax purposes is quite straightforward under the new test, however for those with complex circumstances the test will provide more certainty about their residence status.
HMRC will be launching a pilot version of an on-line residence indicator in the next few weeks, which will help give you an indication of your status from answering a few straightforward questions such as how many days you spent in the UK, where you have a home and if you have family ties.
Understanding how 'residence' and 'domicile' affect your tax
You are probably 'resident in the UK for tax purposes' but 'domiciled abroad' if all of the following apply:
- you live most of the time in the UK
- you and your parents were born abroad
- your permanent home is abroad
- you intend to return to your home abroad
You may be treated as 'not ordinarily resident' if all of the following apply:
- you have only recently arrived in the UK
- you did not intend to live here for three years or more when you first arrived in the UK
- you are not in the UK for three months or more in any one year on average
How you pay tax
If you are living in the UK and are either 'domiciled abroad' or 'not ordinarily resident' in the UK, you can choose how you want to pay tax on your foreign income and gains (a 'gain' is when something which you own is sold for a profit).
- either pay tax on the 'arising basis' – which means you pay tax in the UK on all of your UK and foreign income and gains
- or you can pay tax on the 'remittance basis' – see the table below for what this means for you
What you pay tax on if you choose the remittance basis
Not ordinarily resident in the UK and domiciled abroad
Resident in the UK for tax purposes but domiciled abroad
Tax allowances if you choose the remittance basis
If the amount of foreign income and/or gains that you leave abroad is £2,000 or more in any year, and you decide to be taxed on the remittance basis, you will lose your annual UK tax-free personal allowances and Capital Gains Tax annual exempt amount. (These are explained later in this guide.)
You will lose these allowances whether you are 'not ordinarily resident' or 'resident in the UK for tax but domiciled abroad'.
Tax charges if you choose the remittance basis
If you've been resident in the UK for more than seven out of the previous nine tax years, excluding the current tax year, you may have to pay a £30,000 charge each year. This is called the 'remittance basis charge'. If you have been resident for 12 or more years, excluding the current tax year, the charge rises to £50,000 each year.
How to pay tax on the remittance basis
If the foreign income and/or gains that you leave outside the UK in a tax year are more than £2,000 and you want to pay tax on the remittance basis you must complete a Self Assessment tax return at the end of the tax year. This is an online or paper form that you have to complete and send to HM Revenue & Customs (HMRC) every year. There is a box to tick where you claim the remittance basis.
You also use the tax return to claim relief for any foreign tax you have paid on your foreign income and gains, and to tell HMRC about foreign income and gains that you bring into the UK.
If your foreign income and gains that you leave offshore are under £2,000
If the foreign income and/or gains that you leave outside the UK in a tax year are £2,000 or less, you can use the remittance basis without making a claim or completing a Self Assessment return. You will also be able to keep your UK personal allowances and Capital Gains Tax annual exempt amount.
However, if you bring more than £500 of your income and gains into the UK you must still complete a tax return to tell HMRC about it and pay UK tax on it.
2. Allowances and reliefs if you don't choose the remittance basis
If you do not choose to be taxed on the remittance basis, you will automatically be taxed on the 'arising' basis, which means you:
- keep your Personal Allowances
- keep your Capital Gains Tax annual exempt amount
- pay tax on all your foreign income and gains
- claim double tax relief if you have already paid taxes overseas
- don't pay the £30,000, or the higher £50,000, remittance basis charge
- must complete a Self Assessment tax return
How to tell HMRC about your foreign income and/or gains
You can tell HMRC about foreign income and gains by completing a Self Assessment tax return. You can also use the tax return to claim relief for any foreign tax you have paid on your foreign income and gains. The tax return is an online or paper form that you have to complete and return every year.
The Personal Allowance is an amount of income you can normally receive tax-free each tax year. For the tax year 2013-14 the tax-free Personal Allowance is £9,440. This means you only pay Income Tax on taxable earnings above £9,440.
However if you are claiming the remittance basis you may lose your annual UK tax-free Personal Allowance and any other allowances – such as Blind Person's Allowance – to which you are otherwise entitled. (See the earlier section 'Allowances and charges if you choose the remittance basis'.)
Capital Gains Tax annual exempt amount
Capital Gains Tax is a tax on the profit or 'gain' you make when you sell, give away, transfer or exchange ('dispose of') something of value – 'an asset'. The Capital Gains Tax 'annual exempt amount' in 2013-14 is £10,900. This means you only pay Capital Gains Tax on 'gains' (profits from the sale of, for example, property or investments) above £10,900.
However if you are claiming the remittance basis (see 'Tax allowances if you choose the remittance basis' above) you may lose your UK Capital Gains Tax annual exempt amount ('allowance').
Help and advice
Residency, domicile and tax on foreign income and gains are complicated. You can get help and advice on your situation from HMRC.