Year-end tax planning for overseas individuals

We outline what overseas individuals can do before the end of the UK tax year to make the most of the available allowances and reliefs open to them.

Residence

An individual’s residence status for UK tax purposes is determined in accordance with the Statutory Residence Test (SRT). Whilst this provides certainty on residence status, the rules are complex.

There are three main parts to the test, which need to be applied in the following order:

• Automatic overseas tests (eg the automatic tests for non-residence).
• Automatic UK tests (eg the automatic tests for UK residence).
• Sufficient ties tests (eg ongoing ties to the UK).

The first two tests are based on day count, employment status (abroad or in the UK) and where you have your only or main home. The third test (the sufficient ties test) determines your residence status by looking at a combination of physical presence and the number of connections (ties) you have with the UK, such as whether your family lives in the UK or whether you have accommodation in the UK.

You are considered to have spent a day in the UK if you are present in the country at midnight. This is subject to special rules for individuals who may be deemed to be in the UK, are in transit, or whose presence is due to certain exceptional circumstances.

You should seek professional advice on your residency position: the rules are complex, and it is important to ensure that your particular circumstances are taken into account.

If you are non-resident with UK source income, UK tax may be due. This will depend on the nature and amount of the income. Again, we recommend taking professional advice.

Top tips

• If you were non-resident for 2021-22, or if you left the UK during 2021-22, you will need to ensure that you satisfy the tests to remain non-resident for 2022-23.
• If you intend to leave the UK during 2023-24, start planning now to ensure that you are regarded as non-resident under the SRT. This may involve minimising the number of ties you have with the UK or reducing your planned return visits. Ensure that you are aware of the maximum number of days you can spend in the UK without triggering residence.
• When leaving or arriving in the UK, consideration should also be given to the tax regime in the other country.
• Similarly, if you are planning to move to the UK, ensure that you allow sufficient time for pre-arrival tax planning to be carried out well in advance of acquiring UK residence.

 Non-domiciled individuals (non-doms)

Non-doms are deemed domiciled in the UK for income tax, capital gains tax (CGT) and inheritance tax (IHT) purposes once UK resident in at least 15 out of the immediately preceding 20 tax years. Those non-doms born in the UK with a UK domicile of origin will be deemed domiciled at the point at which they become UK resident.

Once deemed domiciled, individuals are taxed on their worldwide income and capital gains on an arising basis. They cannot access the remittance basis of taxation (see below). Some important protections are available for trusts set up before an individual becomes deemed domiciled. These cannot apply to those non-doms born in the UK with a UK domicile of origin.

The remittance basis

UK resident non-doms who are not deemed domiciled can choose, from one year to the next, whether to be taxed on worldwide income and gains as they arise (the arising basis) or to claim the remittance basis of taxation.

If you elect to be taxed on the remittance basis, you will only pay tax on your overseas income and overseas capital gains to the extent that the funds are brought into or used in the UK. You will usually lose your personal allowance and the CGT annual exemption when accessing the remittance basis.

To take advantage of the remittance basis, certain longer-term residents in the UK must pay an annual Remittance Basis Charge (RBC). With the advent of deemed domicile status there are now two levels of RBC, depending on the length of time you have been UK resident:

• £30,000 if you have been tax resident in the UK for at least 7 out of the previous 9 UK tax years; or
• £60,000 if you have been tax resident in the UK for at least 12 out of the previous 14 UK tax years.

Top tips

• Individuals with less than £2,000 of unremitted income and gains automatically qualify for the remittance basis and retain their entitlement to the personal allowance, even where they are deemed domiciled.
• Non-doms who are not deemed domiciled should seek advice as to whether it is more tax efficient to be taxed on the arising basis for 2022-23 or the remittance basis. This will depend on your level of overseas income and gains, UK income and gains, amounts remitted to the UK during the year, and the availability of any overseas tax credits.
• Consider the timing of overseas income and gains generation (eg asset disposals and dividend payments), to the extent that these are within your control. It may be beneficial to realise significant overseas income and/or gains in a single tax year, and to pay the RBC for that year, filing on the arising basis in other years.
• Take advice if you are considering using overseas income or gains as security for a loan, as this can give rise to a taxable remittance to the UK.
• If you own cryptoassets, it is worth taking advice on the tax implications, particularly if you are (or will become) UK resident but are not UK domiciled. HM Revenue & Customs’ (HMRC’s) guidance on cryptoassets states that ’throughout the time an individual is UK resident the exchange tokens they hold as beneficial owner will be located in the UK’, and as such, any (taxable) transactions taking place whilst an individual is UK resident will be subject to UK tax.

Transparency and information exchange

In response to increased international tax information exchange and transparency initiatives, the UK introduced Failure to Correct (FTC) penalties for taxpayers who have failed to disclose any undeclared offshore tax liabilities relating to relevant periods. The standard penalty is equivalent to 200% of the tax liability that should have been disclosed under the RTC (Requirement to Correct). In serious cases, an additional penalty of up to 10% of the value of the assets connected to the failure can be charged, and taxpayers can be ‘named and shamed’.

Top tips

• Penalties under FTC can be mitigated by cooperating with HMRC. If you believe you may be affected, you should talk to your advisers as soon as possible to consider your options around disclosure.
• You should also ensure that financial institutions hold accurate information, as this will help ensure that only relevant information is reported under the Common Reporting Standard (CRS), so reducing the likelihood of queries from tax authorities.

UK property investment: non-resident individuals and trusts

Non-resident individuals and trusts who let out UK property are subject to UK income tax on any profits, and have ongoing tax compliance obligations in the UK. Profits taxed at rates up to 45%.

Letting agents (and tenants, where there is no agent and where rents exceed £100 per week) are required to deduct basic rate tax (currently 20%) from the gross rental income before it is paid to the landlord. Credit for the tax deducted is then given when the tax return is prepared.

A non-resident landlord can apply to HMRC for approval to receive rental income with no tax deducted. If a property is jointly owned, each joint owner will need to apply.

Certain expenses can be offset against the rental income in calculating the net taxable profits. More information can be found in our article on property.

Disposals of UK residential property, UK commercial property, and certain indirect interests in UK property by non-residents are subject to CGT. Non-residents are entitled to the same CGT reliefs and exemptions as UK residents.

Non-resident individuals and trusts need to make a return and a payment on account of any CGT owed to HMRC in respect of disposals of UK residential property within 60 days of completion. They should also be aware of the self-assessment filing dates as set out above.

Top tips

• Individuals should check whether they are entitled to the personal allowance to offset against rental profits. In limited circumstances, it may be beneficial to disclaim your personal allowance in order to mitigate the tax payable on other sources of income arising in the UK. This will depend on the level and nature of your other UK source income and professional advice should be sought.
• If your rental income is taxable in your country of residence, check whether you can claim a tax credit in that country for UK tax paid on the income.
• Read more about this in our article.

UK property investment: non-resident companies

Non-resident companies renting out UK property are now taxed under the corporation tax regime and must calculate their profits in line with corporation tax principles and file corporation tax returns. These companies are subject to a rate of 19% on their profits in the year ended 31 March 2023.

The payment date for corporation tax is nine months and one day after the end of the company’s accounting period – unless the company and any associated companies have combined profits above £1.5 million, in which case they will need to pay their tax in quarterly instalments.

Looking forward

From 1 April 2023, the corporation tax rate in the UK will increase to 25%.

A ‘small profits rate’ of 19% will apply to companies with annual profits below a lower limit of £50,000, with marginal relief available for companies with profits between £50,000 and £250,000. These thresholds will be proportionately reduced for the number of associated companies and/or short accounting periods.

It is worth noting that the small profits rate will not apply to ‘close investment-holding companies’, a definition that will include many family investment companies.

You may also be interested in:

• Year-end tax planning for individuals.
• Year-end tax planning for business owners.
• Year-end tax planning for employers and employees.
• Year-end tax planning for property owners.
• Year-end tax planning and tax efficient investments.
• Year-end tax planning and going digital.

This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 February 2023. The FCA does not regulate tax advice.