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Residence and Domicile Overview
If you’re a non UK National considering working in the UK or you have lived in the UK and are emigrating or returning home you should consider how Tax Residence, Ordinary Residence and Domicile affect the amount of tax you have to pay.If you intend to work as a freelance contractor in the UK but have not yet arrived call Commonwealth Contractors now on 0800 294 4388 to find out how we can help. You may be in a very fortunate position if you are a high level professional. We may also be able to help you with a UK work permit or HSMP visa if you require work visa assistance and advise you on contracting solutions such as umbrella company solutions and a contractor limited company. To find out more call Commonwealth Contractors now on 0800 294 4388 or Submit your details and we will get right back to you.
What does the UK charge Tax on?
Broadly speaking the United Kingdom charges tax on:- Income arising in the UK, whether or not the person to whom it belongs is resident in the UK
- Income arising outside the UK which belongs to people resident in the UK (non-domiciled temporary residents may escape this if they never bring the money to the UK)
- Gains accruing on the disposal of assets anywhere in the world which belong to people resident or ordinary resident in the UK (non-domiciled temporary residents may escape this if they never bring the gains to the UK)
Income Tax Issues
If you’re UK Tax Resident and Domiciled you must pay UK taxes on your worldwide income, gains and estate. UK Taxes include Income Tax, Capital Gains Tax, and Inheritance Tax etc. This means everything you have is subject to UK tax even if it is located outside the UKIf you’re UK Tax Resident but not UK Domiciled, as is the case for many freelance contractors from Commonwealth countries working in the UK, you are subject to UK Income tax only on:
- UK source Income (Salary and profits from business carried out in the UK), and
- Non UK Income which you bring to the UK
Therefore, a non UK Domiciled national with Tax Residency in the UK can avoid UK taxes on assets outside the UK
Capital Gains Tax issues
Capital Gains tax depends on both Tax Residence and Ordinary Residence.If you’re UK domiciled and cease to be UK Tax Resident, but remain 'Ordinarily Resident', you remain liable for UK Capital Gains Tax on your worldwide assets.
If you cease to be either UK Tax Resident or Ordinarily Resident, you are not liable for UK Capital Gains Tax, even on your UK assets.
Capital Gains Tax in 2007 is levied at your marginal income tax rate (40% for a higher rate taxpayer). However, business assets, including shares in a personal service company, are subject to ‘taper relief’ which can reduce the liability by up to 75%, giving an effective tax rate of 10% (ie 25% of 40%). The Government has proposed moving to a new scheme from April 2008; the new scheme would abolish taper relief and introduce a new flat rate of 18% on capital gains. The proposed abolition of taper relief has been widely opposed, so the 2008 budget may include some compromises.
When Taper relief allowed an effective 10% Capital Gains Tax rate, it could sometimes pay a contractor to leave money in their company for a couple of years, and then realise the capital value (post tax cash holdings) of the company. The arithmetic worked like this:
Sales: £100
Corporation tax: £20 (up to 2006 this was £19)
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Capital value: £80 (cash retained by the company after corporation tax)
Capital Gains tax: £8 (10% of the £80)
Value after all taxes: £72
Obviously, there are costs of running a company, and of a capital transaction, but even allowing 5-7% for these, one gets better than a 65% retention rate. A much better deal than paying a marginal 40% income tax, 1% uncapped employee’s NI, and 12.8% employer’s NI!
This sort of structuring can still be a good deal for expats outside IR35 who are temporarily in the UK and able to wait until leaving the UK before realising capital value. If value is realised after leaving the UK, but before regaining tax residence in your home country, it may be possible to entirely avoid a liability for Capital Gains Tax. Some people find that they can fund a year’s travelling around the world before ‘going home’ from the tax savings!
