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United Kingdom: Living There - Tax Issues

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Living There

INDIVIDUAL TAXATION

Most UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too (but see non-domiciliaries below). Couples, including registered same sex partners, are taxed separately.

INCOME TAX

The resident’s taxable income is his worldwide income, including income from residential property lettings, less allowable deductions. Taxable income is taxed at progressive rates.

Residents are entitled to personal allowances and other credits. Personal allowances depend on the taxpayer’s age and marital status.

The married couple’s allowance is allocated between the spouses. Usually, each spouse claims half of the married couple’s allowance but the couple may elect to have it wholly claimed by either of them, or to have the unused portion of the allowance transferred to either spouse.

A resident may deduct travel costs he incurred, if it were solely for rental business purposes, from his overseas property letting income. Overseas leasing assets are given allowances at special rates (6% and 10%). A resident who is blind may also claim blind persons allowance at £1,730 (€2,163).

CAPITAL GAINS TAX
A resident is taxable on the net capital gains he earns from selling his properties in the UK and elsewhere (subject to double taxation agreements).

There were significant changes in the UK’s capital gains tax (CGT) laws on 6 April 2008. Since then, a single flat CGT rate of 18% has replaced the previous marginal (income) tax rates, which ranged from 10% to 40% and benefited from indexation relief and taper relief (now abolished). Husbands and wives are both entitled to their own annual exempt amount (for the 2008/9 tax year this "annual exemption" is £9,600 or €12,000 each). Capital losses can be set against capital gains in other holdings before taxation.

Primary Residence Relief

No CGT is payable on one’s primary residence. A resident who has resided on his property but later moved out while retaining ownership may claim this relief from the tax on his capital gains. In such a set-up, a resident is not liable to capital gains tax for the period he lived in the property and for the last three years (36-Month Rule) that he owned it. In the capital gains computation, the gains are allocated evenly across the period that he owned it even if those actually arose unevenly.

Letting Relief

A resident may avail of this relief if he has both lived in the property for a time, and let it for residential accommodation. The tax relief is whichever is lowest among: the Private Residence Relief; gain from the let period; and £40,000 (€50,000).

For 2008-2009, a resident is entitled to an annual exemption from capital gains tax of £9,600 (€12,000) with respect to his taxable gains. For couples living together, each spouse is entitled to a separate annual exemption.

A resident who incurs capital losses may set those off against any capital gains he makes for the same tax year. If there are still excess losses, he may carry those forward (without time limit) for set off against the gains of the succeeding years.

NON-DOMICILIARIES
Till 5 April 2008 the UK was generally considered a tax-haven for ‘non-domiciled’ foreign residents, i.e., those who came to the UK without intending to make it their permanent home. However, much has changed since 5 April 2008, when a comprehensive reform of the UK tax rules came into force.

Those who come to the UK temporarily or who are not domiciled in the UK, still benefit from special treatment. The treatment depends on whether they are ‘resident’, ‘ordinarily resident’, and/or ‘domiciled’ in the UK.

What is ‘resident’? Those who spend more than 183 days in any one year in the UK are considered ‘resident’.

Those who come to the UK and who intend to visit the UK regularly (i.e., intend that over the next 4 years their visits will average more than 91 days in the year) are counted as ‘resident’. Those who form no such intention, but in fact average more than 91 days during a tax year for 4+ years, are counted as ‘resident’ from the 5th year.

The concept ‘ordinarily resident’ is less important than ‘resident’:

1. If an individual arrives in the UK with the intention of staying for at least 3 years (students who stay less than 4 years excepted), he is treated as ‘ordinarily resident’
2. After 3 years of residence he is treated as ‘ordinarily resident’.
3. If from the date of the individual’s arrival, if he own accommodation in the UK, unless he sells if before he leaves the UK.

What is ‘domicile’? Domicile status is a complex concept but essentially means, where an individual’s ‘home country ’ is, where he is likely to return to live, where his parents live or were born, or where he has chosen as his permanent location. ‘Domicile’ may be different from an individual’s present residence, or his nationality.

Income tax payable by resident non-domiciliaries
UK residents will almost always be liable to tax on UK income. If they have foreign income or gains, UK residents with income in countries with double taxation agreements with the UK should check the terms of the specific agreement.

If an individual has foreign income or gains, and is a resident but not domiciled in the UK (or resident but not ordinarily resident), he has a choice. Instead of being taxed on his global income, he can choose to be taxed only the foreign-sourced income he remits to the UK. However:

1. This choice is only available if he has resided less than 7 out of the previous 9 years in the UK
2. He will not be able to claim any UK allowances on any income
3. He needs to notify the UK tax authorities that he is choosing the ‘remittance basis’ of taxation.

In order to take advantage of the remittance basis, he will need to set up segregated bank accounts for income and capital, to make absolutely clear the difference between income in a particular year, and all other moneys. Otherwise, remittances of capital are likely to be treated as remittances of income.

Pension income originating in a foreign country is taxed differently.

Capital Gains Tax payable by resident non-domiciliaries
Every resident must pay Capital Gains Tax on the sale of UK assets.

If an individual is a resident but not domiciled in the UK, and sell foreign assets, he will only be liable for Capital Gains Tax on the sale of foreign assets if the proceeds are remitted to the UK. But the remittance basis must be specifically claimed, as above, with the accompanying loss of UK allowances.

PROPERTY TAX

Council Tax

Council tax is a tax set by each locality on UK properties that may be used as dwelling, regardless of whether owned or rented. Fifty percent (50%) of the tax payable is based on the property band (A-H) to which the property belongs. The other 50% depends on the number of persons living in the property. If a person, of legal age, lives alone in the property, the taxpayer may avail of the Single Person Discount and the second 50% may be reduced to 25%.

Where there is an assured tenancy (the normal case) the tenant pays the tax. However if there are no tenants, property owners are usually liable for this tax.

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