How does tax in the UK work?
What are the main UK taxes?
Income tax (a tax on income including employment income, rental income, share dividends and bank interest), capital gains tax (a tax on capital gains when disposing of an asset) and inheritance tax (a tax payable mainly on death, but despite its name, also on some lifetime gifts and trusts).
How is tax liability determined?
Liability to income tax and capital gains tax is generally linked to your ‘residence’ status, whereas liability to inheritance tax is linked to your ‘domicile’ status.
What is the difference between residence and domicile?
Tax residence is determined using a statutory test set out in legislation, whereas domicile is a common law concept. Both residence and domicile are different from nationality and citizenship.
How is tax residency determined?
The test is based on the number of days you spend in the UK. If you spend 183 days or more in any tax year in the UK, you will be UK resident. However, it is possible to spend substantially fewer days in the UK and still be UK resident, depending on how many other connecting factors you have to the UK. These other connecting factors include things such as having family in the UK, having accommodation in the UK available for your use, and working in the UK.
What does it mean to be domiciled in the UK?
A person is generally domiciled in the country that they have substantial connections with and consider to be their permanent home. In most cases, you are domiciled where your father is domiciled when you are born. It is quite difficult to change this.
When is the UK tax year?
The UK tax year runs from 6 April to 5 April. This is different from many countries which use the calendar year.
What are the implications of being tax resident in the UK?
If you are resident but not domiciled in the UK, you receive special tax treatment and will probably be able to be taxed on the ‘remittance basis.’ If the remittance basis applies, you will only be taxed on foreign income and capital gains to the extent they are brought in (or enjoyed in) the UK (and any UK income and capital gains).
However, if you are resident and domiciled in the UK, your worldwide income and capital gains are potentially liable to be taxed in the UK.
For more details the remittance basis please see our recent blog.
What are the implications of being domiciled in the UK?
If you are not UK domiciled, then only your UK situated assets are generally liable to inheritance tax in the UK. However, if you are domiciled in the UK, your worldwide assets are liable to inheritance tax in the UK.
Are there any other taxes that might be relevant?
If you are working in the UK (whether as an employee or as a self-employed individual), you will probably have to pay National Insurance contributions.
If you are going to purchase a property in the UK, then you will probably have to pay Stamp Duty Land Tax (SDLT) on the purchase price.
Most goods and services in the UK are subject to Value Added Tax (VAT) at a rate of 20%.
How can we help?
Gherson can help with a wide range of tax and estate planning matters. We also have extensive experience of working with HMRC and dealing with HMRC investigations. The UK tax system is complicated and it is essential that proper advice is obtained. Please do not hesitate to contact us or send us an e-mail.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.