US nationals who intend to work for extended periods of time in the UK face myriad tax traps. However, if they plan ahead, they may also benefit from a number of tax opportunities.
If you wish to come to the UK, it’s important to take advice in relation to the appropriate visa or citizenship options. These include having British ancestry, being married to a British citizen, or being sent to the UK by your employer.
If you’re being sponsored by your employer, they will need a sponsor license. They can then issue you with a certificate of sponsorship and you can apply for entry clearance into the UK.
Regardless of how you proceed, it’s important to take appropriate advice to understand your rights and obligations.
The main direct taxes for individuals in the UK are income tax and capital gains tax. You will likely also pay national insurance, which is a form of social security payment. Items that you purchase may also be subject to value added tax, which is usually included in the price of the item or otherwise clearly labeled. Finally, council tax is payable on the property you live in (unless your landlord pays it, which is uncommon). This tax is set by the local authority where you live and varies according to the value of the property.
If you have any untaxed income, you may need to file a self-assessment return with Her Majesty’s Revenue and Customs, the UK’s equivalent of the Internal Revenue Service. The UK’s tax year, unlike the US’s, runs from April 6 to the following April 5. The deadline for electronically filing a UK tax return is Jan. 31, which gives you just under nine months to collate the information from the previous tax year. If filing a paper return, the deadline is Oct. 31.
If your tax affairs are complicated, you should use a reputable accountant to help with the UK filings. Unlike in the US, married couples cannot file jointly.
To understand how you will be taxed in the UK, you need to determine your tax residency status, which can be one of the following:
- resident and UK-domiciled; or
- resident and non-UK domiciled.
Non-resident persons are subject to tax only on income arising in the UK, including disposals of UK residential property sold at a gain. Resident UK-domiciled persons are taxable on their worldwide income and gains. Resident non-UK domiciled persons may be able to claim relief for any non-UK income or non-UK gains.
Determining whether you are resident or not is a complex undertaking, and the UK has a set of rules known as the Statutory Residence Test to help determine your status. It is again advisable that specialist legal or accountancy advice is taken at the earliest opportunity.
Domicile, crudely speaking, is a settled intention to permanently remain in the jurisdiction. However, there are several factors to consider and, in a similar fashion, you should seek specialist legal or accountancy advice to assess your domicile position.
There are advantages to being non-domiciled in the UK. As a non-domiciled person, you can elect to pay tax on the remittance basis, which means that, whilst you are subject to tax on your UK income and gains, you are not subject to UK tax on your worldwide income unless you remit that income or gain back to the UK. If you claim the remittance basis, you lose your personal tax allowances (the amount of income or gains you can receive without paying UK tax), so it’s important to consider this carefully.
Meanwhile, it’s important to note that, if you elect to be taxed on the remittance basis, you are subject to the remittance basis charge. This annual charge of 30,000 pounds ($34,668) first arises when you have been resident in the UK for at least seven out of the previous nine tax years. For those who have been resident for at least 12 of the previous 14 tax years, the charge increases to 60,000 pounds per year. Once a person has been resident for 15 out of the previous 20 tax years, they are “deemed domiciled” and can no longer claim the remittance basis. At that point, their worldwide income and gains are taxed on an arising basis, and their worldwide assets are brought into the UK inheritance tax net (see below).
To ensure you are not taxed twice on the same income (in the jurisdiction where the income arises and in the UK, if you are resident there), double taxation treaties are in place. As a UK resident, it would be normal to pay the UK tax and claim double taxation relief in the foreign jurisdiction.
Claiming the remittance basis of taxation also helps prevent being taxed twice on the same income.
As mentioned above, all UK employment income is taxable in the UK. In addition, if you are provided with allowances and other benefits, such as a company car or housing, they will be taxed in the UK as a “benefit in kind.” Certain expenses, such as a relocation allowance, may be subject to relief, but only up to a maximum of 8,000 pounds.
Furthermore, travel costs for trips “back home” can be reimbursed by your employer tax free for up to five years, provided you were not tax resident in the UK in the two years prior to your arrival. These trips do not have to have a business purpose for them qualify for the relief; they can be undertaken simply to meet family or friends.
Your Home in the US
If, having moved to the UK, you decide to rent your old home in the US, the income generated from that is subject to UK tax if you are resident or resident and UK domiciled. However, if you are non-resident or resident and claiming the remittance basis, then that rental income will not be subject to UK tax provided the income is not remitted to the UK.
If you later choose to sell your old home in the US, any gains on the sale are also subject to UK capital gains tax unless you are non-resident or resident and claiming the remittance basis. However, if you are operating under the remittance basis, then the gain will become taxable if the proceeds are remitted to the UK (subject to any relief available under a double taxation treaty).
UK Inheritance Tax
UK inheritance tax, or IHT, is similar to, but not quite the same as, estate tax and gift tax in the US.
IHT is a tax charged against the net value of a person’s estate on their death. Everyone is entitled to a nil rate band allowance of 325,000 pounds, although this figure reduces if the deceased made significant gifts in the seven years before they died. In addition, there is a residence nil rate band allowance worth up to 175,000 pounds which is attributable to residential property being passed to a lineal descendant, such as a child or grandchild. This allowance tapers if the value of the worldwide estate exceeds 2 million pounds.
Assets passing on death to a spouse or civil partner are exempt from IHT, provided both the deceased person and their spouse or civil partner are UK domiciled or UK non-domiciled. Married couples can claim their deceased spouse’s unused allowances, meaning that up to 1 million pounds of allowances are available on death. IHT is charged at 40% unless an asset qualifies for relief (for example, business assets or farmland). Gifts to charities are exempt from IHT.
Non-UK domiciled persons, or more accurately their estates, are subject to IHT only on their UK situs assets. UK-domiciled individuals, however, are subject to IHT on their worldwide estate. Therefore, a person coming to work in the UK may expose their worldwide estate to UK IHT if they are resident and acquire a UK domicile of choice or if they become deemed domicile by being resident in the UK for 15 out of the previous 20 tax years. It is possible to become resident in the UK even if you have not spent the whole tax year there. For example, if you arrive in September, you will become a resident by the end of the tax year, and therefore a situation can arise where you become deemed domicile within 13 calendar years, as the calendar year does not marry up with the tax year.
Gifts are not subject to IHT or gift tax provided the person making the gift survives for seven years from the date of the gift. If the person does not survive seven years, the value of the gift will reduce the nil rate band mentioned above, or, if it exceeds that value, the amount by which it exceeds the nil rate band will become chargeable to IHT. Taper relief, a relief to lower the rate of IHT for gifts, applies where the person making the gift dies between three and seven years after making the gift. However, it’s important to note that making a gift may trigger other taxes, for example capital gains tax if the asset being gifted (such as property or securities) has risen in value since the date of acquisition.
Finally, a lower rate of IHT (20%) is applicable where a person establishes certain types of trust in the UK.. However, specialist legal or accountancy advice should be sought as the trusts to which this lower rate applies usually come with other tax consequences, as well as reporting obligations to the Internal Revenue Service.
Under current legislation, anyone who is a UK resident is not subject to charge for hospital care and treatments. For healthcare matters, a person is treated as UK resident provided that person is in the UK lawfully and residing here on a settled basis. As an example, if you come to the UK for employment, you will be exempt from medical charges under the National Health Service. Your spouse and children under 16 (or under 19 if in higher education) will also qualify for the exemption provided they have followed you for your employment. Of course, you may receive private medical care through your employment and, depending on the type of care/policy in place, it may be taxable as a benefit in kind. You should check with your employer for the tax consequences, if any.
Specialist advice should be sought prior to your arrival in the UK or as soon as possible thereafter.
Some of the key factors to consider are:
- your residency status;
- whether it’s beneficial to elect to be taxed under the remittance basis and, if so, whether transfers of foreign income or capital will trigger UK tax charges;
- the obligation to, and deadline for, filing self-assessment tax returns;
- exemptions and reliefs to which you may be entitled; and
- depending on the length of your residence, whether your worldwide estate becomes subject to UK inheritance tax.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Amish Patel is a Senior Associate and Rod Smith is a Partner in the private client team at RWK Goodman.