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Taxation in the UK: how to benefit from the British tax laws

PUBLISHED: 1 November 2019

If you have decided to work and live in the United Kingdom, well known for its freedoms and rights, for a long period of time, you might find yourself in a difficult situation when you would not know what taxes to pay and when; first you will be warned, then penalised and the worst is the review of your immigration status. Though from outside the UK, before you move here, British laws look simple and transparent, they are not so simple when you finally arrive in the country and it is hard sometimes to figure them out.

Fortunately for you, there are companies that specialise in tax matters and tax optimisation. Our company is one of them, but unlike many other tax experts, we provide tax solutions along with and in conjunction with other matters, including legal, immigration and accounting. Our Accounts Manager and Immigration Adviser Vasily Kluev is answering a few important questions about British tax laws.

Am I tax resident in the UK?

Tax period in England starts on 6 April and runs till 5 April the following year. If you spend in total more than 46 days in the country during a tax year, it is time to check if you have become tax resident. As you might have already guessed, British laws distinguish between immigration and tax statuses.

To determine your tax status, you need to do a special test designed by the tax authorities which consists of a series of questions.

What do I need to do as a tax resident?

If the Statutory Residence test established that you are tax resident in the UK, the following rules apply to you:

  1. You are automatically deemed tax resident for the whole current tax year.
  2. You must report your total income received by you during the period from the last 6th of April last year till the nest 5th of April, irrespective where and how it was gained, and you must pay UK taxes on that income.

Are there exceptions to the rules?

Yes, exceptions do exist, but it all depends on personal circumstances of each new tax resident. For example, if your initial intention is to move to this hospitable country, you can start you tax year from the date of your arrival instead of the 6th of April.

Foreigners can significantly reduce their tax burden in the UK by applying a special regime called remittance. In a nutshell, remittance means that a non-domiciled tax resident would only need to pay taxes on two types of income:

  • Income earned in the United Kingdom;
  • Income received outside the United Kingdom but transmitted to the UK.

Basically, it signifies that if you, as a non-dom, earn something abroad and keep it there, you don’t have to pay UK taxes on that income. At this point, you must be asking yourself, who are these non-doms and domiciles?

Domicile and non-domicile

Domicile is part of the common law; it has nothing to do with either nationality or citizenship – it is a country where you were born and where your father was born. There is also a domicile by choice. British domiciled residents must pay taxes both on the UK and worldwide income.

If you are born outside the UK, you are considered a non-dom here, even if you have been living and paying taxes in the country for years. This status gives certain benefits in the form of a special taxation regime known as the remittance basis which we mentioned earlier. please bear in mind, that UK tax authorities would not know what basis of taxation you have opted for until you tell them so in a tax return. You must file it online not later than 31 January of the year following the reporting year.

Remittance taxation

It is a very important thing that many people don’t realise; the remittance does not come free of charge, so each year you would be given a choice, whether to use arising or remittance basis of taxation. By choosing remittance you are automatically losing the zero-taxed personal allowance which in 2019-2020 year is £12,500.

How much does remittance cost?

After living in the UK for seven years as a tax resident, starting from the 8th year you will be paying £30,000 annually, if you choose to use remittance. Starting from the 13th year in England, this annual charge will increase to £60,000, and from the 16th year you will be assigned a status of deemed domicile. With that status you are taxed on all income earned both in England and abroad. Besides, your family, excluding a spouse, will be subject to 40% inheritance tax on your estate worldwide.

Do I need to pay UK taxes if I am not tax resident?

Unfortunately, yes. What comes to mind in the first place are short-term or contractual works done on the UK soil. For example, when a foreign expert is invited to take part in a local project. Apart from a promised commission due to you while you are on a short-term visa and definitely not a tax resident, a UK contractor must also pay all taxes and social security contributions to the HMRC.

You, from your side, must also pay your share to the UK treasury if you earn money within the UK. It can be real estate proceeds from rent, resale or any other investment and construction activities. To be on the safe side, in case you do have tax liabilities in the UK, it’s advisable to consult a specialist.

How to plan taxes in England?

Now, when you are aware of basic principles of UK taxation of individuals, you would not be surprised hearing a story of yet another British celebrity whose short visits to the motherland are counted with unfailing precision and whose main place of residence is for some reason on the Bahamas. But the reason is the system’s tough approach to rich residents. At the same time, it offers a lot of opportunities for tax optimisation and reduction of tax burden.

Vasily Kluev, Accounts Manager at Imperial & Legal, strongly recommends getting yourself a safety cushion prior to becoming a tax resident in England. If you have not worked out yet how to prepare your assets and plan your taxes step by step, get in touch with experts in this field. Our specialist will provide both taxation, immigration and other support to make you relocation to the UK as smooth and painless as possible.

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