Tax residency in the UK

If we talk about the British economy – it is steady, its legal system is dependable, and it provides its citizens with a good standard of education and a plethora of social benefits. That is why a large number of foreigners opt to come and settle in our country. Additionally, the United Kingdom provides privileges and incentives to its tax residents, which benefits business owners and property buyers. When it comes to tax residency, many people are unaware of when and how to become tax residents, minimise taxes, and avail benefit from the system.

Individual taxation in every country (Including the UK) begins with establishing its status, and each country has its own legislation and standards for doing so. Until 2013, establishing your tax status in the country was difficult. New rules have been implemented to make the process easier for everyone.

1. When an individual is considered a UK resident?
2. How is tax residency determined?
3. Statutory residence test
4. What if I make repeated short-term visits?
5. What if I have already paid tax on my foreign income?
6. Test results, taxes and exemptions
7. Still not able to work out your residential status in the UK?

When an individual is considered a UK resident?

A person is considered a resident of the United Kingdom for taxation purposes if they satisfy either the automatic residency test or the sufficient tie test. If they match neither of these criteria, they will be considered a non-UK resident. If they meet at least one of the automatic UK tests but none of the automatic overseas tests, the automatic residency test is met.

How is tax residency determined?

Determining whether you are a UK resident for tax purposes is based on a number of factors. All calculations must be performed within the same financial year (6 April to 5 April).

The fundamental rule is that you deemed to be a resident of the United Kingdom if you have spent more than 183 days in the country. Alternatively, you are a UK resident if your primary residence is in the United Kingdom and you owned, rented, or stayed there for a total of 91 days, 30 of which must have occurred within the tax year in question.

On the other hand, if you spent less than 16 days in the UK during the tax year, you are a non-resident. Additionally, you are a non-resident if you work full-time abroad and spend lower than 91 days in the UK (including a maximum of 30 days working). For expatriates, a few extra days in or out of the country might significantly affect your residence and tax status. In such instances, it is prudent to consult an expat tax specialist.

Statutory residence test

HMRC introduced the Statutory Residence Test to evaluate the tax residence status of individuals having connections with the UK. While the Statutory Residence Test is complicated, it is vital to determine your UK tax position, resulting in your worldwide income is liable to UK tax. Correctly reporting and paying tax on any source of income may result in penalties and fines. HM Revenue & Customs established a new statutory residence test (SRT) in 2013 that consists of three primary sections and some simple questions. By responding to these questions, you will be able to determine if you were a UK tax resident during any tax year beginning on 6 April and ending on 5 April. If you cannot answer "YES" to any of the first two parts of the SRT test, you should go for the sufficient ties test to determine your tax year residence status.

Due to the complex nature of the statutory residence test, it is always recommended that you must take professional advice from a tax expert when determining your residence status.

In case you’re a UK tax resident, you need to pay tax on your worldwide income unless your permanent residence (domicile) is located outside the UK. This includes the following:

1. If you’re working abroad, how much do you earn as wages?
2. Income earned from rentals from the overseas property.
3. Foreign investments and interest on savings.
4. Income earned from pensions held overseas.

In the simplest words, you will be treated as a non-UK resident for tax purposes if you satisfy the automatic overseas test but neither the automatic UK test nor the sufficient ties test.

What if I make repeated short-term visits?

It makes no difference whether your visits to the UK are for the same purpose, for different purposes, or at different time intervals for residence purposes. The number of days you have spent in the UK is one of several factors that must be taken into account when determining your UK residence status.

What if I have already paid tax on my income from foreign country?

When you disclose your foreign income via Self-Assessment tax return, you can claim foreign tax credit relief.

The amount of tax relief you receive is determined by the UK's double taxation agreement with the nation from which your income originates. Generally, you can obtain relief even when there is no agreement. This is referred to as unilateral relief.

If we talk about foreign tax credit relief, it is usually calculated on the basis of the lowest between the following:

1. The actual tax paid, and
2. The equivalent UK tax on the same income.

Test results, taxes and exemptions

If you are classified as a resident for tax purposes as a result of the test findings, the same regulations apply to you as they do to any other UK tax resident. You are a tax resident for the entire year from 6 April to 5 April and are required to declare and pay taxes on worldwide income earned during that period, regardless of the country or source of the income via a self-assessment tax return.

However, these regulations may be subject to exceptions based on individual circumstances. For example, if you go to the United Kingdom to settle, you will most likely become a resident for tax purposes on the date of your arrival rather than the start of the tax year. Additionally, any non-domiciles, individuals who were not born in the United Kingdom, can opt to be taxed on a remittance basis, meaning that they will only be taxed on income generated in or brought into the nation.

Still not able to work out your residential status in the UK?

We know that nobody wants to face the HMRC’s difficult questions but if you’re a dns client and would like assistance determining your UK tax residency status, please contact our client managers. We will arrange a meeting with one of our experienced accountants who not only explain you about your tax residency status in the UK but also help you file self-assessment tax returns.

In case you have queries or want specialist advice on "Tax residency in the UK", kindly call us on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.