Part 1 of 4
This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).
From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.
Liability to tax in the UK depends on an individual’s residence and domicile status, together with the location of their assets and the sources of their income. It is a tricky area and can be confusing. This article aims to clear up any confusion you may have.
This article starts with some basic rules, an understanding of which will enable you to identify the particular areas of tax affected by an individual coming to, or leaving, the UK. It then goes on to review those areas in some detail, and provides a clear set of questions to ask in order to determine an individual’s liability to UK taxes. Finally, it deals briefly with the impact of double tax relief and treaties.
Some basic rules
Generally, the UK tax position of an individual who has always lived and worked in the UK (i.e. someone who is resident and domiciled in the UK) is as follows:
- Income tax (IT) on worldwide income.
- Capital gains tax (CGT) on worldwide assets.
- Inheritance tax (IHT) on worldwide assets.
Similarly, the UK tax position of an individual with no links to the UK (i.e. someone who is not resident and not domiciled in the UK) is as follows:
- IT on UK source income only.
- No CGT (in most circumstances – but see below for exceptions).
- IHT on UK assets only.
Read the above points carefully, think about them, and recognise that they result in the following:
- UK source income is always subject to UK IT, regardless of the status of the individual.
- There is no UK CGT, even on (most) UK assets, where the individual is based outside of the UK.
- UK assets are always subject to UK IHT, regardless of the status of the individual.
UK source income consists of: income in respect of UK assets, employment income in respect of duties performed in the UK, and trading income in respect of trades carried on in the UK.
UK assets include land, buildings and chattels in the UK, cash in UK bank accounts, and UK registered securities.
Completing the picture
The rules set out above raise three fundamental questions:
- Overseas income: In what circumstances does overseas income become subject to UK IT?
- Liability to UK CGT: In what circumstances are gains on UK and overseas assets subject to UK CGT?
- Liability to UK IHT on overseas assets: In what circumstances do overseas assets become subject to UK IHT?
This article identifies the order in which the key factors of residence and domicile should be considered when answering these questions. A brief reminder of the rules used to determine an individual’s residence status is set out below.
The rules governing residence are very detailed and depend on the time spent in the UK and the circumstances of the individual concerned.
The split year treatment
Normally an individual is resident or not resident for the whole of a tax year. However, in certain circumstances, the tax year of arrival and departure can be split. Under the split year treatment, the year is split into a UK part and an overseas part. The individual is taxed as a UK resident for the UK part and as a non-UK resident for the overseas part. This applies to both income tax and capital gains tax.
In order to be able to handle questions on international matters in the exam you will need to have done some methodical learning. In particular, you should be confident in your knowledge of the basic rules set out above, the tests used to determine automatic residence or non-residence and the UK ties. The table indicating the number of required UK ties by reference to the number of days in the UK will be provided in the exam.
Written by a member of the ATX-UK (P6) examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.