Part 1 of 4
This is the Finance Act 2013 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in 2014. Candidates sitting Paper P6 (UK) in 2015 should refer to the Finance Act 2014 version of this article, to be published on the ACCA website in 2015.
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.
It begins 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 (ie 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 who has always lived and worked outside of 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 (unless the asset sold is used in a UK trade).
- 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 assets include land, buildings and chattels in the UK, cash in UK bank accounts, and UK registered securities.
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.
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 and domicile 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.