Migrants to the UK can cope reasonably well with the UK tax system if all their income and gains come only from UK sources for the duration of their stay in the UK.
But if migrants to the UK retain sources of income (or they dispose of assets) outside the UK whilst being in the UK, they have to consider a range of complex rules.
Dealing with your tax affairs, if you have income or gains outside the UK, is difficult enough for someone who was born in the UK and has always lived their life here. But people from the UK choose to have such sources and they usually understand how the UK tax system works.
People coming from overseas to the UK for the first time are unlikely to understand our tax rules, but they often retain bank accounts back in their home country; they may have some earnings arising outside the UK; they may have rented out their home property; or they may dispose of an overseas asset while in the UK (for example, a property or shares overseas).
They are immediately into the complexity of a tax system which tries to assess its residents on their worldwide income and gains.
Historically, the UK welcomed the short-term overseas visitor (generally called “non-doms”) and the UK gave them tax advantages which used to mean that income and gains arising outside the UK and kept outside the UK were not subject to tax. However, in recent times there have been significant and complex changes in the law to reduce and, in some cases, remove those advantages.
Much of the complexity in the new law or practice has been designed to catch the very wealthy migrant, with very little regard for the low-income worker. The tax authorities in the UK have turned a blind eye to the needs of low-income migrant workers. They give them neither sensible exemptions nor adequate support and education. We find it very difficult to write accurately about existing law in a way which is understandable to a migrant (and sometimes to ourselves).
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Choices
The low-income migrant with income and/or gains outside the UK whilst working in the UK is given two choices:
- Be like most people in the UK and declare your worldwide income and gains (this however means you have to cope with self-assessment tax returns and significant complexity)
- Claim the benefit of limited exemptions given to people who are not domiciled in the UK (if the exemptions do not apply to you, then you will be forced into the self-assessment system as mentioned above).
We have explained earlier when you might have a domicile outside the UK and nearly all migrants will be not domiciled here. We are also assuming that as a migrant you are in the UK for long enough to become resident here.
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The £2,000 exemption
As a low-income migrant not domiciled in the UK, if you have overseas income and/or gains which you do not bring directly or indirectly (‘remit’) to the UK which is less than £2,000 in a tax year it can be effectively ignored for UK tax purposes and you do not need to take any action to tell HMRC.
If, however, you have overseas earnings you might be able to claim the overseas work exemption described below.
The overseas work exemption
There are some special rules for ‘foreign workers’ (that is, non-domiciled) in the UK if all of the following apply:
- you are resident in the UK
- you are not domiciled in the UK
- you have not claimed to use the ‘remittance basis’ of taxation in the UK
- your foreign employment income does not exceed £10,000 and it has been subject to tax in the country it arose (even if no tax was paid, for example because it was covered by a tax allowance in that country)
- you have no foreign capital gains and your other foreign interest does not exceed £100, and is subject to tax in the country it arose
- your worldwide income and gains are less than the higher rate threshold or the tax year (£35,000 in 2011/12 after deducting personal allowances)
- you are not required to complete a self assessment tax return for any other reason (for example, if you were self-employed)
If all of the above conditions apply you will be treated as being taxed in the UK on the ‘arising basis’, but because of the exemption you will not actually be liable to UK tax on your employment income from abroad - either when it arises or when it is brought to the UK. You will still be liable to UK tax on your UK employment income and this will be deducted by your employer through the PAYE system.
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What happens if neither of the exemptions apply?
If you have £2,000 or more of foreign income and/or gains that you leave outside the UK during a tax year and you’ve been resident in the UK for fewer than seven of the past nine years (excluding the current tax year) you will:
- pay tax on your UK income and gains
- lose your entitlement to a range of UK personal allowances and the annual exempt amount for capital gains tax
- have to complete a self assessment tax return and make a claim to use the remittance basis on form SA109 ‘Residence, remittance basis etc’ of your annual tax return
- pay tax on the overseas income and gains that you remit (bring directly or indirectly) to the UK.
Or you will ignore the remittance basis and offer your worldwide income and gains to be taxed on a self-assessment basis (but keep your UK personal allowances etc.)
A migrant finding themselves in this position will need to take advice directly from HMRC (or a professional adviser) in order to understand what is necessary and to decide which regime is advantageous.
Resident in the UK for seven years
If you have been resident in the UK for seven out of the last nine tax years then there is the potential for incurring a £30,000 annual charge if you claim the remittance basis. This is only relevant to those with very large incomes or gains outside the UK. More detail can be found on the HMRC website.
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Remittances to the UK under the remittance basis
If you adopt a remittance basis then you have to understand what a remittance is. This is not simple at all, even though the basic concept may be.
In broad terms, if you have overseas income or gains and you bring them directly or indirectly to the UK so that you enjoy the benefit of their existence in the UK then that will constitute a remittance. This remittance can then be taxed here.
An example of a remittance:
| Example Robert has come to the UK from Romania to work on a farm in Lincolnshire. His only income in the UK is from the farmer who employs him on the national minimum wage. He sends his spare cash back to Romania where it goes into his only bank account there. His bank in Romania pays him 6.5% interest on any balance that he holds; this produces the equivalent of £120 in 2011/12. Robert uses his Romanian debit card to draw out £50 from a High Street cash machine in Lincoln when he left himself particularly short. Robert has made a remittance of £50 of his Romanian bank interest. The consequences of this are as follows: - He has a UK tax liability on the Romanian interest to the extent of £50
- He will be required to notify HMRC of this liability and request a self assessment form
- He will need to establish the Romanian withholding tax deducted from his Romanian interest by his Romanian bank
He will need to claim a double taxation credit against his UK liability of £10 (£50 at 20%) which may eliminate his liability. |
As can be seen, remittances are best avoided, but can be difficult to avoid without a full understanding of the complex law and advice from a tax professional.
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Types of remittance which are exempt from UK tax
Some items that have been bought with overseas income (or gains) may be brought into the UK without incurring a tax charge including:
- items of clothing, footwear, jewellery or watches that are brought to the UK for your personal use (though if you sell such items once in the UK they no longer qualify as exempt and will be considered a remittance)
- property with a value of less than £1,000
You can find more information about remittances in part 5 of HMRC 6 - Residence, Domicile and the Remittance Basis.
If you need to complete a self-assessment form
Tax life becomes complicated if you have income or gains overseas and they do not fall within the £2,000 exemption or the £10,000 employment (or £100 interest) exclusion. This will almost always place you within the UK's self assessment system and require you to notify HMRC about these sources and provide them with a lot of information.
In order to complete the self-assessment return accurately the migrant may have to do some or all of the following things:
- establish their residence position for the tax year concerned which will include counting days of presence in the UK
- consider whether any double taxation agreement establishes that the individual is not resident in the UK for the purposes of that international agreement
- consider whether any double taxation agreement provides for an exemption from UK taxation for any relevant overseas income source or, failing that, provide a credit for overseas taxes paid
- establish which overseas basis period is appropriate for crediting of foreign taxes as other countries may have tax years that end on a different date to the UK. The UK tax year ends on 5 April
- consider whether any double taxation agreement provides for a re-instatement of UK personal tax allowances
- consider whether there is unilateral relief in the UK for overseas taxes paid
- find the appropriate exchange rates for the income or gains arising overseas in order to convert to £
- compute any overseas income/gain on a UK basis of assessing income/gains
- consider whether UK law gives any special reliefs for the overseas sources held by the individual, for example, overseas pensions attract a 10% deduction.
- in addition the individual needs to understand that is possible that any tax charge arising in the UK may become a deduction or credit for the purposes of their tax situation back in their home country.
As can be seen, depending upon individual circumstances, this can be beyond the abilities of most migrants. Anyone in this situation should seek help from HMRC Residency.
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Ordinary residence
If a migrant to the UK is not ordinarily resident in the UK roughly the same rules as described above for those non-domiciled apply. It is a status which need not worry the low income migrant who is not domiciled here.
Tax credits
It is appropriate to mention tax credits here. Tax credits have their own rules about what is and what is not income. However the migrant who is claiming tax credits should be aware that a remittance basis does not exist for tax credits so effectively a worldwide or arising basis is imposed, regardless of what basis is adopted for income tax. Very confusing.
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