ATXP6 UK
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Syllabus A1. Income tax A1b. The Scope of Income Tax

A1bi/ii. Residence and Domicile for Income Tax

Syllabus A1bi/ii)

Explain and apply the concepts of residence and domicile and advise on the relevance to income tax
and
Advise on the availability of the remittance basis to UK resident individuals

What is UK Income Tax paid on?

  • If an individual is UK resident – he will pay UK income tax on his worldwide income

  • If an individual is NOT UK resident, he will only pay UK Income Tax on his UK Income ONLY

Illustration – UK resident

John is UK resident and earns a trading profit in the UK of £60,000 p.a. and he earns rental income from a villa in Spain of £10,000. 

How much UK Income tax will he pay?

  • Solution

    Trading profit £60,000

    Overseas income £10,000

    Total income £70,000

    Less:
P.A. (£12,500)

    Taxable Income £57,500

    
£37,500 * 20% = £7,500
    
(£57,500 - £37,500) * 40% = £8,000


    UK Income tax payable £15,500

Illustration - Non-UK resident

John is not UK resident and earns a trading profit in the UK of £63,000 p.a. and he earns rental income from a holiday home in New Zealand of £10,000.

How much UK Income tax will he pay?

  • Solution

    Trading profit £63,000
    
Less:
P.A. (£nil)

    Taxable Income £63,000


    £37,500 * 20% = £7,500
    
(£63,000 - £37,500) * 40% = £10,200


    UK Income tax payable £17,700

    Note: as John is not a UK resident, nor a citizen of the EEA, it is unlikely that he will be able to claim a personal allowance.

Domicile and deemed domicile

Domicile

An individual’s domicile can be determined in one of three ways:

  1. Domicile of origin 

    - inherited from father at birth

  2. Domicile of dependency 

    - if, whilst under 16, father’s domicile changes then domicile changes with that of the father

  3. Domicile of choice 

    - once 16, can sever ties with old country and move to settle permanently in another country

Deemed domicile

An individual can be deemed domicile in the UK for income tax and capital gains tax if they satisfy one or both of the following conditions:

  • The individual is a formerly UK domiciled resident who:

    - Was born in the UK; and
    - Has a UK domicile of origin; and
    - Is UK resident in the relevant tax year.

  • The individual is a long-term UK resident who has been UK resident for at least 15 of the 20 years immediately before the relevant tax year.

Illustration

Jake was born in the UK and his father was domiciled in the UK. 

At the age of 3 Jake acquired a domicile of dependency when his father became domiciled in Spain. 

Jake returned to the UK on 6 April 2019 and intends to stay for the foreseeable future.

Jake passes the statutory residence test and so will be treated as UK resident in 2019/20.

He also passes the deemed domicile condition of a formerly UK domiciled resident.

Jake will therefore be UK resident and domicile for 2019/20.

UK Resident but not UK Domiciled/deemed domiciled

If an individual is UK resident but not UK Domiciled/deemed domiciled, there are 2 options for taxing income that arises overseas (Overseas Income):

  1. Remittance Basis

    – whatever overseas income/gain exists, you only pay UK income tax on the amount of income that you send back to the UK.

    If the remittance basis is claimed, the taxpayer will not be entitled to a Personal Allowance (PA) for Income tax or Annual Exempt Amount (AEA) for Capital Gains. 

    The remittance basis will automatically apply if unremitted income (income that has not been sent back to the UK) is below £2,000. 

    In this situation, there is no need to elect for the remittance basis and no RBC will be charged. The taxpayer also gets to keep their PA and AEA.

    For example 

    John is UK resident but not UK domiciled/deemed domiciled. 

    He has investment income arising in Barbados of £10,000. 

    He remits £9,000 of this income back to the UK. 

    Will the remittance basis automatically apply? 

    Solution

    Yes it will automatically apply as unremitted income is below £2,000. 

    There will be no Remittance Basis Charge (see below).

  2. Arising Basis

    – whatever overseas income/gain exists, UK income tax is paid on it entirely.

Illustration – Remittance basis

John is UK resident but not UK domiciled/deemed domiciled and earns a trading profit in the UK of £63,000 p.a. and he earns rental income from a villa in Spain of £10,000. 

He sends £3,000 of the rental income back to the UK. 

How much UK Income tax will he pay if he chooses the remittance basis?

  • Solution

    Trading profit £63,000
    
Overseas income £3,000
    
Total income £66,000
    
Less:
P.A. (£Nil) - he is not entitled to the PA if he chooses the RB

    
Taxable Income £66,000

    
£37,500 * 20% = £7,500
    
(£66,000 - £37,500) * 40% = £11,400


    UK Income tax payable £18,900

Illustration – Arising basis

John is UK resident but not UK domiciled/deemed domiciled and earns a trading profit in the UK of £63,000 p.a. and he earns rental income from a villa in Spain of £10,000. 

He sends £3,000 of the rental income back to the UK. 

How much UK Income tax will he pay If he chooses the arising basis?

  • Solution

    Trading profit £63,000
    Overseas income £10,000
    Total income £73,000
    P.A. (£12,500)
    
Taxable Income £60,500

    
£37,500 * 20% = £7,500
    
(£60,500 - £37,500) * 40% = £9,200

    
UK Income tax payable £16,700

Conclusion:

The Remittance basis looks like the expensive option because John loses his entitlement to the Personal Allowance.

The decision whether or not to claim the remittance basis should be considered year by year as, depending on the level of unmerited income, sometimes it will be the cheaper option.

Consequences of choosing the remittance basis

  • If income not sent back to the UK is LESS than £2,000 then the remittance basis is automatic, otherwise it must be elected.

    If the remittance basis is automatic, then there is no remittance basis charge.

  • Remittance Basis Charge  (see below)

  • No personal allowance available for income tax.

Remittance Basis Charge

If prior to the current tax year an individual (over the age of 18) has been UK resident for at least 7 of the last 9 tax years then by making the remittance basis election they must pay HMRC a remittance basis charge. This charge increases once they have been in the UK for at least 12 of the last 14 years.

This is similar to paying tax on their unremitted income, except that it’s just a flat charge.

If prior to the current tax year a person has not been UK resident for at least 7 tax years then if they make the remittance basis election, there is no remittance basis charge.

  • Prior to the current tax year the person was UK resident for at least 7 out of the last 9 tax years 

    RBC £30,000

  • Prior to the current tax year the person was UK resident for at least 12 out of the last 14 tax years

    RBC £60,000

Illustration

Benny is domiciled in India.

She has been resident in the UK since 06/04/2012 and earns an annual salary of £80,000.

She has a property in India from which she earns rental income of £24,000 and from this remits £15,000 to the UK annually. 

Which basis should she choose to tax the overseas rental income in 2019/20?

  • Solution

    Remittance basis

    She has been resident in the UK from 06/04/2012 – 05/04/2020 = 8 out of the last 9 tax years.

    Therefore the R.B.C. will be £30,000. 

    Income tax computation:

    Salary £80,000
    Remitted Income £15,000
    Total income £95,000
    (No P.A.)

    £37,500 * 20% = £7,500
    
(£95,000 - £37,500) * 40% = £23,000


    Total amount payable to HMRC = £7,500 + £23,000 + £30,000 = £60,500

  • Arising basis

    Salary £80,000
    Overseas Income £24,000
    Total income £104,000
    P.A. (W1) (£10,500)
    
Taxable income £93,500

    Income tax

    £37,500 * 20% = £7,500
    
(£93,500 - £37,500) * 40% = £22,400


    Total I.T. payable £29,900

  • W1

    Income>£100,000
    (£104,000 - £100,000)/2 = £2,000 – reduce P.A.

    P.A. £12,500
    
Less (£2,000)

    Available P.A. £10,500

  • Conclusion

    The remittance basis results in a payment to HMRC of £60,500


    The arising basis results in a payment to HMRC of £29,900

    The arising basis should be chosen as it saves £30,600