10.1 Residence, Domicile and collecting tax

Question 1

Who does the tax year (or fiscal year) relate to?

Answer 1

Individuals

Question 2

What does the financial year relate to?

Answer 2

Companies

Question 3

When does the tax/fiscal year start and end?

Answer 3

Tax year = 6 April to 5 April

Question 4

What is distinct about each tax year?

Answer 4

Each tax year has its own set of tax rules that apply to UK individuals during the tax year.

Question 5

What is the process of proposing changes to tax rules?

Answer 5

Proposed changes to the tax rules are announced in the autumn Pre-budget Report by the Chancellor, and then finalised in the actual budget statement in March. This provides an opportunity for consultation with interested parties, meaning that proposals for change can be amended if necessary.

Question 6

How are the finalised Budget changes implemented?

Answer 6

By the passing of the Finance Act each year that makes changes to UK tax law.

Question 7

List 4 reasons why the tax year is very important in financial planning.

Answer 7

1. Individuals are assessed on their total income received during each tax year for income tax
2. Individuals are assessed on any capital gains made during each tax year for capital gains tax
3. Each tax year brings new allowances for UK individuals such as a new personal allowance and a new capital gains tax allowance
4. Changes to financial products are often made and come into effect in a new tax year

Question 8

Define the financial year?

Answer 8

The financial year relates to companies and provides the tax rates, rules and allowance for UK companies for a 12-month period.

Question 9

When does the financial year start and end?

Answer 9

Financial year = 1 April to 31 March

Question 10

What is vital to how an individual will be charged income tax and capital gains tax?

Answer 10

Their residency status

Question 11

What does HMRC use to assess whether a person is resident in the UK or not?

Answer 11

The HMRC uses a thorough test to assess whether a person is resident in the UK or not. This test comprises two categorical statements – ‘automatic overseas resident’ and ‘automatic UK resident’ – and a sufficient ties test for those that do not meet the categorical statements.

Question 12

How does an individual qualify as an oversees automatic resident?

Answer 12

To qualify as an automatic overseas resident there are three tests, and an individual need only meet one of these test.

Question 13

What is the first overseas test?

Answer 13

An individual is present in the UK for fewer than 16 days in a fiscal year

Question 14

What is the second overseas test?

Answer 14

If an individual has not been resident in the UK during the previous three years, and are present in the UK for fewer than 46 days in this fiscal year

Question 15

What is the third overseas test?

Answer 15

An individual works full-time overseas and visits the UK for fewer than 91 days during the tax year (with no more than 30 days spent working in the UK)

Question 16

How does an individual qualify as an UK automatic resident?

Answer 16

To qualify as a UK automatic resident there are three tests, and an individual need only meet one of these test.

Question 17

What is the first UK resident test?

Answer 17

An individual is present in the UK for at least 183 days in a fiscal year.

Question 18

What is the second UK resident test?

Answer 18

The individual’s only (or main) home is in the UK. This home must be available to them for 91 days or more and must be used for at least 30 days.

Question 19

What is the third UK resident test?

Answer 19

An individual works full-time in the UK

Question 20

What happens if an individual meets neither of the automatic tests?

Answer 20

They should apply the sufficient ties test to assess whether they are UK resident or not. This test is based on any ties an individual may have in the UK.

Question 21

What are the 3 ties in the sufficient ties test?

Answer 21

1. Family tie
2. Accommodation tie
3. Work tie

Question 22

What is the concept of residency based on?

Answer 22

The amount of time that an individual spends in the UK or the ties that an individual leaves in the UK.

Question 23

What is domicile NOT based on?

Answer 23

Domicile is not based on the residence, nationality or citizenship of an individual.

Question 24

Explain domicile.

Answer 24

Domicile is considered to be where the individual ‘belongs’. An individual can be resident in more than one country. However an individual can only be domiciled in one country at a time.

Question 25

What is domicile of origin?

Answer 25

Domicile of origin which is acquired at birth, normally from the individual’s father. It does not have to be the country in which the individual was born. Individuals who were born in the UK to UK-domiciled parents are not able to claim non-domicile status whilst they are resident in the UK.

Question 26

What are the rules surrounding a domicile of choice?

Answer 26

A domicile of choice cannot be acquired until the individual is at links with their former domicile and settling permanently in the new country. HMRC will review the facts of each case.

Question 27

When is an individual deemed UK domicile?

Answer 27

An individual can be deemed UK domicile if they are resident in the UK for 15 out of 20 consecutive fiscal years.

Question 28

What is domicile important in determining?

Answer 28

The basis of income tax, but most importantly in determining the liability to inheritance tax.

Question 29

What is the general rule on income tax for UK residents?

Answer 29

The general rule is that a UK resident is liable to income tax on their worldwide income, i.e. income earned in the UK and overseas.

Question 30

Summarise the 3 different statuses and their liability in regards to income tax.

Answer 30

• A UK resident is liable for income tax on worldwide income and gains on an arising basis.
• A UK resident who is non-UK domiciled is liable for income tax on UK income and gains on an arising basis, as well as overseas income and gains on an arising basis or on a remittance basis.
• An overseas resident is liable to UK income tax on an arising basis but overseas income is not subject to tax.

Question 31

What is the basic rule to remember when it comes to income tax?

Answer 31

The basic rule to remember is that an individual will be liable to tax on income earned in the UK regardless of their status.

Question 32

What does taxation on a remittance basis allow?

Answer 32

Taxation on a remittance basis allows certain UK residents the opportunity of having their overseas income and gains untouched by HMRC. Only when overseas income and gains are remitted to (brought into) the UK, would it be subject to UK tax.

Question 33

When is a non-domicile UK resident taxed on a remittance basis?

Answer 33

When a non-domicile UK resident’s overseas income and gains are less than £2,000 in any fiscal year the income is taxed on a remittance basis.

Question 34

What happens when a non-domicile UK resident’s overseas income and gains are £2,000 or more in any fiscal year?

Answer 34

They must choose to have that income taxed on an arising or remittance basis.

Question 35

What happens when a non-domicile UK resident’s overseas income and gains is taxed on a remittance basis?

Answer 35

The remittance basis means their UK income and gains will be taxed as normal, but their overseas income and gains will be taxed only if they bring the money in to the UK.

Question 36

What benefits do residents lose when they opt for a remittance basis?

Answer 36

They will no longer have the benefit of income tax allowances, or capital gains tax annual exemptions.

Question 37

Which individuals are subject to additional remittance rules?

Answer 37

Long-term residents of the UK who opt for the remittance basis.

Question 38

What happens if the individual is resident in the UK for seven out of the past nine years?

Answer 38

They may have to pay a remittance basis charge (RBC) if they want their overseas income and gains to be taxed on a remittance basis. The remittance basis charge is an annual charge of £30,000 that compensates HMRC partially for the lost revenue from this resident.

Question 39

What happens to the remittance basis charge where the individual is resident for longer than 12 out of the last 14 years?

Answer 39

It increases to £60,000 per year.

Question 40

What are the rules around remittance tax after an individual’s 16th year of residency in the UK?

Answer 40

Any individual who has been resident in the UK for at least 15 of the past 20 tax years will be deemed UK domiciled for tax purposes. From the 16th year, an individual will no longer be able to use the remittance basis of tax, nor can they rely on any other rules for people who are not domiciled in the UK.

Question 41

What are the 3 ways income tax is collected?

Answer 41

1. Tax on non-savings income from employees is collected under the pay as you earn (PAYE) system
2. Tax on non-savings income from the self-employed is collected twice a year by payments on account
3. Tax on savings

Question 42

The tax authorities ensure our earned income is fully taxed, so how do they ensure our savings and investments are taxed?

Answer 42

They need us to declare to them what investment income we receive each tax year on a tax return.

Question 43

How do the majority of employees pay their income tax?

Answer 43

Through the pay as you earn (PAYE) system.

Question 44

How is basic rate income tax on savings income collected?

Answer 44

It is deducted at source by banks and building societies.

Question 45

When are higher rate taxpayers required to complete a tax return?

Answer 45

If they have significant investment income or income from other sources (such as rental income).

Question 46

Which individuals are required by HMRC to make instalment payments?

Answer 46

• Self-employed individuals
• Individuals who paid less than 80% of last year’s income tax at source

Question 47

When are the instalment payments due?

Answer 47

The payments are due on the following dates:

• 31 January within the tax year
• 31 July after the tax year

Question 48

How is the instalment payment calculated?

Answer 48

The payment is calculated as 50% of the previous year’s income tax liability.

Question 49

What happens if the calculated instalment payments are insufficient to meet this year’s liability?

Answer 49

A sweep-up payment is due on 31 January the following year (including any capital gains tax due).

Question 50

What does the self-assessment system require from the individual?

Answer 50

The self-assessment system requires the individual to submit details of their income for the fiscal year and to keep sufficient records to justify it (if required to do so by HMRC).

Question 51

How long must business records be kept for?

Answer 51

5 years after the 31 January following the end of the tax year.

Question 52

What are the deadlines for submission of the tax return?

Answer 52

• Taxpayer submits details of their income and gains for the year and HMRC calculates the tax payable or repayable – 31 October after the tax year.
• Taxpayer submits their return and calculates the tax liability themselves – 31 January the following year.

For employees who submit their returns by 31 October any further tax due is collected through PAYE. For other individuals the tax is due by 31 January the following year.

Question 53

How has the advent of online return submissions impacted the tax return process?

Answer 53

It has made the tax return process much more straightforward for the majority of taxpayers as the calculation of the tax liability is done automatically.

Question 54

What are the 4 important dates in the UK tax calendar?

Answer 54

• 6 April – start of a new tax year.
• 5 April – end of the tax year. Higher rate taxpayers are sent their tax returns to be completed, received by HMRC and paid by 31 January the following year.
• 31 October – individuals can ask HM Revenue & Customs to calculate their tax due for free until 31 October each year. Alternatively you can fill it in yourself, do it online or pay an accountant to do it for you.
• 31 January – tax returns must be received for the previous tax year or a late penalty will be due. All tax due in a tax year must also be paid by this date or else interest will start accruing.