Current legislation says a person cannot spend more than 90 days – excluding arrival and departure days – in the United Kingdom in one year if they wish to avoid paying tax. But these rules are set to change, meaning some people will either have to cut the number of days they spend at home or pay a hefty fine. If you are in the UK for more than 90 days a year, you will be considered resident.
However, the British Government has announced plans to change this. Under the new rules, days of arrival and departure will be counted.
Alec Emmerson, a partner at UAE-based law firm Clyde and Co, believes the new rules are a way for the UK Government to increase revenue and will mean the days of taking flights at the end of the day to keep the time spent in the country down, may be numbered.
“The new rules will mainly affect people making lots of business trips back to the UK. Some people go on a night flight, have two days of meetings then leave on a night flight so those days don’t count.
“But there are also people who have families in the UK so go back and forward for the weekend without too many days impinging on their allowance, but it stacks up if you now have to count 36 days instead of 12. I can see it having an impact on expatriates in the UAE.”
Emmerson says it is vital these changes are sorted out before April, as the UK authorities are also planning changes to the way “residents” and non-domiciled individuals are taxed, which will also have an impact on people living abroad.
Usually, anyone resident in the UK pays tax on their worldwide income and gains in the year that they arise. But the remittance basis is an alternative method, allowing UK residents who are not normally domiciled or “ordinarily resident” there to delay the payment of tax on offshore income and gains until they are brought back – remitted – onshore. Any UK-sourced gains are usually taxed as they arise, but there is no charge at that point on the remittance basis.
Anyone who has been resident in the UK in seven of the previous 10 tax years will be offered the option of paying a £30,000 (Dh216,000) a year “fee” to the Government to keep their existing remittance basis for taxation, which for some people will be beneficial. The alternative is paying tax within the UK on all of their income. The Treasury has published a consultation paper, and is aware these changes would affect expats who will eventually go back to the UK, although it expects it to be only a “small” number, as their move abroad is usually a “temporary” status.
The consultation paper states: “Generally individuals will, in due course, establish ordinary residence in the UK, and thereby make a normal contribution to the UK tax system. The number affected by this measure is likely to be small.
“Only those with unremitted income in excess of £80,000 are likely to pay the charge; others will find it less costly to opt out of the remittance basis.”
The reason £80,000 is important is because you would probably be better off having all of your worldwide income and gains taxed as they arise if you earn less than this from outside the UK than paying the £30,000 figure. For example, a 40 per cent taxpayer would need to have £75,000 or more of unremitted foreign income a year to generate a tax charge equivalent to £30,000.
But the Treasury also plans to remove the personal allowances available in the UK to those who continue to use the remittance basis for taxation and are non-domiciled in the UK.
It states: “Under the current rules remittance basis users enjoy the double benefit of having two elements of their overall income and gains exempt from UK tax. Firstly, their unremitted foreign income and gains is not subject to UK tax. Secondly, they also enjoy the same tax-free personal allowances as other UK taxpayers.
“Under the new rules, remittance basis users will lose automatic access to personal tax allowances, blind person’s allowance, reductions for married couples and civil partners, reliefs on payments to trade unions, police organisations, and relief for payments for the benefit of family members. They will similarly lose access to the Annual Exempt Amount (AEA) on gains.
“They will instead have a choice between continuing to use the remittance basis or continuing to enjoy their personal allowances. This choice will be made annually.”
In short, the personal allowances would need to be added to this under the new regime to calculate when it is more cost effective to pay the charge and lose the allowances rather than opting out of the remittance-based taxation.
The Treasury said: “In 2008-09 the usual personal allowance is £5,435 so the minimum income required is £80,435.”
Around 4,000 individuals are expected to pay the charge and it is believed that in the long term almost 14,000 more will opt out of the remittance basis and pay UK tax under the normal rules, with a further 3,000 expected to become non-resident in response to the charge. The Treasury added: “It is estimated that just over 113,000 remittance basis users will lose personal allowances as a result of this reform. The usual personal allowance (£5,435 in 2008-09) is worth approximately £2,200 to an individual whose marginal tax rate is the higher rate of 40 per cent, and £1,100 at a marginal rate of 20 per cent.”
Of course, these are just proposals at present, and there will be plenty of discussions before a final paper is produced by the Treasury.
But no matter what the final outcome, the changes, when they have been ironed out, will take effect from April 6.
How will the rules affect you?
- You will have to count days of arrival and departure within the 90-day residency test from April, if the rules are brought in as they stand
- If you are considered to be resident in the UK, the way you are taxed will change
- If you have been resident in the UK for seven of the past 10 years, and you have foreign income, you will be offered the option of paying £30,000 to the Government so you do not pay tax through the usual “remittance” basis
- Depending on your choice, you may lose your personal allowances in the UK, as the Government considers that these are giving a “double tax break” to those who are living abroad or primarily have foreign income
Tax in other countries
If you are a US expatriate you are required to fill out a tax return every year regardless of your salary. The tax threshold stands at $80,000 (Dh293,600) a year, if you earn less than that you will not be taxed at all. Once your annual income exceeds that amount you will be taxed on any earnings above $80,000.
Non-Resident Indians (NRIs) under the Foreign Ministry do not pay tax, but under the Finance Ministry they have to pay tax if they spend more than 180 days a year in the country. The government also taxes NRIs on any income earned in India above a certain threshold (which changes regularly). This income can be from a number of sources including property.
If you are no longer a citizen and do not have Australian income then you do not need to file a tax return. But if you are overseas and earning money at home you will have to complete a tax return if the appropriate taxes are not automatically deducted. In order for you to avoid income tax if you are still an Australian citizen you have to lodge a tax return.
A taxing year for expats