what is UK tax residence

What is UK tax residence? 6 things you NEED to know

Posted on Posted in Tax

What is UK tax residence? It’s something you need to know if you are a Malaysian with assets in the UK. Or if you rent out your UK property, or visit the UK often to see friends or children at school.

If any of the above applies to you, then chances are you have some questions about UK tax.

In fact, after clients attend my estate planning and wills seminar, I’m often inundated with them. What is UK tax residence? How long am I allowed to stay in the UK before I am considered a tax resident? Is it 90 or 182 days? And what are the repercussions if I do become a tax resident?

Because of the historical links between Malaysia and the UK, these are questions that many Malaysians have to consider. A lot of us have friends, family and even assets invested over there.

It’s common to solicit off-the-cuff advice from friends but lots of people stop short of getting professional advice. Unfortunately, information passed on in this way just isn’t reliable. You should ALWAYS seek professional advice, especially concerning tax.

In this blog, I’ll be focussing on the typical issues a Malaysian may encounter when visiting the UK and hopefully answering the question of what is UK tax residence. This should help to make your trips worry free, at least from a tax perspective. However, I encourage you to seek professional advice if you remain unsure of how your residence status will affect what you need to pay.

Before I start, it’s important that you understand the different between two key words: residence and domicile. These terminologies vary in importance when considering the different types of tax.

Residence

This refers to where you live physically. The UK Finance Act 2013 lays out its criteria for residence very clearly with the Statutory Residence Test (SRT).

In a nutshell, the SRT states you need to stay in the UK for more than 182 days to be deemed a UK tax resident. However, if you stay in the UK for more than 46 days, you may still be deemed a UK tax resident, depending on the strength of your links with the country. The ‘sufficient ties’ test takes into account how long you’re staying, where your properties are based, where you work and any family you have living in the UK in order to determine your status.

So if your sole property is based in the UK and your immediate family lives there, chances are you’ll be deemed a tax resident after 46 days. (For more reading refer to The New UK Residence Rules by Jon Golding, which I have included in a separate post.)

Domicile

This refers to the country where you reside permanently. If you’re only planning to be absent on a temporary basis, this is the country you intend to return to.

It can be trickier to determine this status because there are various factors to consider. Generally speaking, if you’re spending fewer than 16 days in the country, or you’re staying longer but can prove you work abroad full-time, you’ll be considered domiciled outside of the UK.

What is income tax? Do I have to pay it?

A UK tax year runs from 6 April to 5 April the following year.

If you’re deemed a UK tax resident for a UK tax year and are domiciled outside of the UK, you’ll need to do the following:

  • Submit a tax declaration; and/or
  • Pay UK income tax on your UK income (e.g. property rental in the UK) as well as on any foreign income you bring into the UK over £2,000 (assuming you elect for remittance basis, meaning you only pay tax on your earnings in the UK, as opposed to arising basis, meaning you pay tax on your entire income worldwide)

Need a practical illustration? Well, if you frequently travel to the UK, have a property and/or relatives living in the country (that’s the ‘sufficient ties’ I was talking about earlier), and/or bring money into the country to pay for properties or your kids’ school fees, you probably need to chat with a tax adviser.

What is capital gains tax? Should I worry about it?

If you’re planning to sell your UK assets, be aware that capital gains tax may be payable on any gains. These assets include houses and apartments (‘real property’) as well as shares, stocks and bonds.

Your residence status plays a part in determining whether you pay tax only on real property. You may have to pay tax on all of your assets. Allowable deductions are limited and may push your gains income into a higher capital gains tax bracket. That could be from 18% or 28%, depending on how big the gain is.

What is inheritance tax? Does it apply to me?

All assets in the UK are subject to 40% inheritance tax above the value of £325,000. That is irrespective of the domicile of the owner. Assets include real property and any shares in companies that own real property.

Are you UK domiciled? Then all of your assets worldwide are subject to UK inheritance tax. From 6 April 2017 onwards, this rule will apply to all Malaysians who are deemed UK resident for at least 15 years out of 20 years.

Luckily, there are ways to get around this if you plan in advance. Take the time to set up an ‘excluded property trust’ to legally avoid the high costs of UK inheritance tax on your overseas assets, even if you are deemed UK domiciled further down the line. 

I was born in the UK and have a British passport. What does that mean for me?

Good question! New rules subject UK expats to immediate UK domicile treatment if they return to UK residence by accident or design. So whether you decide to go back for good, spend time in the UK looking after a sick relative, or visit on an extended trip, you have to pay tax as a UK domicile.

In the past, you could change your domicile to another country if you had no substantial connections in the UK and were buried abroad. However, it was pretty difficult to prove – just look at renowned actor Richard Burton, who lived in Switzerland for the last 26 years of his life but was slapped with a huge inheritance tax bill of £2.4 million after the UK Revenue claimed he had retained ‘emotional ties’ to Wales. What was their claim based on? Simply that he asked to be buried in a red suit with a copy of Dylan Thomas’ poems.

So if you’re a British expat, you have to be very careful not to become a UK resident by default. Otherwise inheritance tax applies to your worldwide assets.

So what is UK tax residence? Hopefully, this blog has answered that question for you and made clear the steps you need to take to remain compliant with UK tax legislation.
Still confused? Got more questions? Please let me know in the comments!

Disclaimer: Information on this site is intended as a general guide to a complex area, which I have put together with the help of the tax advisors I work with. Although best efforts have been used to prepare this information, you should not treat the above as legal or tax advice. No fiduciary or advisory relationship is intended with the readers of this site.

Author: Sam Choong

Sam Choong is a lawyer practising in Penang, Malaysia. His areas of practice include estate planning, wills and UK inheritance tax for expats residing or seeking to retire in Malaysia.

2 thoughts on “What is UK tax residence? 6 things you NEED to know

  1. Hi Sam,
    Thanks for the information you posted especially regarding the inheritance tax.
    You have mentioned Malaysian. Can I assume it badically means foreigners as recently we have converted to Singapore citizenship.
    Both children are in UK now, my concern is the Singapore property inheretance tax.
    They will be taxed as well?

  2. Hey Heen Hiang! Yes, I was writing from a Malaysian perspective but i would assume it applies to Singaporeans too. I wrote this article because, in Malaysia, we are a source based tax system and we don’t have inheritance tax, so us Malaysians who have not worked internationally can sometimes be less savvy, tax wise.

    On the Singapore citizen front, Singapore and the UK may have a Double Taxation Treaty. To be sure, drop me a note at Sam@ckylegal.com and I could point you in the direction of one of the UK associate tax advisers my firm works with because my article covers the repercussions of Inheritance tax, Gains tax and income tax. There’s a lot to cover for a short article.

    Hope that helps.

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