How to set up a company UK keeping in view the income tax regulations for the scenario where the individual have UK residence and domicile or UK residence but not domicile?

14 Jan

When an individual has residence both in UK and overseas, the regulations of income tax varies, as the income can either be earned by having a overseas business or working in a corporation having ltd UK registration etc. The income tax depends on different factors such as residence, domicile of the individual.

The arising basis for the individual acquiring income states that in general, a resident of UK has income tax liability on the attainment of income done either from UK or from abroad as soon as it is earn. On the other hand, according to the remittance basis, a individual who does not have a UK-based domicile but have UK-based residence, then the individual has the UK income tax liability on the income acquired from a foreign country if the remittance is perform in UK or in simple words, it is brought back to UK. The general principles of the overseas income acquired from a company or from a property business, along with the overseas dividends will be a part of our discussion in the blog. The second part of the blog will discuss the case where the individual is UK resident but does not hold a domicile of UK.

Individual having UK Residence and Domicile

General Principles of Foreign Income

The taxation of the individuals who are both a resident of UK and also hold a domicile is done on the income they have acquired from a foreign country based on the arising basis, since the remittance of income to the UK is irrelevant and kind of out of question here. In case if the taxation of the income is done in the country of its origin, then a relief for double taxation may be available.

The taxation and identification of an income from abroad is done quite in a similar manner as that of UK based income. However, the points that are mentioned below should be brought under consideration.

Foreign Business of Property

An individual that is acquiring rents and other income from foreign property can be said to have a foreign business of property. As we discussed earlier for a regular income, the income which is acquired from a foreign property business is subject to the charge of income tax in a similar manner as that of a property business being operated within the premises of UK and the calculation is also performed in a similar manner. The calculation of the profits should be done separately if the individual owns both a property business running in the UK and outside the UK.

In case there is an unfortunate event of occurrence of a loss on that property business, then as soon as it occurs, it may be carried forward and set against the future income obtained from the foreign business of property.

The special treatment in case of furnished holiday lettings does not hold applicable to the foreign properties excluding those in the European Economic Area (EEA).

Dividends from Overseas

The overseas dividends are defined as the dividends from companies that are not established in the UK. The income becomes liable to tax in the year of its occurrence and its taxation is done in a similar manner as the UK dividend income, which is equal to 10% if it is under the basic rate limit, at 32.5% if its range is from basic rate limit to higher rate limit and if it is above higher rate limit, then 37.5%.

When a taxpayer possesses less than 10% of the company’s shares, the acquisition of a dividend is done from a foreign country with a 10% non-refundable credit of tax. In case of the taxpayer having an ownership of shares in the foreign company which are 10% or more, the non-refundable credit of tax will also apply, under the condition that the company resides in the country that has a treaty of double-taxation with the UK that has a non-discrimination provision that states that the foreigners are not made liable to tax more heavily than the nationals of the UK.

Individual having UK Residence but not Domicile

Taxation of Individuals on Remittance Basis

The taxation of an individual’s foreign income may be done on a remittance basis if that individual resides in the UK but is not domiciled in the UK.

In case of the remittance basis not being applicable, the taxation of the individual will be done on an arising basis on both the income acquired from inside and outside of the UK, which means that the individual will be liable to tax in a similar manner as an individual who is both the resident and domicile holder of UK.

On the contrary, when the remittance basis is applicable, the treatment of all the income acquired from a relevant source is done in the form of a non-savings income. The taxation is done in the same way as other non-savings income (i.e. 20% in case of basic rate band, 40% in the higher rate band and 45% for above).

How can remittance be defined?

Where an individual is making use of the income in UK, the remittance of non-UK income is made by that individual. It is clear that the remittances in the form of cash are also included under this definition. However, it also includes:

  • Making use of the foreign income for the settlement of a non-UK debt where the borrowing of money was done in the UK or overseas and it was then brought into UK.
  • The acquisition of services, money and property done with the foreign income and brought into the UK. However, there are some exemptions for: personal effects including clothes, jewelry, shoes and watches; assets whose price is below £1000; assets brought into the UK for the purposes of restoration and repair and the assets in the UK for a net period of below 275 days. The UK income tax will also not be applicable to the remittance of foreign income if the purpose of bringing it in the UK is the acquisition of shares or making a loan to a company of trade or a trading group’s member, or for the payment of charge of remittance basis.

Remittance Basis – Automatic Application

An individual will not need to make a claim of the remittance basis, and the remittance basis will be applicable automatically if that individual has an entitlement of being liable to tax on the remittance basis on the foreign income, has the possession of unremitted non-UK income and gains equal to an amount below £2000 being occurred in a year of tax.

If the individuals intend to, they can disapply the remittance basis for a tax year. This can be done by notifying the HMRC in their return of self-assessment for that specific year of tax. Their taxation will then be done on an arising basis on the foreign income occurring in that year of tax.

The remittance basis can also be applicable automatically in a tax year under the condition that an individual:

  • Resides in the UK but does not have a domicile in UK for that year.
  • Possesses no income or gains instead of the investment income liable to tax not more than £100.
  • Does not perform the remittance of the gains or income to the UK in the year.
  • Has been a resident of UK in not more than six out of the total 9 years of tax instantly before that year or is below the age of 18 during the year

Making a Claim of the Remittance Basis

In a specific year of tax, any other individual who holds the entitlement of being taxed on the remittance basis should claim if they want that basis to be applicable to their foreign income. The claim is made on the tax return of self-assessment of that individual. In case if no claim is made, the taxation of the individual is done on the foreign income on an arising basis.

An individual will not have the entitlement of personal allowance if he makes a claim for the remittance basis. The individual who has the entitlement of the remittance basis without a claim is exempt from this rule.

An individual claiming a remittance basis also does not have the entitlement of the yearly exempt amount against the chargeable gains.

The Charge of Remittance Basis

The amount of charge that is to be paid by an individual in the form of a remittance basis charge is equal to either £30,000 or £50,000 on unremitted income and gains. This is applicable to a person who makes the claim of a remittance basis and is a long term resident of the UK.

The following conditions need to be checked in order to confirm if an individual needs to make the payment of the remittance basis charge:

  • The claim of remittance basis for that year of tax is made by the individual; and
  • The individual is of 18 years of age or above in the year of tax; and
  • Have been a resident of the UK for a minimum of seven of the nine years of tax preceding that tax year.

The charge of remittance basis is a charge on the income whose acquisition is done from outside the UK and the gains which are not remitted to the UK. The individual, according to the usual manner, remains liable to the UK tax on the income acquired from inside or outside of the UK remitted to UK.

The amount of charge on the remittance basis in a tax year is dependent on the length of time for which the individual resided in the UK. An individual who has worked in a companies house set up company or has register a business in UK in the form of ltd UK registration, and stayed in UK for twelve tax years out of the fourteen preceding that tax year, then he/she has a charge of remittance basis equal to an amount of £50,000. Similarly, an individual who has worked in a companies house set up company or has register a business in UK, and stayed in UK for the seven of the nine years of tax preceding that year (but not twelve of the last fourteen years of tax as yet), then he/she has a charge of remittance basis equal to an amount of £30,000.

The treatment of the charge of remittance basis is done in the same way as the UK income tax or the capital gains tax whose payment is made on the arising basis and so its availability must be there for the relief from double taxation, such as in the country in which the foreign income or gains occurs.

It is required by the individual to make a nomination of the unremitted foreign income and gains on which the charge of remittance basis is applicable. In case if the unremitted gains or income is later brought back into the UK, then their taxation will not be done again. However, some ordering rules exist that consider other untaxed income and gain as being brought back into the UK before the nominated income or gains.

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