Income Tax Calculation by Splitting the Tax Year for UK and Overseas Residence of an Individual along with Discussion on Domicile and Income Tax Liability under Tax Setup UK


14 Jan

For the calculation of income tax, the residence of an individual plays a factor and it’s a general perception that, an individual either resides in the UK or is a non-resident for the entire tax year. There are some specific rules that are applicable in the income tax calculation for the tax year when an income is acquired from working in a UK company incorporation, or by establishing a new company formation UK, or earning overseas. However, in some specific scenarios, the tax year for the income tax calculation may be divided into UK and foreign parts. The regulations related to this splitting will be considered in this blog along with the discussion of domicile and regulations related to the liability to UK income tax.

Splitting the Tax Year

In a strict manner, each tax year should be looked at in its entirety. The main principle under the tax setup UK states that an individual resides in the UK or is a non-resident either for an entire tax year or not at all.

However, it is possible that an individual may be able to divide a tax year into UK and foreign parts in some cases. The treatment of split year can only be applicable for a year in which an individual is residing in the UK according to the usual rules. In case where the splitting of a tax year is done, the taxation of the individual is done by considering him/her as a resident of UK for the UK part and considered as a non-UK resident for the foreign part.

The individual who is arriving in the UK can make use of a split year treatment if that individual does not reside in the UK in the year before the split year and if one of the following scenarios are applicable:

  • The individual arrives at the UK, performs the acquisition of a home there, and does not possess enough ties to the UK to be called as its resident before the acquisition of home in UK (the beginning of the UK part is marked after the acquisition of home in the UK), or
  • The individual arrives in the UK, in order to work full-time in a UK company incorporation for a duration equivalent to at least a year but he does not have enough number of ties to be called as a resident of the UK before beginning the work in a establish company in UK (the beginning of the UK part is marked when the UK work is initiated by the individual), or
  • The event of return of the individual to UK happens after a duration where the partner of the individual (supposedly spouse, civil partner or the one living with that individual) has performed work abroad on a full-time basis (the beginning of the UK part is marked on the later of the cessation of work abroad by the partner of the individual and the individual joining the UK based partner), or
  • As soon as the duration for which the individual has performed work abroad on a full time basis comes to an end, the individual comes back to UK (the beginning of the UK part is marked when the individual stops working abroad).

The individual who is leaving the United Kingdom, can make use of the treatment of split year if before the split year, the individual as considered to be a resident of the England, and after the split year, in the tax year, that individual was considered to be a non-UK resident and in case if one of the scenarios mentioned below is applicable:

  • The beginning of the overseas part is marked when the foreign work is initiated by the individual, so a scenario of the individual leaving the UK in order to begin a full-time work abroad; or
  • The beginning of the foreign part is marked on the later of the initiation of foreign work by the partner and the joining of the individual to that partner abroad, so a scenario of the partner of the individual leaving the UK in order to start working abroad and the individual leaving the United Kingdom for the continuity of living together with that specific partner; or
  • The beginning of the overseas part is marked upon the cessation of having a home in the UK by the individual, so the scenario here can be the individual leaving the UK to settle or live abroad and that individual performs the cessation of having a home in the UK, spends a small amount of time in the country and becomes the resident of the foreign county through the establishment of ties with the foreign country.

Examples for Illustration

  • Let’s consider the example of Harry who never resided in the UK and had no ties in UK until the date of July 1st 2013 upon his arrival in UK from Germany. From that specific date, his flat in Germany was rented out by him on a two-year lease. From the very date of July 1st 2013, he buys a flat in London on the basis of a lease of 12 months as soon as he starts to live there. It should also be noted that Harry does not start to work. As Harry is considered as a resident for 2013/14 on the basis of automatic UK tests with the reason that he has spent 183 days in the UK, then he holds an entitlement to make use of the treatment of split year for 2013/14. He was not considered as a resident of UK for the year of 2012/13, the acquisition of a home in UK was done by him during the year of 2013/14 and he did not spend any time within the UK between the duration of April 6 and July 1st 2013 so he could not be considered a UK resident before the acquisition of the home (which means the ties test does not hold any relevance). The foreign part of Harry of the tax year for 2013/14 begins on April 6th 2013 and comes to an end on June 30th 2013. The beginning of the UK part of tax year 2013/14 is marked on July 1st 2013 (the day the acquisition of his home is done in the UK) and comes to an end on April 5 2014.
  • Consider the example of Charlie who has been a resident of UK. To start a three-year full-time contract abroad on October 15 2013, Charlie leaves the UK. During the period of contract, he will not pay a visit to the UK. As he is a resident of UK in the year of 2013/14 and as he spends above 183 days in the UK, Charlie can split the tax year 2013/14 and he will be considered as a resident of the UK for 2012/13 and a non-UK resident for the year of 2014/15 (automatically as he works abroad full-time in that tax year and does not spend a number of days above in the UK throughout that tax year), and to start full-time work abroad, he is leaving the UK. The beginning of the UK part of the tax year 2013/14 is marked on April 6th 2013 and comes to an end on October 14th 2013. The foreign part of the tax year 2013/14 begins on October 15th 2013 and comes to an end on April 5th 2014.

Domicile of the Individual

The country in which the individual has his/her own permanent home, the individual is said to be domiciled in that country.

It should be kept in mind that the domicile is a different entity than the residence or nationality. An individual may be a resident of multiple companies, but at a single time, he/she can be domiciled in only a single country.

When an individual is born, the acquisition of the domicile is done at the origin of birth which is, in normal practice, their father’s domicile, or mother’s if the father had passed away before their birth or their parents were not bound in marriage at the time of their birth, and hence not mandatorily the country of their birth. The retaining of this domicile is done by the individuals until the acquisition of a different domicile of dependency is done by them (if, during the time in which their age is less than 16, the domicile of their father changes) or a domicile of their choice. The acquisition of a domicile of own choice can be done only by the individuals whose age is 16 or above.

The individuals who wish to acquire the domicile of their choice, should sever their ties with the country on which their previous domicile was based and they should settle in some other country having the intention of settling there with the help of a permanent home. Being the resident of some other country is not in itself sufficient to prove that the acquisition of a domicile of choice is done by the individuals, there has to be a proof to make sure that their intention is firm to live there permanently.

Basic Principles of UK Income Tax Liability 

In general, a resident of UK has the liability of UK income tax on the income acquired from UK or from overseas upon its occurrence. An individual has the liability of income tax UK on the income present in the UK, who is a resident of the UK but does not hold a domicile in the UK and he may have an entitlement of taxation on the foreign income on the basis of remittance. A person who does not reside in the UK, has the liability of income tax UK only on the income being present in UK.

The arriving basis states that in general, an individual who is a resident of the UK has the liability of income tax UK on the income being earned from an establish company in UK or from overseas.

According to the basis of remittance, an individual who resides in the UK but does not hold a domicile in the UK has the liability of income tax UK on the foreign income only to the extent that its remittance is done to the UK. The individual may have to make a payment of the charge of remittance basis. In case if the remittance basis does not hold applicable (such as, its claim is not made), the taxation of the foreign income is done on the arising basis. Individual who does not have UK domicile but is a resident of the UK has the liability of income tax UK only on the income that occurs within the UK.

Summary of the Basis of Income Taxation of an Individual

In a nutshell, depending on the residence and status of domicile, the taxation of an individual is done in the following manner:

  • If the source of income is UK based, then the income is always liable to tax.
  • If the source of income is foreign basis, then there are three scenarios: resident and domiciled; resident and non-domiciled; and non-resident.
  • If the individual is a resident and domiciled, the arising basis is applicable.
  • If the individual is a resident but non-domiciled, the remittance basis may be applicable.
  • If the individual is not a resident of the UK, then the income is not liable to tax.
  • When the remittance basis may become applicable, the possible remittance basis charge may be applicable (equivalent to an amount of £30,000 or £50,000).
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