PERSONAL INCOME TAX

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PERSONAL INCOME TAX
Theory and practice of taxation AModule code
C33TA1 Lecture 14

• OVERSEAS ASPECTS

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RESIDENCE AND DOMICILE

• A taxpayers
• Residence
• Ordinary residence
• Domicile
• have important consequences in establishing the
  taxation treatment of his UK and foreign income

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RESIDENCE

• Tests for determining residence
• A person is resident in UK for a given tax year
  if he/she either
• Is present in UK for 183 days (exclude days of
  arrival and departure)
• Makes substantial annual visits to UK (Visits
  averaging 91 days per year)
• A person is regarded as either resident or not
  resident for the whole tax year (for exceptions
  see later)

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ORDINARY RESIDENCE

• Ordinary residence implies a greater degree of
  permanence than residence
• Status of ordinary residence will help to
  determine residence
• Thus presence for 183 days establishes
  residence(see above)
• But if not present for 183 days the person who is
  ordinarily resident will still be regarded as
  resident
• To establish non residence the person who is
  ordinarily resident will have to go abroad for
  a full tax tear.

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Residence - examples

• John comes to work in the UK on 22 June 2006 and
  returns permanently abroad on 28 February 2007
• Liam and Natalie work in Kuwait from 1 April
  2006. Liam returns to the UK on 31 March 2007.
  Natalie returns one week later on 7 April.
  Otherwise they have never been outside the UK
• What is the residence status of John, Liam and
  Natalie for 2006-07?

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Residence

• Residence not applicable for whole year
• Year of arrival when a person takes up permanent
  residence or comes to stay in UK for at least 2
  years
• Year of departure when a person leaves the UK for
  permanent residence abroad, or to live abroad for
  at least 3 years or
• In the years of departure and return if a person
  takes up employment abroad under a contract for
  at least a whole tax year
• NB a spouses residence is not governed by the
  other spouses status.

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Residence

• Natalie revisited (Contract 1/4/06 to 7/4/07)
• Explain her residence status for the 3 years
  2005-06, 2006-07 and 2007-08

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RESIDENCE

• RESIDENCE coming to UK
• A person whose home was abroad and who comes to
  UK to live permanently, or for at least 3 years
  is regarded as resident from their date of
  arrival
• A person who comes to UK to work for at least 2
  years is treated as resident for the whole period
• A person who comes to UK and does not intend to
  stay for at least 3 years is treated as
  ordinarily resident from 6 April following the
  3rd anniversary of his arrival (residence will be
  established each year by 183 day rule or 91
  average)

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RESIDENCE

• RESIDENCE leaving UK
• A person who has been (ordinarily) resident is
  treated as remaining so if he goes abroad for
  occasional periods(lt 1 tax year)
• If a person goes abroad under a full-time
  contract where
• (a) His absence from UK is for a period which
  includes a full tax year and
• (b)Interim visits to UK do not amount to 6 months
  or more in any one tax year or 3 months or more
  per tax year on average
• He is normally regarded as not (ordinarily)
  resident for the whole period of the contract (
  same applies to accompanying spouse)

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DOMICILE

• DOMICILE
• Domicile of origin (acquired at birth - normally
  fathers) - retained until individual acquires
• domicile of dependence (if under 16 and fathers
  domicile changes)
• domicile of choice - can only be acquired by
  persons over 16 - must sever ties with country of
  previous domicile and settle (permanently) in
  other country

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IncomeGeneral rules

• If resident in UK liable to UK tax on all income
  (UK and foreign)
• If not resident in UK liable to pay UK tax on UK
  income only
• If resident but not domiciled, or not ordinarily
  resident, only charged to tax when income is
  brought into the UK. The remittance basis
• If tax year is split into resident and non
  resident then the appropriate set of rules will
  apply to the two periods

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OVERSEAS ASPECTS The rules applied 1

• ALLOWANCES
• Generally, non-residents are not entitled to
  allowances
• EXCEPT
• Citizens of EEA and Commonwealth countries
• Residents of Isle of Man and Channel Islands
• Current/former Crown servants and their
  widow(er)s
• Former residents who have left for health
  reasons
• Missionaries
• applies to both Income and Tax reducing Allowances

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EMPLOYMENT INCOME

• Amount taxable depends on
• Residence status
• Where duties are performed - UK or abroad

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Employment Income and Residence
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Foreign Income

• Interest from overseas investments
• eg foreign securities
• Foreign possessions
• eg dividends, pensions, profits from trades and
  rent from property

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Foreign Income

• Basis of assessment
• Must be resident
• If resident but not ordinarily resident, or not
  domiciled
• Remittance basis
• Otherwise (ie resident and ordinarily resident
  and domiciled)
• Tax on a current year basis calculating income
  (generally) in the same way as if it had arisen
  in the UK

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TRAVEL EXPENSES FOR WORKING ABROAD

• Employee
• resident and ordinarily resident inUK
• duties of employment performed wholly abroad
• Employer may provide (no benefit)
• travel from and to UK at start and end of
  appointment
• return journeys during the employment (any
  number)
• employees board and lodging costs
• two return journeys for spouse and children
  (under 18 at start of journey) provided absence
  at least 60 days

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TRAVEL EXPENSES FOR WORKING ABROAD

• Employee bears travel expenses himself
• only the costs relating to travel at the
  beginning and end of the appointment are
  deductible expenses

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Double taxation relief

• Double taxation agreements
• Made with many countries to avoid income being
  taxed twice
• eg dividends from abroad

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Unilateral double taxation relief

• Where no double tax agreement UK gives
  Unilateral double taxation relief for foreign
  tax suffered
• Lower of
• foreign tax suffered and
• UK tax due on foreign income
• UK tax due on foreign income is difference
  between
• Tax due on total income (including foreign
  income) and
• Tax due on income excluding foreign income

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Unilateral double taxation relief

• Example
• Margot a UK resident has the following income in
  2006-07
• 
  UK salary
  40,000Rents from
  foreign property (net of 20 withholding tax)
  8,000Calculate UK income tax for
  2006-07

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Unilateral double taxation relief

• Margot income tax 2006-07
• 
  Employment Income
  40,000Foreign income (8,000 x 100/80) 10,000
  
  50,000Less personal allowance
  5,035Taxable income
  44,965

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Unilateral double taxation relief

• Margot Income tax 2005-06 2,150 _at_ 10
  215.0031,150 _at_ 22
  6,930.0011,665 _at_ 40
  4,666.0044,965
  11,811.00Less double tax
  relief, lower of(a) foreign tax (2000)
  2,000.00(b) UK tax on foreign income
  (40 10,000)UK tax liability
  9,811.00

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Tax Planning When Working Abroad

• The following points highlight the pitfalls and
  planning possibilities to be considered when
  going to work abroad
• Timing is vital. Leaving just before the end of
  a tax year may enable the taxpayer to spend a
  complete year outside the UK so qualifying for
  non-resident status
• Insurance policies are available to cover the
  risk of extra tax liabilities should an early
  return to the UK be necessary.

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• If the employer bears the cost of board and
  lodging abroad, this will represent a tax-free
  benefit. The employee may visit home as many
  times as he likes without the costs being taxed
  as benefits. Likewise, for absences of 60 days
  or more, travelling expenses for a spouse and
  minor children are also tax-free if paid or
  reimbursed by the employer. Up to two return
  visits per person per year are allowed.
• Where the remittance basis applies it may be
  advisable to keep funds abroad separate so that
  it can be proved that sums remitted to the UK are
  capital (not subject to income tax) or income
  from a specific source.

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• Having established non-residence in the UK, any
  UK investments should be reviewed to ensure they
  are still tax effective.
• Bank and building society interest, may be paid
  gross where the deposit-taker is given a written
  declaration that the recipient is not ordinarily
  resident in the UK.
• Consider carefully the tax system in the foreign
  country concerned and the terms of any double
  taxation agreement. The UK has such agreements
  with most countries they contain rules on where
  income and gains are to be taxed, and on other
  matters.