UK Income Tax For Non-UK Residents
Once you have worked out if you are UK resident or not, you can then determine how you will be taxed in the UK, if at all, as a non-UK resident. If you are non-UK resident, you should only be liable to UK income tax on your UK sourced income. Sometimes determining the source of income is not straightforward but in most instances it will be obvious.
You will only receive a UK personal allowance if you are a citizen of the European Economic Area (which includes British passport holders) or you worked for the UK government during the tax year.
As a non-UK resident, you can claim to be taxed under section 811 Income Tax Act 2007. Under this provision, income tax on “disregarded” income (for example, bank interest, dividends and certain pensions) is restricted to the tax deducted at source. So, for example, you may be in receipt of UK bank interest of £100, and tax of £20 has been deducted at source. No further UK income tax will be payable by you. If you have elected to receive bank interest gross, there will be no UK income tax liability in relation to this income. Electing to be taxed under this provision does result in the loss of your personal allowances but can be advantageous in the right circumstances.
Renting UK Property
Many UK expatriates continue to own UK property when they leave the UK which is then rented out. It is important that your UK tenant or letting agent is aware that you, as the landlord, are not UK resident as UK basic rate income tax should be deducted from rental payments and paid to HMRC (either by the tenant or the letting agent).
Non-UK resident landlords can apply to HMRC for the rental income to be paid gross through the Non-Resident Landlord Scheme. If approved, you can receive the rent without deduction of tax at source; however, you will still be required to complete a UK tax return every year and UK income tax will be payable on your net rental profit.
Typically you will need to keep a record of expenses, eg loan interest, letting agency fees, repairs and similar so you can prepare accounts to support your income tax return.
Receiving Loan Interest
If you are Caymanian resident and in receipt of UK sourced interest on a loan to a UK resident person, the borrower will be obliged to deduct income tax from loan interest payments. You should have no further UK income tax liability if you are taxed under the disregarded income rules mentioned above.
Working in the UK
As can often be the case, you may still be required to travel to the UK for work even if you no longer live in the UK, whether you are employed or self-employed.
As long as the duties you carry out in the UK are merely “incidental” to the duties that you carry out overseas, you will not be subject to UK income tax on your earnings. Examples of incidental duties include meeting clients whilst visiting the UK or spending a short amount of time training in the UK.
If the duties carried out in the UK are non-incidental, for example, similar to the duties carried out overseas or if you are a director attending board meetings in the UK, the earnings related to your UK duties will be subject to UK income tax. It is important to note that HMRC are unlikely to agree UK duties are merely incidental if you are a director.
If you have to spend time working in the UK then care must be taken regarding the number of days you spend in the UK because this might have an impact on your residence position. Typically if you work in the UK for less than 31 days and work sufficient hours overseas, then you should not be considered UK resident and may also be able to split the tax year if the tax year is a year of departure. The rules are complex and the way they are drafted mean that it is only possible to determine your residence position with certainty in retrospect.
If you are obliged to work for a UK subsidiary of a Cayman entity it is likely that that UK entity will have reporting obligations depending on the number of days you are working in the UK. In addition you may be subject to Pay As You Earn (broadly your UK company will have to operate a payroll for you) on a proportion of your UK earnings. Your employer can agree with HMRC how much of your salary is taxable in the UK through a specific clearance process.
If you work for your own Caymanian company in the UK not only will you need to consider your own tax position but you will also need to consider the tax position of your Caymanian company. For example, you may need to consider the place of residence of your company (it could be in the UK) or whether the company has a permanent establishment in the UK.
If you carry out a trade, profession or vocation wholly in the UK, you will be liable to UK income tax on the profits generated. If the trade, profession or vocation is carried on partly in the UK and partly overseas, you will be liable to UK income tax on the profit from the part of the trade carried on in the UK.
This can be a complex area of tax and it is recommended that you seek tax advice as there are many issues to consider, such as the creation of a permanent establishment and the application of double tax treaties, to name but a few. The Cayman Islands does have a double tax treaty with the UK but it is narrowly drafted and therefore can only be relied upon in certain limited circumstances.
Capital Gains Tax (“CGT”) for Non-UK Residents
Broadly speaking, non-UK residents are not liable to CGT on the sale of either UK or foreign assets, although there are a couple of exceptions to this discussed below. As a general rule, best practice is to wait until the tax year following the date of your departure before disposing of any assets which will realise chargeable gains.
When you leave the UK you may be subject to CGT on the disposal of assets the tax year of departure, if you fail the conditions to split the tax year into resident and non-UK resident periods.
From 6 April 2015, you will be subject to CGT on the disposal of any UK residential property (let or otherwise). Broadly speaking, you will be subject to CGT on gains arising after April 2015 and you will be entitled to the Annual Exempt Amount. You may be able to claim principal private residence relief if the sale is a disposal of your main home, although this will only be in point if you or your spouse/civil partner were living in the UK in the tax year the sale takes place, or you or your spouse/civil partner stayed overnight in the property at least 90 times in the tax year (which may impact upon your UK residence status).
If you are thinking of returning to live in the UK, you should bear in mind that there is a CGT “temporary non-resident” rule, which is discussed in more detail below.
If you dispose of an asset used for the purposes of a trading activity carried on in the UK then you can also be subject to CGT.
Annual Tax on Enveloped Dwellings (“ATED”)
This may not immediately apply to you but if you choose to own residential property through a company you need to bear in mind that UK and foreign resident companies and other corporate bodies that own UK residential properties valued at more than £500,000 are likely to be within the ATED regime. If this is the case, the corporate vehicle will be to an annual tax charge and CGT on any chargeable gain realised on the sale of the UK residential property. The gain chargeable is the “ATED-related” gain, ie the gain arising during the period/s the company was subject to the ATED regime.
There are exemptions from the ATED and CGT rules for genuine property businesses, for example if the UK property in question is let out to unconnected third parties, some of these rules would not apply (albeit, there would continue to be on-going compliance obligations for the company).
Inheritance tax (“IHT”)
All Caymanian residents should have an eye on UK IHT. Simply owning UK assets directly can bring you within the charge to UK tax even though you may have no other connections. For example you may have a portfolio with an investment manager. Assuming you are non-UK domiciled, if that portfolio contains UK shares then you may have a liability to IHT on your death. You can insurance against this risk but this needs to be done carefully. Alternatively, you can consider how you own such investments: typically such investments are held via an overseas company.
From 6 April 2017 any UK residential property, however that property is held, is within the scope of IHT, even if let out to third parties. There are exemptions for private residences held but they are limited. If you own shares in a Caymanian company owning UK residential property then the value of the shares will no longer be outside the scope of IHT. There are also significant risks where such property is ultimately owned by a trust which may be settled by you. In these circumstances if you can still benefit from the trust, the assets may be regarded as being in your estate by virtue of some rules called the gift with reservation of benefit rules. Once again, risks can be managed by obtaining appropriate levels of life insurance which should provide funding provided it is correctly held.