US citizens moving to the UK part 2: Understanding the UK tax system

Key takeaways:

• UK tax residence is determined by the Statutory Residence Test, which is separate from immigration status and based on days spent in the UK and ties to the country.
• Qualifying new residents can claim the foreign income and gains (FIG) regime to exempt most non-UK source income and gains from UK tax for their first four years of residence.
• Income Tax rates reach up to 45% and Capital Gains Tax rates reach up to 28%, but the US/UK double tax treaty may help to prevent taxation on the same income in both jurisdictions.

How HMRC operates: The basics of UK tax administration

His Majesty’s Revenue and Customs (HMRC) is the UK’s tax authority, equivalent to the US Internal Revenue Service (IRS). HMRC is responsible for the collection and enforcement of UK taxes. Generally, the UK operates a self-assessment system of taxation. Whilst in certain cases tax is deducted at source, self-assessment means that the taxpayer is responsible for working out their UK tax liability, reporting information to HMRC and paying the correct amount of UK tax.

A person’s UK tax position is considered on a tax year by tax year basis, and the rules relating to tax residency are distinct from the immigration rules. In contrast to the US tax year, which is based on the calendar year, the UK tax year runs from 6 April one year to 5 April the next year.

Income and capital gains: How UK tax residence affects you

Broadly, exposure to UK tax on income and capital gains depends on whether an individual is a UK tax resident in a given UK tax year, irrespective of the individual’s citizenship, nationality or residency for immigration purposes. In most cases, a UK tax resident is subject to UK Income Tax (IT) on their worldwide income and UK Capital Gains Tax (CGT) on their worldwide gains. In certain circumstances, this will include income and gains generated within entities that are owned or controlled by the taxpayer. Meanwhile, a non-UK tax resident is subject to IT and CGT on specific income and gains only, for example UK source income. Certain reliefs and exemptions may be available to reduce an individual’s IT and CGT exposure.

The Statutory Residence Test: Determining your UK tax residence

UK tax residence is established by applying the UK’s Statutory Residence Test (SRT). The SRT is complex and multi-layered, but it has the benefit of providing certainty as to whether an individual is or is not UK tax resident for the relevant tax year. The SRT contains various tests which may result in an individual being automatically non-UK tax resident or automatically UK tax resident, for example due to the amount of time spent in the UK, where the individual has a home or where they work.

If none of the automatic tests apply, UK tax residence is established according to the number of specific ties the individual has to the UK combined with the number of days the individual has spent in the UK in the relevant tax year. The specific ties include whether the individual has a UK resident spouse or minor child, whether the individual has available accommodation in the UK and how much time the individual spends working in the UK. If an individual spends more days in the UK than allowed for their number of UK ties, they will be UK tax resident for that tax year.

Concessions for new arrivals: The FIG regime

“Qualifying new residents” (QNRs) can take advantage of the foreign income and gains (FIG) regime to exempt most types of non-UK source income and gains from IT and CGT respectively in their first four tax years of UK tax residence. A QNR is an individual who becomes UK tax resident after having been non-UK tax resident for at least ten consecutive tax years. To take advantage of the FIG regime, the QNR must claim the exemption in their tax return for the relevant tax year or years and identify the income and gains to which the claim should apply. For US taxpayers, this level of disclosure may be similar to what they already report in the US. 

A key part of any pre-immigration planning is ensuring that any sources of income and gains remain “foreign” and are not accidentally brought into the UK, along with the new resident.   This is covered in more detail in part 3 of this series.

UK tax rates and national insurance contributions

IT is based on the type and amount of income received. Currently, IT is charged at rates up to 45%. CGT is charged at rates up to 28%. Fortunately, US persons living in the UK may be able to benefit from the double tax treaty between the US and the UK to avoid tax on the same income and gains in both jurisdictions.

In the UK, social security contributions are known as National Insurance Contributions (NICs). NICs are generally payable if you are employed or self-employed in the UK, subject to a de minimis threshold. The US and the UK have a Social Security Totalisation Agreement that can prevent dual liability for US Social Security and UK National Insurance contributions and may allow periods of work in both countries to be taken into account when determining entitlement to benefits.

This is part 2 of our eight-part series, US citizens moving to the UK. Read the other posts in this series for guidance on immigration, inheritance planning, healthcare, banking, housing and education.

Tags:  UK Tax | Tax Residence | Income Tax | Capital Gains Tax | National Insurance