Determining tax residency as an expat can be tricky, but it’s also crucial to understanding your net income and how to comply with UK tax law while you’re out of the country.
Keep reading to find out the different obligations of UK residents and non-residents. Many expats assume they aren’t resident for UK tax purposes when they actually are, or overlook items that need to be declared even if they are considered non-resident.
Alternatively, you can jump ahead to the following sections. If you need clarification, you can contact us to speak to a professional.
- Non-Resident Status for UK Tax
- Residency Tests: Are you a non-resident or resident?
- How can I check my residency status?
- Tax Residency Certificates
- The HMRC and UK Residency
UK residents have to pay tax on their worldwide income, although this tax is subject to relief.
As a non-resident, you’d be taxed the same rates as a resident, but only on income you earn within the UK. This means that your residency status will dramatically affect what you need to pay in tax, both at home in the UK and abroad. Read more at mytaxresidency.com.
You’re typically considered “non-resident” for UK tax purposes the day after you depart to work full-time in a foreign country, if:
- Your employment contract abroad is for one year or more,
- You have departed the UK to begin this employment contract (not for holiday, even if it’s a brief one before you start work),
- You are absent from the UK for a full year. Any visits to the UK must be less than 183 days, and must average fewer than 91 days a year. Jump here to read more about the 183 Day Rule.
The UK has a series of Residency Tests that will determine whether you’re considered resident or non-resident.
Working abroad and spending significant portions of the tax year outside the country aren’t always enough to establish non-resident status. A “sufficient ties” test could qualify you as resident, so individuals looking to become non-resident should seek to mimimise the following “ties”:
- The family tie: You may be considered to have a sufficient family tie if you have a close family member who is a UK resident during the tax year in question. This generally includes a spouse or civil partner, or child under 18.
- The accommodation tie: A tie exists here if you have British accommodation available to you for a continuing period of at least 91 days in the tax year. You must also spend one or more nights there (this could even be a holiday home or other temporary accommodation).
- The work tie: You may have a work tie to the UK if you have worked there for three hours a day, 40 days per tax year.
- The 90 day tie: This is a tie if you have been in the UK for 90 or more days during the last two tax years.
- The country tie: You might also have a tie if you have been considered a British resident in one or more of the previous three tax years.
You can read more about the Sufficient Ties test and the different criteria for each tie in this article.
Even if you’re considered non-resident, you may still need to pay taxes on capital gains or be liable for other taxes arising from earnings or assets within the UK.
Be aware that the HMRC don’t always send a self-assessment return to non-residents who need to submit one. The non-resident is still responsible for submitting a tax return to declare his or her UK taxable earnings. It can also be in your best interest to file anyway, as this is the safest way to confirm that all expenses and allowances are claimed.
Filing a British tax return as a non-resident
Non-residents will still need to file a UK tax return and declare any income earned in the UK from self employment, directors’ fees, partnership profits, or bonuses received for work performed in the UK before non-resident status was established.
Non-residents must also declare income derived from property owned inside the UK, provided tax isn’t already being deducted under the Non-Resident Landlord Scheme (you can read more about this scheme here or simply jump ahead in this article).
Double taxation agreements
The UK has over a hundred double taxation agreements with different countries. These agreements ensure that individuals aren’t taxed double on the same earnings.
If you can confirm that you’re a resident in a foreign country while working abroad, you may be able to claim relief for UK income by filing a double taxation claim form.
Non-Resident Landlord Scheme
The Non-Resident Landlord Scheme is a scheme that taxes British rental income of non-residents. Essentially, it requires letting agents in the UK to subtract basic tax rates from any rent collected for non-resident landlords. You don’t have to be non-resident to be subject to the NRLS – it covers anyone whose usual abode is outside the UK.
However, you can potentially receive rent payments without the deduction of tax. To do this, you’ll need to get approval from the HMRC. Find out more about the NRLS and how to apply for payment of rent without tax deduction.
Although non-residents aren’t typically subject to tax on capital gains arising from the UK, you may still owe capital gains tax depending on several factors.
If your gains arise during a period of “temporary non-residence,” they could be liable for tax. Put simply, “temporary non-residence” is non-residency that has lasted for five years or less. As such, you should be careful when selling or disposing of assets even if you’re working abroad and are considered non-resident.
As an expat, it will be important to determine whether you can keep making national insurance contributions. If you don’t, you could potentially lose full entitlement to your state pension when you retire.
You’ll need to check both the terms of your contract abroad and the terms of the pension scheme. Generally for state pension, you can keep making voluntary contributions even while working abroad.
You also need to confirm your eligibility; generally, eligibility will be determined by how long you have lived in the UK and whether you’ve paid contributions in the past. You usually need to have lived in the UK for three continuous years, or have paid contributions for three years before going to work abroad.
For non-residents wanting to rent out property in the UK, you will be liable for UK tax, regardless of your residency status. Whoever is responsible for collecting the rent will typically be the one who deducts the tax at source, as dictated by the Non-Resident Landlord Scheme.
You can apply for rent payments without tax deduction, but be aware that this doesn’t make the income exempt; the rental income will still need to be declared on your self-assessment tax return.
The UK uses the “statutory residence test” to determine your residency for tax purposes. This involves a series of Automatic Tests. First, it’s important to understand the concept of domicile.
Your domicile is the country where your real or permanent home is located. An individual can only have one domicile at any given time. It’s generally where you intend to remain indefinitely, even if you leave it for a temporary period of time.
There are several different types of domicile:
- Origin: Domicile of origin is a person’s country of birth, or where your father considered his real or permanent home (or your mother, depending on your circumstances).
- Dependence: Anyone who is legally dependent on another person will take on that person’s domicile. For instance this usually means that children under 16 years of age will assume the domicile of their parents.
- Choice: Anyone 16 years or older in the UK can choose a domicile. This is important for expats, because it means that you can choose your own domicile by relocating there for work, without an intention to return to the UK. However, you will need to provide sufficient evidence that you have changed domicile - there are laws in place to ensure that UK citizens do not simply change domicile to avoid taxation.
While UK residents are taxed on their worldwide income, they can still seek relief under double taxation agreements for taxes paid in a foreign country.
Although both non-residents and residents are taxed at the same rates, non-residents are usually only liable for tax on earnings that arise from the UK.
A UK resident who is nonetheless not domiciled in the UK can choose to be taxed on a remittance basis, which means that income earned outside the UK will only be taxed if it’s brought back inside the UK. Click here for more information on paying on a remittance basis.
To determine tax residency, the UK has a “statutory residence test.” If you meet the first automatic test (the 183 Day Rule), you are considered resident and do not need to progress to the other tests.
However, keep in mind that even if you are not considered resident based on the first test, you might still be considered resident based on the other tests that follow it.
If you have spent 183 days in the UK during that tax year, you are considered resident.
While you are automatically considered resident if you meet this test, you are not automatically considered non-resident if you don’t. You might still be considered resident based on the other Automatic UK Tests, the Three Automatic Overseas Tests, or the Sufficient Ties Test.
All of these questions should be applied to relevant tax year.
First Automatic Overseas Test
- Were you in the UK for at least one of the previous tax years?
- Did you spend 16 days or less in the UK?
Second Automatic Overseas Test
- Have you been considered non-resident in the UK for the last 3 continuous tax years?
- Did you spend 46 days or fewer in the UK?
Third Automatic Overseas Test
- Did you work full time while in a foreign country? (Not sure if your work is considered “full time”? Double check using this formula.)
- Did you spend 91 days or less in the UK?
- Did you work less than 31 days inside the UK?
If you can answer “yes” to every component of at least one of these tests, you will have met the Automatic Overseas Test and are probably non-resident for tax purposes. If you didn’t meet any of these tests, you will need to move on to the Second and Third Automatic UK Tests.
The Second Automatic UK Test
If you own a home in the UK (or have previously owned one), then the Second Automatic Test will apply to you.
- Did you own a UK home for 30 consecutive days in the tax year?
- Were you present in this home for 30 days of the tax year?
- Did you have this home for a total of 91 back-to-back days?
- Did you not have a home abroad, OR a home abroad where you spent less than 30 days of that tax year?
The Third Automatic UK Test
- Have you worked in the UK for a period of 365 days? If so, does that period fall within the tax year in question?
- Did you spend at least 75% of the total work days in the UK during that period?
If you answered “yes” to all of the Second Test or both parts of the Third Test, then you are considered tax resident. If not, you should move on to the next test.
The Sufficient Ties Test
This test examines an individual’s “ties” to the UK. As mentioned in our section on becoming non-resident, there are four main ties that will be questioned: the family tie, accommodation tie, work tie, and 90 day tie.
For a detailed look on the Sufficient Ties Test and each of its components, please see this article.
This treatment occurs when someone’s tax residency changes partially through the tax year. This will be especially relevant if you’re an expat who has recently moved abroad to live and work.
There are eight different cases that cover split year treatment; the first three involve moving abroad, while the remaining cases are for those moving to the UK. Read up on all of the cases here.
You can use the information in this article to assess your residency yourself. For a more detailed, step-by-step walkthrough of the tests, click here.
You can also check your residency status through the HMRC – they have several means for ascertaining your status. One is an online tool, requiring registration with the HMRC. Note that this tool isn’t available all the time, since only a certain number of users may access it at a time.
HMRC also has a flowchart that can help you determine your residency.
You can request that the HMRC issue you a tax residency certificate. These are sometimes necessary for exemption or tax relief under DTAs between UKs and other countries. This certificate will provide evidence that you are entitled to the benefits under that treaty.
If you’re contacted by the HMRC, you should seek professional advice to ensure you’re clear about what kind of information you do or do not have to disclose. A professional can help clarify your case to the HMRC and guide you through your best course of action.
If you’re looking for more detailed information on the HMRC, see this article for a summation on HMRC points of interest and the costs of fighting tax cases.