As an accounting practice, we understand that dealing with tax obligations can feel overwhelming, especially when you’re unsure about your residency status and how it impacts your tax responsibilities. The rules around residency and tax are straightforward in principle, but the details matter, and getting it right is crucial to avoid unexpected bills or penalties.
Understanding residency for tax purposes
Your residency status determines what taxes you’re liable for in the UK. Simply put, if you’re a UK resident, you’re usually taxed on your worldwide income. If you’re not a UK resident, you’re generally taxed only on your UK income.
But how do you determine if you’re a UK resident? The Government uses the Statutory Residence Test (SRT), which looks at the number of days you spend in the UK, your connections to the country, and other relevant factors.
The Statutory Residence Test explained
The SRT is the main tool used to determine your residency status. It’s broken down into three parts:
- Automatic Overseas Test: If you meet certain conditions, like spending fewer than 16 days in the UK in the tax year, you’re automatically classed as a non-resident.
- Automatic UK Test: If you meet conditions such as spending 183 or more days in the UK in the tax year, you’re automatically considered a UK resident.
- Sufficient Ties Test: If neither of the above tests applies, this test considers your connections to the UK, such as family, accommodation, or work, along with the number of days you spend in the country.
Each test requires careful consideration of your circumstances. Even minor changes, like spending just one more day in the UK, could change your residency status and, consequently, your tax obligations.
Tax implications of UK residency
Once you know your residency status, the next step is understanding how it affects your tax obligations. If you’re a UK resident, you’ll need to declare your worldwide income, which includes:
- Income from employment
- Profits from self-employment
- Rental income from property
- Interest on savings
- Dividends and other investment income
- Pensions
If you’re a non-resident, you must only declare and pay tax on your UK income. This might include income from a UK property, profits from UK business activities, or earnings from UK employment.
For the 2024/25 tax year, the UK personal allowance remains at £12,570. This means that the first £12,570 of your income is tax-free. Beyond this, income tax rates are 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.
Non-residents don’t automatically get the personal allowance, but you might be entitled to it if you’re a citizen of an EEA country or have other specific circumstances. It’s worth checking if this applies to you, as it could significantly reduce your tax bill.
Capital gains tax and inheritance tax
Residency also impacts your liability for Capital Gains Tax (CGT) and Inheritance Tax (IHT). If you’re a UK resident, you’ll pay CGT on the sale of assets both in the UK and abroad. Non-residents, however, generally only pay CGT on UK property and land.
The CGT allowance for the 2024/25 tax year is £3,000, down from £6,000 in the previous year. Any gains above this threshold are taxed at 10% for basic rate taxpayers or 20% for higher and additional rate taxpayers (or 18% and 28% on residential property).
Inheritance Tax (IHT) is another area where residency matters. If you’re a UK resident, your entire estate is subject to IHT at 40% on amounts above the £325,000 threshold. Non-residents, however, are usually only liable for IHT on UK assets.
Double taxation relief
One concern we often hear from clients is the risk of being taxed twice—once in the UK and once in another country. To mitigate this, the UK has double taxation agreements with many countries. These agreements ensure you’re not taxed twice on the same income, which can be a significant benefit if you have income from abroad or split your time between the UK and another country.
If you find yourself in this situation, using these agreements is vital. They can be complicated, but we’re here to help you navigate the process and ensure you only pay the tax you owe.
Practical steps to take
If you’re unsure about your residency status or your UK tax obligations, here are a few steps you can take:
- Consult with us: Understanding the details of your residency and tax obligations can be complex. We can provide tailored advice to ensure you meet your obligations and take advantage of any available tax reliefs.
- Track your days in the UK: Keeping a detailed record of your time in the UK is essential for determining your residency status.
- Review your connections: Consider how your ties to the UK might affect your residency status, such as property, family, or employment.
- Plan ahead: Whether you’re planning a move abroad or spending more time in the UK, understanding how your plans affect your residency and tax status is crucial. Early planning can help you avoid unexpected tax bills.
Final thoughts
Determining your UK tax obligations can be daunting, especially when your residency status is unclear. But with the right guidance, it doesn’t have to be. At GHLD, we’re here to provide you with clear, reassuring, and practical advice so you can focus on running your business.
If you’re unsure about your residency status or how it impacts your tax obligations, get in touch with us today. We’re here to help you understand your responsibilities and ensure you’re compliant with UK tax laws.
If you’re unsure of your UK tax obligations, please contact us to see how we can help.
