Taxation of international executives
The extent of the liability to U.K. tax on earnings depends upon the individual’s residence status in the United Kingdom. Prior to 6 April 2013, residence was based on case law and depended mainly on the length of time an individual spent (or intended to spend) in the United Kingdom, although it could also be affected by other factors such as whether or not he/she purchased accommodation in the United Kingdom. However, as these were deemed to be “uncertain and complicated residence rules”, the U.K. Government introduced a Statutory Residence Test (“SRT”) with effect from 6 April 2013.
The domicile status of the individual can also affect the tax liability and this is particularly relevant as many cross border inbound assignees are likely to be foreign domiciliaries (“non-doms”).
The taxation of non-doms has been significantly amended in the recent Finance Bill and the changes came into effect retrospectively from 6 April 2017. The main change is the introduction of the concept of “deemed domicile” for Income Tax and CGT and the alignment of the IHT concept of deemed domicile with the new Income Tax/CGT definition.
Broadly speaking this means that a non-dom now becomes deemed domiciled in the U.K. once they have been resident in the U.K for 15 out of the previous 20 tax years. Once deemed domiciled, the individual can no longer claim the remittance basis of taxation (unless subject to the £2,000 de minimis – see below) and is liable to U.K. IHT on their worldwide assets.
The anticipated impact of this change on short-term assignments should be minimal.
The other main change is targeted at those born in the U.K. and who had a U.K. domicile of origin but now asserts a foreign domicile of choice. Under the old rules, such an individual would benefit from the same U.K. tax treatment as other non-doms, notwithstanding their former links to the U.K.
Under the new rules however, while U.K. resident, they are treated as deemed domiciled for U.K. tax purposes even though they assert a foreign domicile of choice under general principles. As such, the individual can no longer claim the remittance basis of taxation (unless subject to the £2,000 de minimis – see below) and is liable to U.K. IHT on their worldwide assets (subject to a very short grace period).
The impact on those who fall within the scope of this change (i.e. U.K. resident, born in the U.K. with a U.K. domicile of origin but asserting a foreign domicile of choice) is likely to be materially adverse and advice should be sought immediately.
The article that follows is based on the law as it stands at the time of writing (January 2018). Further changes are being wrought to the taxation of non-doms by the Finance Bill currently before parliament. However, they relate primarily to offshore trusts settled by non-doms and are not expected to impact a significant number of assignees.
The maximum U.K. income tax rate for the tax year ending April 5, 2019 is 45% (the U.K. tax year that runs from 6 April 2018 to 5 April 2019 is commonly referred to as 2018/19).
The U.K. tax authority is known as Her Majesty’s Revenue and Customs (“HMRC”).
The official currency of the U.K. is the pound sterling, often referred to just as sterling or as the British pound (“GBP”). The U.K. has a decimal currency system with 100p (pence) making up GBP 1 (one pound).
Herein, the host country refers to the country to which the employee is assigned. The home country refers to the country where the assignee lives when he/she is not on assignment.
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