Tax on foreign income as a UK Tax Resident

Over recent years we have seen growing focus from HMRC in targeting UK tax resident individuals with offshore sources of income.  This offshore income includes but is not limited to for example bank interest, overseas rental income, overseas dividends, gains etc. 

Under various Automatic Information Exchange Agreements, HMRC have access to individuals overseas financial information such as details of their overseas bank accounts/assets.  In light of this, from 1 October 2018, HMRC are introducing a Requirement to Correct which would impose severe penalties on non-compliant individuals who have tax underpayments arising on their offshore income.  If you are a UK Tax Resident individual with offshore sources of income, we would therefore recommend undertaking a review of this and if required, making a disclosure to HMRC as soon as possible before 1 October 2018.

Overview – Taxation of foreign income

As a UK tax resident individual, broadly you would be taxable on your worldwide income on an arising basis.  This is irrespective of whether or not any taxes on the income have been paid overseas.  The only exception to this is where for example you are considered Non-UK Domiciled.  Determining your domicile status is not straightforward and would involve reviewing your country of birth, links to your country of birth, the birth country of your father etc. 

As a Non-UK Domiciled individual, you can elect to be taxed on a remittance basis.  This means that you would only be taxable on your foreign income if you bring/remit this into the UK.  However, please note, depending on your circumstances e.g. how long you have lived in the UK, making this election can in some cases be less beneficial and could result in an additional cost to you.   Advice should therefore be sought before automatically assuming that you are Non-UK Domiciled and before making this election.

Automatic Exchange of Information Agreements (AEIAs)

Automatic Exchange of Information agreements are made between the UK and other countries. These agreements allow the exchange of information between tax authorities of different countries about financial accounts and investments to help stop tax evasion.

HMRC will receive information from other countries about UK residents with financial accounts and investments overseas. The UK has Automatic Exchange of Information agreements under 4 regimes.

• United States Foreign Account Tax Compliance Act (FATCA)

The agreement between the UK and USA requires UK financial institutions to report to HMRC on US customers that hold accounts with them.

• Crown Dependencies and Overseas Territories

The agreement between the UK and its Crown Dependencies and UK Overseas Territories to report on those who are tax residents in one territory and hold accounts in the other.

• Common Reporting Standard

The standard for all automatic exchange of financial information.

• Directive on Administrative Co-operation

The Directive which applies the Common Reporting Standards throughout the European Union.

We are already seeing instances where some of our clients have received notices/enquiries from HMRC regarding their offshore income and overseas bank accounts. For your reference, an example HMRC letter can be found here.

Worldwide Disclosure Facility (WDF)

In light of the above, HMRC is offering individuals an opportunity to make a disclosure and settle any underpayments of tax arising on their offshore income under the WDF.  Disclosures made under this facility would attract a much lower penalty compared to the penalty regime which would apply from 1 October 2018.

How We Can Help

If you are a UK tax resident individual with overseas (non-UK) sources of income, we would recommend that you undertake a review of your arrangements and if required make a disclosure to HMRC.  Some of the ways in which we can support you include: -

• Reviewing your circumstances to determine whether you are impacted and advising on next steps.
• Assisting you with responding to any HMRC enquiries/letters that you may receive.
• If you need to make a disclosure to HMRC, liaising with HMRC on your behalf to settle the liabilities and minimise any penalties HMRC may seek to impose.
• Assisting you with preparing your UK self-assessment tax returns and reporting your foreign income.