This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “McCarthy Denning“ is an excellent option in the United Kingdom.
This is the second part of “Corporate and Personal Taxes in the UK”. If you want to read the first part, click here.
There are currently three stamp tax regimes in the UK as follows. Stamp duty land tax (‘SDLT’) is a transfer tax charged on transfers of UK land transactions of whatever nature (subject to exemptions) regardless of the residence of the parties. The old slab system was replaced by the slice system so SDLT for residential property applies to slices of consideration rather than to all the consideration. For transfers of residential freeholds (or leases where the only consideration is a premium) the rate of duty starts at 2% for transactions in excess of £125,000 but not more than £250,000, 5% where the consideration is more than £250,000 but not more than £925,000, 10% where the consideration is more than £925,000 but not more than £1,500,000, rising to 12% for transfers over £1,500,000. Higher rates of SDLT (applying an additional 3% levy) will apply to purchases of additional UK residential properties in England, Wales and Northern Ireland such as second homes and buy to let properties acquired for more than £40,000. A higher rate of 15% may apply to all the consideration where certain non-natural persons (such as a company) purchase an interest in a single residential property for more than £500,000.
Leases are generally chargeable at 1% of the net present value of the rentals under the lease (applying a 3.5% discount rate) where the net present value exceeds £125,000 in the case of residential property and £150,000 in the case of non-residential. Stamp duty reserve tax is a transfer tax charged on agreements to transfer UK shares and securities and on foreign shares and securities which retain a register of shareholders in the UK. The rate of charge is generally ½% of the consideration. Stamp duty is payable on the transfer of UK shares and other marketable securities (where the consideration is over £1000) at the rate of ½% and cancels any stamp duty reserve tax which may be payable. Stamp duty is not chargeable on transfers of most other assets. There is no capital duty in the UK.
2.- Value-Added Tax
VAT is a tax paid when goods or services are bought from a VAT-registered business in the EU, including within the UK. VAT is not paid on all goods and services, and sometimes it is paid at a reduced rate. In some circumstances, refunds of VAT paid may be claimed,
Each EU country has its own rates of VAT. In the UK there are three rates.
- Standard rate. The standard rate of VAT on most goods and services in the UK is 20 %.
- Reduced rate. In some cases, for certain fuel and power, some energy saving materials, some residential property works etc. VAT is paid at a reduced rate of 5 %.
- Zero rate of 0% There are some goods on which VAT is not paid, like most food items, books, newspapers and magazines and children’s clothes.
The Government’s MTD project, to be introduced under the Finance (No. 2) Bill 2017, will apply to VAT from April 2019 for businesses with a turnover in excess of the VAT registration threshold, subject to certain exemptions
3.-National Insurance Contributions
Employer’s national insurance contributions are payable at the rate of 13.8% on earnings in excess of £157 per week. Employees national insurance is payable at the rate of 12% for earnings between £157 and £866 per week and at 2% thereafter. For higher paid employees therefore the highest rate of tax is 47% being 45% income tax and 2% employee’s national insurance.
1.- Residence and Domicile
An individual’s liability to tax in the UK is determined by his residence and domicile status. Up until April 2013, the terms “resident”, “ordinarily resident” and “domiciled” were not defined in UK legislation so it was necessary to rely on case law and the practice of HMRC. A Statutory Residence Test (‘SRT ”) was introduced with effect from April 2013. The SRT is quite complex and requires a series of tests to be considered. Under the new rules an individual will be treated as tax resident in the UK if he satisfies one of the Automatic UK Tests or the Sufficient Ties Test, and does not satisfy one of the four Automatic Overseas Tests. In addition, the Government has abolished the concept of ordinary residence although it has been replaced by legislation that allows short-term UK resident, foreign domiciled employees to continue to claim the remittance basis where part of their duties is carried out overseas.
Domicile is a fundamentally different concept from residence. Unlike residence, it is not possible to have more than one domicile at any one time and it is not the same as nationality. Essentially, it is the place where an individual has his real home, and has the strongest cultural, economic and family links, and where he ultimately intends to reside. UK domiciled individuals are assessable on their worldwide income and gains.
Domicile can have a significant effect on UK tax liabilities. Resident non-UK domiciled individuals need not pay UK tax on income and capital gains arising overseas if they are not remitted to the UK. The remittance basis results in an individual paying tax on foreign income and capital gains by reference to amounts brought into the UK. Individuals domiciled outside the UK who use the remittance basis will pay an additional £30,000 charge if they have been resident in the UK for at least seven out of the nine preceding tax years, £60,000 if they have been resident in the UK for at least 12 years out of the 14 preceding tax years and £90,000 if they have been resident in the UK for at least 17 years out of the preceding 20 years. They will pay higher rate tax at 40% on remitted foreign dividends
It was intended that various reforms would be included in the Finance Act 2017 and take effect from 6 April 2017. The relevant clauses were included in the Finance Bill 2017 when it was first published on 20 March 2017. However, they were dropped from the Bill following the sudden announcement of the June 2017 general election. Now the Summer Recess is over, the Government is in the process of publishing revised provisions of the Finance (No 2) Bill 2017 so there will be further changes to the remittance rules. Under the Finance (No. 2) Bill 2017, one of the main changes will be the amendment to the deemed domicile rules with effect on and from 6 April 2017. The legislation provides that those who are not domiciled in the UK will be deemed UK domiciled for tax purposes if they have been UK resident for more than 15 out of the last 20 tax years or if they are born in the UK with a UK domicile of origin. Also the inheritance tax benefit of a non-domiciled individual holding UK residential property through an offshore structure has been removed.
2.-Individual Tax Rates (for the tax year 2008/2009)
Dividends* Savings Other
£1-£33,500 7.5% 20%** 20%
£33,501-£150,000 32.5% 40% 40%
Over £150,000 38.1% 45% 45%
* New dividend nil rate band on first £5000 of an individual’s dividend income (reduced to £2000 from April 2018)
** Personal savings allowance results in nil rate on £5000 of savings income where taxable income other than savings and dividends is below the upper limit of the starting rate band.
Dividends are treated as the top slice of total income, savings as the next slice and other income as the lowest slice.
Inheritance tax is due on an individual’s estate on death, on gifts within seven years of death and on certain lifetime gifts. It is charged at the rate of 40% on transfers in excess of £325,000 for the tax year 2017/2018 To the extent that chargeable transfers exceed the nil rate band, the tax rate is 20% for lifetime transfers where the donor survives seven years and 40% for transfers on death and in the three years preceding death. A tapered inheritance tax charge applies to gifts made between three and seven years before death. Inter spouse transfers are free of tax provided either both are domiciled or non-domiciled in the UK for inheritance tax purposes. The rules differ where the transferee spouse is non-domiciled but the transferor spouse is domiciled.
An additional nil rate band of £100,000 (for 2017/18), £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21 is available where a residence is passed to direct descendants. Any unused nil rate band can be passed to a spouse or civil partner.
4.-Capital Gains Tax
Individuals are subject to capital gains tax on their chargeable gains subject to the annual allowance and other exemptions and reliefs. Capital gains tax also applies to other entities that are not companies such as trustees and personal representatives. Gains are taxed for a “year of assessment”. Each year of assessment starts on 6 April and finishes on 5 April in the following year. Under the capital gains tax regime, an individual is taxed on gains arising in a year of assessment during any part of which the individual is resident in the UK. The rate of capital gains tax is 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers and trustees and PRs. However, for disposals of UK residential property the rates are 18% and 28% respectively where principal private residence relief is not available. The annual allowance is £11,300 for 2017/18 (and £5650 for trustees).