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United Kingdom

The UK imposes three direct taxes on individuals: income tax, capital gains tax and inheritance tax. The UKs is a low-tax country by European standards, and enforcement is strict. Aspects of the tax system are complex, particularly relating to capital gains tax.

The UK tax treatment of individuals depends on whether a person is resident, ordinarily resident and/or domiciled in the UK.

Where an individual is resident, ordinarily resident and domiciled in the UK, that person is subject to UK income tax and capital gains tax on worldwide income and gains, whether or not received in the UK, subject to the provisions of an applicable tax treaty.

There is a limited exception for seafarers. As discussed below, not all UK residents are subject to worldwide taxation.

Taxable income and rates
Employment, trading and investment income (other than dividends) are taxable at marginal rates of up to 40%. The marginal rates of personal tax for the 2008/09 fiscal year are 20% on the first GBP 34,800 of taxable income and 40% on taxable exceeding this amount (32.5% on dividend income).

Dividend income is taxable at 32.5%, with dividends from UK companies (and some foreign dividends from April 2008) carrying a 10% tax credit, resulting in an effective tax rate of 25%. UK-source royalties and fees paid to UK residents are usually subject to a 20% withholding tax; the withholding tax on interest is also 20%. The tax rates on dividends are 10% for income up to the basic-rate limit (GBP 34,800 in 2008/09) and 32.5% for income exceeding that level.

Capital gains tax is payable at a rate of 18% on all disposals after 5 April 2008. For these disposals, there is a special rate of 10% on the first GBP 1 million of capital gains. This GBP 1 million threshold is a "lifetime" limit per individual.

There was formally a system of "taper relief", which reduced the amount of gain chargeable to tax based on the number of years an asset had been held. For business assets, the percentage of gain chargeable ranged from 100% for assets held less than one year to 25% for those held two years or longer. For non-business assets, the percentage ranged from 100% for assets held less than three years to 60% for assets held 10 years or longer. This regime ended on 5 April 2008.

Various assets escape capital gains tax: gains on the sale of a principal residence, on most life insurance policies, on national savings certificates and on bonds (in most circumstances). When the gains are reinvested, capital gains tax may be deferred for business assets, "heritage property" and farmland, subject to restrictions on the classes of assets into which funds are reinvested. Deferral for personal investments is much more restricted.

Determination of taxable income 
The tax year for personal taxpayers is 6 April to 5 April.

Earned and unearned (investment) income, whether from domestic or foreign sources, are combined to arrive at taxable income. Income from employment is assessed on a current-year basis and is normally withheld by the employer under the pay-as-you-earn system. Dividends and other unearned income are assessed on the year's receipts. The timing of the taxation of income from self-employment will depend on the year-end of the business. Husbands and wives are normally taxed independently on all income, although anti-avoidance provisions may, for example, treat income arising from certain gifts as taxable to the settlor.

Employees may deduct expenses incurred wholly, exclusively and necessarily in the performance of their duties, such as for travel (but not travel to their normal place of work) and protective clothing. Allowable deductions have been tightened in recent years. Neither national insurance contributions nor medical insurance premiums are deductible.

UK residents are entitled to personal allowances. The personal allowance deductible in calculating taxable income in 2008/09 is GBP 6,035. Special allowances exist for persons older than age 65 and for the blind. A tax-free child benefit also is granted.

Expatriate allowances must be included in taxable income, although an exemption is available for certain subsistence expenses where the employee intends to be in the UK for two years or less.

Unless the employee earns less than GBP 8,500 per year (including reimbursed expenses and benefits in kind), benefits are liable for tax. Employer-paid healthcare also is a taxable benefit.

Share-incentive, pension and certain savings schemes may confer tax advantages if they comply with the rules of HMRC. The tax deductibility of private pension contributions is limited to the lower of 100% of annual salary or GBP 235,000 (for 2008/09), subject to certain conditions.

Special expatriate tax regime
Certain UK residents are not subject to worldwide taxation. For example, an individual who comes to the UK to work and becomes resident in the UK but does not become ordinarily resident and is regarded as having a non-UK domicile (often described as permanent home) might be subject to UK tax in respect of non-UK duties only if the remuneration relating to those duties is remitted to the UK. Similar opportunities arise for a foreign national who, although not UK-domiciled, becomes UK resident and ordinarily resident. In that case, the remittance basis might apply to earnings from the individual's overseas duties provided the duties are performed under a separate employment with a non-UK-resident employer and all duties are performed outside the UK. What constitutes a remittance and an employment is complicated and is based on case law.

Similar rules also limit the taxation of non-UK investment income or capital gains on non-UK assets of individuals who are not domiciled in the UK to a remittance basis.

From 6 April 2008, the remittance basis will only be available to individuals who have been UK tax residents for seven out of the previous 10 years if they elect for this basis and pay a GBP 30,000 annual charge.

The above measure is part of an ongoing review of the taxation position of non-UK domiciliaries by the UK government.

Capital taxes
In addition to capital gains tax, individuals are subject to inheritance tax (IHT). Generally this only applies upon death, to the value of the estate and gifts made within the previous seven years subject to a reduction for gifts made between four and seven years before death. IHT is payable on assets in excess of GBP 312,000 at a rate of 40%. In most cases, IHT is not due at the time of a gift provided it is a 'potentially exempt transfer', which generally includes an outright gift to another individual.

For individuals domiciled in the UK, IHT applies to worldwide assets. Although there are reliefs, for example, for certain business property, there is no exemption for a private residence. Lifetime transfers or transfers on death to the individual's spouse are exempt from IHT provided the donee spouse has a UK domicile. If the donee spouse has a non-UK domicile, the exemption only applies to the first GBP 55,000.

Where an individual subject to IHT does not have a UK domicile, the IHT broadly only applies to UK situs assets.

For IHT purposes (but not for income tax or capital gains tax) an individual will be deemed to be UK-domiciled if resident in the UK for 17 out of the past 20 years.

The treatment of foreign nationals and foreign property may be affected by a relevant double taxation agreement.


Source: Deloitte

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