Taxation in the UK
Nobody would argue that the United Kingdom is one of the most attractive investment destinations. Its taxation system is complex and requires relevant knowledge in order to eliminate losses when starting a business or buying a property there. At the same time, it offers certain benefits and incentives; to use its full potential, you must look at it from different angles and use a thorough approach.
If you intend to move to the UK, it is advised to be prepared beforehand in terms of applicable taxes – this will help to foresee and avoid potential losses and problems. Our specialists are happy to analyse your situation and plan your move to the UK and further stay there.
UK taxation system includes both local and national taxes. National taxes are corporation tax, income tax, capital gains tax, petroleum revenue tax, inheritance tax, customs and stamp duties, and excises. There is only one local tax – Council Tax. National taxes make up 90% of contribution to the public purse.
If you want to set up a business in England, remember that all the profits are taxable irrespective of where the company is registered or trades. Companies that are non-UK tax residents must pay tax only on the profit received in the UK while profits received outside the UK are not taxable.
Individual UK tax residents and domiciles must pay income tax on all worldwide income. If you are a tax resident in the UK but a domicile in another state, then you must pay tax on all income received in the UK and foreign income brought to the UK.
How much you need to pay is worked out from company and self-assessment tax reports sent to the HMRC for every accounting period. Tax year in the UK runs from 6 April to 5 April the following year. A company can also change the dates of its accounting period.
Resident companies must pay corporation tax on all their profits irrespective of its origin. For taxation purposes, a resident company is a company incorporated in the UK or with headquarters in the UK. Non-resident companies are companies that have been trading in the UK through a representative office, and they have to pay UK tax on any profit related to that representative office.
Corporation tax is calculated for each accounting period. If a company’s accounting period is different from a standard fiscal year, then the profit is separately taxed at the rates applicable for each relevant period.
Corporation tax main rate for the year 2018/2019 starting on 1 April 2018 is 19%. For the year starting on 1 April 2020, it will be reduced to 17%. Lower rate of Corporation tax 10% is applied to profits earned from patented inventions. IP income taxed at 10% is not just income from exploiting patented inventions, it may also come from selling patented products.
Dividends received by the UK holding company from other UK companies or from overseas companies should benefit from an exemption from corporation tax, called the dividend exemption. If available this means that the UK holding company does not have to pay corporation tax on the dividends it receives.
If the holding company is a small company, then it doesn’t have to pay corporation tax on dividend received from subsidiaries either in the UK or overseas provided the UK has a double tax treaty agreement and a few additional conditions are satisfied.
If the holding company is not a small company, then the dividend exemption may still be available if the dividend is paid by a company which the holding company controls provided certain other conditions are satisfied.
Capital gains tax
Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) like shares or property that’s increased in value.
Companies do not pay CGT. Instead resident companies pay Corporation Tax on their chargeable gains which is currently set at 19%.
Non-resident companies must pay tax only on gains from selling or disposing of assets they have in the UK or from deals signed through a representative office. Capital loss can be set off against capitals gains only, not income, during the current of future tax periods.
For individuals, if you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets. You are liable to 10% to 28% CGT. Non-residents must report about chargeable gains from selling property within 30 days after they have arisen.
VAT in the UK is charged on many things including business sales of goods and services by UK companies. It is applied at every step of supply chain, for title transfer and for provision of services. Every UK-based company must register for VAT with HM Revenue and Customs (HMRC) if VAT taxable turnover is more than £85,000.
The standard VAT rate is 20%; reduced rate is 5% for some goods and services, e.g. children’s car seats and home energy. Zero rate is charged on exported goods, most food and children’s clothes.
Stamp Duty Land Tax
Both resident and non-resident buyers must pay this tax when buying a property or land in England and Northern Ireland. Tax rates vary based on the property value and legal status of a buyer.
The current SDLT threshold is £125,000 for residential properties and £150,000 for non-residential land and properties, meaning that you only start paying SDLT on the property and land price above those figures. Historically, the SDLT rate in the UK was fixed for every property, but since 2014 it has been charged on increasing portions of the property price:
- 0% for the first £125,000 of the property price;
- 2% for the next £125,000 (the portion from £125,001 to £250,000);
- 5% for the next £675,000 (the portion from £250,001 to £925,000);
- 10% for the next £575,000 (the portion from £925,001 to £1.5 million);
- 12% for the remaining amount (the portion above £1.5 million).
If you buy a house for £275,000, the SDLT you owe is calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT = £3,750
Stamp Duty Land Tax (SDLT) is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies.
Inheritance tax and taxable gifts
All assets located in the UK are taxed at the current rate of 40% IHT of the market value of the property on the date of death if the value of the estate is below the £325,000 threshold.
Property inherited by a spouse is exempt from taxation. For the rest of the estate, an untaxed allowance of £325,000 is provided. In some cases, this allowance can pass to a spouse and add up to their allowance, providing up to £1m of untaxed inheritance and other benefits to remaining beneficiaries.
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.
Tax residents and non-doms
Those who immigrated to the UK (so called non-doms) but keep receiving their main income abroad will benefit from the UK tax system most of all.
It’s important to define your tax residency status in the UK that can be done with a Statutory Residence Test. Our specialists will help you pin down your tax status in the UK or plan it in advance.
If you are a tax resident in the UK and receive income in any other country, you are liable to prepare and submit your personal tax return which is called Self-Assessment.
Taxes may also arise when you are buying real estate in the UK. Besides, both UK residents and non-residents should be aware of inheritance tax.
Our experts offer detailed and comprehensive consultations on relevant taxes and help you work out your tax strategy.
UK taxation explained with Imperial & Legal
There are many taxes that you might have to pay when starting a business or buying property in London or anywhere else in the UK. We have an extensive knowledge of the English taxation system which enables us to give you advice on any matter and help you reduce costs when starting a business or buying real estate. We make sure that taxes you have to pay in the UK are reduced to a minimum or even nil.
All you need to do is call us or send us a message via an online form on our website.