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12. Glossary

Glossary of some of the terms we use

The following are simple explanations of some of the terms used in this guidance. These will help you to understand some basic concepts. In many cases they are supported with more detailed information elsewhere in the guidance. They are set out alphabetically.

12.1. Abroad/foreign

In this guidance abroad and foreign refer to any country outside the UK (see 12.24). The Channel Islands and the Isle of Man are abroad (except in the limited context of certain bilateral Social Security Agreements). If you have bank accounts or investments in the Channel Islands or the Isle of Man they are foreign or abroad from the UK (often referred to as offshore). If you are resident, domiciled and ordinarily resident in the UK, you will still be liable to UK tax on any interest you receive from such accounts and investments.

12.2. Accrue

Accrue is a term used when talking about capital gains (see 12.4). A gain ‘accrues’ on an asset when its increase in value during the period you have owned it is realised for Capital Gains Tax purposes. You can realise the value of an asset in a number of ways for Capital Gains Tax purposes. For example, by selling, exchanging or giving away an asset.

12.3. Arising basis

A person who is resident in the UK is normally taxed on the arising basis. This means that they will pay UK tax on all of their income as it arises and on their gains as they accrue, wherever that income and those gains are in the world.

When you are taxed on foreign income and/or gains on the arising basis you might find that your foreign income/gains have already been taxed in the country in which they are located. That does not mean that they are not taxable in the UK. You must still declare all of your foreign income and gains. In many cases, relief is given in the UK for foreign tax paid on foreign income and gains under the provisions of the relevant Double Taxation Agreements (see 12.6) or via unilateral relief. Even if no UK tax is payable because it is covered completely by the foreign tax you have paid you can only claim relief under a Double Taxation Agreement by completing a Self Assessment tax return.

12.4. Capital gains and Capital Gains Tax

Capital Gains Tax is a tax on the profit – ‘gain’ – you make when you dispose of assets. In the context of capital gains, ‘dispose of’ means sell, exchange or give away, and it also includes part-disposals and some other events involving assets which the law says shall be treated as disposals. You don’t pay Capital Gains Tax on some assets, for example personal possessions worth £6,000 or less, or in most cases, your main home.

You usually have to work out if there is any Capital Gains Tax to pay if you:

• • sell, give away, exchange, or cease to own – ‘dispose of’ – all or part of an asset
• • receive a capital sum, such as an insurance payout for a damaged, lost or destroyed asset.

Common items that attract Capital Gains Tax when they are disposed of include:

• • land
• • buildings, for example a second home
• • personal possessions such as a painting or jewellery worth more than £6,000
• • shares or securities
• • business assets, for example business premises or goodwill
• • foreign currency which you bring to the UK to spend
• • foreign currency which you dispose of to acquire other assets.

You don’t have to pay Capital Gains Tax when you sell personal belongings worth £6,000 or less, your car – and in most cases – your main home.

Other things that you don’t have to pay Capital Gains Tax on include:

• • ISAs or PEPs
• • UK government gilts
• • betting, lottery or pools winnings
• • money which forms part of your income for Income Tax purposes, for example from property trading
• • gifts to charities
• • foreign currency acquired for personal use outside the UK.

There is a tax-free allowance called the Annual Exempt Amount (the tax-free allowance) for Capital Gains Tax. For the tax year 2010–11 this was £10,100 for every individual. Many people using the remittance basis will not be able to claim this Annual Exempt Amount because of the rules for using the remittance basis (see part 5 of this guidance).

12.5. Domicile

Your domicile is where you have your permanent home. Domicile is a general law concept: it is not defined in tax law. Your domicile is distinct from your nationality and from your place of residence. You can be resident in the UK but have a domicile somewhere else.

Your domicile status matters for Income Tax and Capital Gains Tax purposes if you have income and/or capital gains outside the UK. It is also relevant for Inheritance Tax purposes.

12.6. Double Taxation Agreements (DTAs)

The UK has Double Taxation Agreements (DTAs) with many countries around the world. The main purpose of a DTA is to prevent you having to pay tax in two countries on the same source of income. When you are resident in the UK and in a country with which the UK has a DTA, that DTA will provide:

• • special rules for determining which of the countries is regarded as your country of residence for the purposes of the agreement (often referred to as ‘treaty residence’), and
• • details of any exemptions and reliefs from UK tax and tax in the other country granted under the agreement to residents of that other country.

The content of each DTA is different as it has been agreed between the UK and the individual country in question. You should always ensure that the DTA you look at is the one dealing with the correct country.

Where a DTA exists between the UK and another country, it will usually have the effect of reducing the amount of foreign tax that you have to pay. To benefit from the terms of a DTA you must make a claim or application under the terms of the agreement.

12.7. Dual resident

Other countries have their own rules about residence. It is possible to be resident (or ordinarily resident) in the UK and resident (and/or ordinarily resident) in another country under that country’s rules. This means that you are dual resident (or dual ordinarily resident).

In many cases when you are dual resident there will be a Double Taxation Agreement (DTA) (see 12.6) between the UK and the other country. The DTA will cover, among other things, the rules for determining in which country you are resident for the purposes of the treaty and what tax you are due to pay where. The DTA will provide other information which might affect you – for example, what UK tax allowances you can receive.

12.8. Earned income

Earned income is any income which is paid to you for something that you have done – work you have carried out. It also includes pensions from funds to which you contributed when you were in employment.

Although this is not a complete list, earned income includes:

• • a salary, wage and any bonuses from an employment – for example, your daily, weekly or monthly payment from an employer or from employers if you have more than one employment
• • any payments that you receive as a director or office holder
• • any pensions including the State Pension
• • income from any trade, profession or vocation – for example your earnings from a business or payments that you receive for something you have produced such as a piece of writing or a painting
• • benefits in kind provided by reason of an employment.

Dividend income is not earned income.

12.9. Foreign

Foreign means something from outside the UK – see Abroad (12.1).

12.10. Income Tax

UK Income Tax is a tax on your income. Not all income is taxable and you are taxed only on your taxable income above a certain level. There are reliefs and allowances that may reduce your Income Tax bill – and in some cases determine that you have no tax to pay (see 12.17).

We collect Income Tax in different ways depending on the type of income that you have and whether you are employed, self-employed or not working. These include:

• • Pay As You Earn (PAYE)
• • Self Assessment
• • tax deducted ‘at source’ where tax is deducted from some bank/building society interest before the interest is paid to you
• • one-off payments.

If you are an employee, your employer will deduct tax from your earnings through PAYE. If you are self-employed, you will be responsible for filling in a Self Assessment tax return and paying your own tax.

You could also be liable to Income Tax if you are a trustee. You can find guidance on trustees in the Trusts, Settlements and Estates Manual at www.hmrc.gov.uk

The rates of Income Tax may change from one tax year to another. For more information on the current and previous years’ rates of Income Tax and more information about taxable and non-taxable UK benefits, go to www.hmrc.gov.uk

12.11. Investment income

Investment income is any income that is not a pension and has not been earned by you as an employee, by carrying out your profession or from running your own business. In most cases investment income arises from investments you have made.

Although this is not a complete list, income from savings and investments includes:

• • interest from bank and building society accounts
• • dividends on shares
• • interest on stocks
• • rental income which is received by you and is not part of the profits of a business which you run.

12.12. National Insurance contributions (NICs)

Most people (aged between 16 and 65) who work in the UK pay National Insurance contributions (NICs). There are six classes of contributions, some of which count towards certain Social Security benefits. You may be exempt from NICs if you continue paying Social Security in your home country and are covered by a Certificate of Coverage from that country.

All people who work in the UK and pay NICs need to have a National Insurance number (NINO) which is a unique number allocated to you so that a record of your NICs can be kept and any benefits you are entitled to can be calculated. NINOs are also used to uniquely identify you in the tax system.

The terms resident and ordinarily resident have different meanings for NICs than for tax. The leaflet NI38 Social Security abroad gives guidance on the rules that apply for National Insurance purposes.

12.13. Non-resident

If you do not meet the criteria to be resident in the UK you will be non-resident. If you are not resident in the UK you might not have to pay UK tax on some of your income and gains. You can find more detailed information in part 10.

If your normal home is outside the UK, and you are in the UK for fewer than 183 days in the tax year, you might be non-resident. But you might still be resident even if you spend fewer than 183 days in a tax year in the UK (see 12.23). Being resident in the UK is not simply a question of the number of days you spend in the country.

12.14. Offshore/overseas

The terms offshore and overseas refer to anywhere outside the UK. (UK is explained at 12.24.) In this context offshore and overseas mean the same as abroad (12.1) or foreign (12.9). You might see references to offshore bank accounts and offshore income.

Offshore is sometimes used in a different sense to describe some workers in the oil and gas exploration and exploitation industries. In this usage it is possible to be working offshore from the UK but still be working in the UK for employment income purposes. This would be the case when a person works in the oil or gas industry outside UK territorial waters, but within any UK designated area of the continental shelf (12.25).

12.15. Ordinarily resident/ordinary residence

Ordinary residence is different from residence. It is not defined in tax law and our guidance is based on cases heard by the courts. If you are resident in the UK year after year, this would indicate that you ‘normally’ live here and you are therefore ordinarily resident here.

If you are resident here your ordinary residence position in the UK generally matters only if you have income from outside the UK. Income from outside the UK can include earnings for duties performed outside the UK.

Resident and not ordinarily resident

You can be resident in the UK but not ordinarily resident here. When we talk about someone being ‘not ordinarily resident in the UK’ we mean that although they are resident in the UK for a particular tax year, they normally live somewhere else. For example, if you are resident in the UK in a tax year because you have been in the country for more than 183 days but you normally live outside the UK, it is likely that you are not ordinarily resident

12.16. Permanent home

Permanent home is a concept considered in deciding domicile status. It does not refer to one particular property. Generally, your permanent home is the country or state where you live, or have lived, and where you intend to remain, or to return to permanently.

Permanent home has a different meaning in relation to ordinary residence and Double Taxation Agreements.