ARE DIVIDENDS TAX-FREE NOW THAT YOU ARE A NON-UK RESIDENT?

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

In the United Kingdom (UK), the tax treatment of investment income for non-residents depends on various factors, including your residency status, the type of income, and any applicable tax treaties between the UK and your home country.

Under certain circumstances, non-UK residents may be able to claim “disregarded income” status for their UK-sourced investment income such as dividends and interest. However, rental income from UK properties will still be subject to UK taxation. Disregarded income status means that the income is not taken into account for UK tax purposes, and thus not subject to the UK income tax. However, it is important to note that specific conditions must be met to qualify for this treatment.

To determine your eligibility for disregarded income status, you should consider factors such as your residency status, the nature of the income (e.g., dividends, interest), and any relevant tax treaties. These treaties can provide provisions for the taxation of specific types of income and may include rules on residency, permanent establishment, and other factors that affect the tax liability of non-residents.

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The Statutory Residence Test (SRT) in the United Kingdom provides special split year treatment rules for individuals who move overseas or become non-residents mid-way through the tax year. These rules help determine an individual’s residence status and how their income will be taxed.

When the split year rules apply, the tax year is divided into two parts: the UK part and the overseas part. The individual is treated as becoming a non-UK resident on the date they leave the UK, and their tax liability is calculated separately for each part of the year.

WHAT IS SPLIT YEAR TREATMENT IN THE UK & HOW TO BENEFIT FROM IT?

The specific conditions for qualifying for split year treatment can vary depending on the circumstances. Generally, there are two scenarios where the split year rules may apply:

Starting full-time work abroad: If an individual or their partner starts full-time work abroad, they may be eligible for split year treatment. In this case, the individual is treated as non-resident from the date they leave the UK to start employment abroad.
Termination of a UK home: If an individual ceases to have a UK home and establishes a new home overseas, they may qualify for split year treatment. The individual is treated as non-resident from the date they leave the UK home.

By applying the split year treatment, individuals can separate their income and tax liabilities into the UK part (subject to UK tax) and the overseas part (potentially subject to tax in the new country of residence).

In the case of split year treatment, where an individual qualifies as a non-UK resident for only part of the tax year, the special rules that disregard UK investment income for tax purposes do not apply. These rules only apply when an individual is a non-UK resident for the entire tax year.

Therefore, if an individual only qualifies as a non-UK resident for a portion of the tax year due to split year treatment, their UK sourced investment income, including dividends and interest, would generally remain subject to UK income tax for the UK part of the tax year.

CASE STUDY

Steven Ireland intends to extract significant profits from his UK company by way of a £1 million dividend and hopes to do this after becoming a non-UK resident, so that the dividend will be outside the scope of UK income tax.

Steven moves from the UK to Dubai to work full-time on 1 August 2023 and the split year rules apply. He therefore becomes a non-UK resident from 1 August 2023 and remains so for the next five years. The company pays the dividend on 1 January 2024 and Steven now has a tax liability of just under £0.4m!

However, if the dividend payment was delayed until 6 April 2024, the dividend could be disregarded and, consequently, Steven would not suffer any UK income tax on the dividend.

To ensure that the dividend remains outside the scope of UK income tax under the Temporary Non-Residence Rules, Steven needs to remain a non-UK resident for at least five complete years. The clock for these purposes starts ticking from the date he became a non-UK resident under the split year treatment rules, which is 1 August 2023. Therefore, he would need to remain a non-UK resident until 2 August 2028 to ensure the dividends remain outside the UK tax net.

TAKEAWAY

If you are considering leaving the UK prior to extracting a dividend, it is crucial to seek advice from a tax professional who is knowledgeable in both UK tax laws and the tax laws of your home country. They will be able to provide guidance based on your specific circumstances and help you understand the tax implications of your investment income in the UK.

For more information regarding how Creation can assist with tax services, contact our Tax department via email [email protected] or call UAE +971 4 878 6240 to arrange your expert consultation.