DBI United Kingdom 2020

DOING BUSINESS IN UNITED KINGDOM
2020
Editors:
Africa: Ridha Hamzaoui, Sabrine Marsit, Emily Muyaa, Yvette Nakibuule

Asia-Pacific: Karen Lim, Janice Loke, Mei-June Soo, Nina Umar
Caribbean: Priscilla Lachman, Sandy van Thol
Europe: Mery Alvarado, Madalina Cotrut, Francesco De Lillo, Larisa Gerzova, Teresa Morales, Magdalena
Olejnicka, Andreas Perdelwitz, Benjamin Rodriguez, Marnix Schellekens, Ruxandra Vlasceanu
Middle East: Ridha Hamzaoui
Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderón Manrique, Gabriela Rodríguez
Arguijo
North America: John Rienstra, Julie Rogers-Glabush
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DOING BUSINESS IN
THE UNITED KINGDOM
ARGENTINA
MARCH 2020
JANUARY 2013
DOING BUSINESS IN THE UNITED KINGDOM 2020
INTRODUCTION
This publication has been prepared by the International Bureau of Fiscal Documen-
tation (IBFD) for BDO, its clients and prospective clients. Its aim is to provide the
essential background information on the taxation aspects of setting up and running a
business in this country. It is of use to anyone who is thinking of establishing a busi-
ness in this country as a separate entity, as a branch of a foreign company or as a
subsidiary of an existing foreign company. It also covers the essential background tax
information for individuals considering coming to work or live permanently in this
country.
This publication covers the most common forms of business entity and the taxation
aspects of running or working for such a business. For individual taxpayers, the
important taxes to which individuals are likely to be subject are dealt with in some
detail. We have endeavoured to include the most important issues, but it is not fea-
sible to discuss every subject in comprehensive detail within this format. If you
would like to know more, please contact the BDO firm(s) with which you normally
deal. Your adviser will be able to provide you with information on any further issues
and on the impact of any legislation and developments subsequent to the date men-
tioned at the heading of each chapter.
About BDO
BDO is a global organisation of independent public accounting, tax and advisory
firms which perform professional services under the name of BDO. The global fee
income of BDO firms, including the members of their exclusive alliances, was
US$9.6 billion in 2019. These firms have representation in 167 countries and ter-
ritories, with over 88,000 people working out of 1,617 offices worldwide.
BDO’s brand promise is to be the leader for exceptional client service and when
you choose to work with BDO you quickly discover what makes our service offer-
ing stand out. BDO offers a comprehensive collection of high quality tax services
and assets designed to support exceptional performance, and all our tax engage-
ments benefit from the hands-on involvement of experienced professionals,
backed by world-class resources. BDO people embrace technology and combine
their expertise in this area with the unique relationship-driven and responsive
skills we have as human beings to create truly memorable and valuable experi-
ences for our clients. Your advisers are both fit for the future and are agile
enough to handle the biggest and the smallest names in the industries we serve.
We work hard to understand our clients’ businesses and ensure that we match
both our service offering and our people to their complex individual needs. We
believe that providing our clients with access to experienced professionals who
are actively engaged in addressing their tax and business issues is the most reli-
able way to provide exceptional service, always with a strong focus on trust and
transparency.
Regardless of your location, size or international ambitions we can provide effec-
tive support as you expand into new areas of the world. In an ever-evolving eco-
nomic environment, businesses need a global organisation that provides
exceptional, bespoke service combined with local knowledge and expertise. BDO
is uniquely positioned to serve this demand, providing effective support and a
truly global integrated global footprint.
3
TABLE OF CONTENTS
CORPORATE TAXATION .......................................................................... 9
ABBREVIATIONS ..................................................................................... 9
INTRODUCTION ...................................................................................... 9
1. CORPORATE INCOME TAX ..................................................................... 11
1.1. TYPE OF TAX SYSTEM ....................................................................... 11
1.1.1. The current system .............................................................. 11
1.1.2. Surplus advance corporation tax .............................................. 12
1.2. TAXABLE PERSONS .......................................................................... 12
1.2.1. Residence ......................................................................... 12
1.3. TAXABLE INCOME ............................................................................ 13
1.3.1. General ............................................................................ 13
1.3.2. Exempt income ................................................................... 13
1.3.3. Deductions ........................................................................ 13
1.3.3.1. Deductible expenses ............................................... 13
1.3.3.2. Non-deductible expenses .......................................... 14
1.3.4. Depreciation and amortization ................................................ 15
1.3.5. Reserves and provisions ........................................................ 17
1.4. CAPITAL GAINS .............................................................................. 17
1.5. LOSSES ..................................................................................... 19
1.5.1. Ordinary losses ................................................................... 19
1.5.2. Capital losses ..................................................................... 20
1.6. RATES ...................................................................................... 21
1.6.1. Income and capital gains ....................................................... 21
1.6.2. Withholding taxes on domestic payments ................................... 22
1.7. INCENTIVES ................................................................................. 22
1.7.1. Research and development relief ............................................. 22
1.7.2. Tonnage tax ...................................................................... 22
1.7.3. Real estate investment trusts ................................................. 22
1.7.4. Patent box ........................................................................ 23
1.8. ADMINISTRATION ............................................................................ 23
1.8.1. Taxable period ................................................................... 23
1.8.2. Tax returns and assessment ................................................... 24
1.8.3. Payment of tax ................................................................... 24
1.8.4. Rulings ............................................................................. 24
2. TRANSACTIONS BETWEEN RESIDENT COMPANIES ......................................... 25
2.1. GROUP TREATMENT ......................................................................... 25
2.1.1. General ............................................................................ 25
2.1.2. Group and consortium relief .................................................. 25
2.1.3. Transfer of capital assets within a group ................................... 26
2.2. INTERCOMPANY DIVIDENDS ................................................................... 27
3. OTHER TAXES ON INCOME .................................................................... 28
3.1. GENERAL ................................................................................... 28
3.2. OIL TAXES .................................................................................. 28
3.2.1. Corporation tax .................................................................. 28
3.2.2. Petroleum revenue tax ......................................................... 29
3.3. DIVERTED PROFITS TAX ...................................................................... 29
3.4. CHARGE TO INCOME TAX ON OFFSHORE RECEIPTS ............................................ 30
4. TAXES ON PAYROLL ............................................................................ 31
4.1. PAYROLL TAX ............................................................................... 31
4.2. SOCIAL SECURITY CONTRIBUTIONS ........................................................... 31
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DOING BUSINESS IN THE UNITED KINGDOM 2020 TABLE OF CONTENTS
5. TAXES ON CAPITAL ............................................................................. 31

5.1. NET WORTH TAX ............................................................................ 31
5.2. REAL ESTATE TAX ........................................................................... 32
5.2.1. The National Non-Domestic Rate ............................................. 32
5.2.2. Annual tax on enveloped dwellings ........................................... 32
5.3. OTHER TAXES ............................................................................... 33
5.4. BANK SURCHARGE ........................................................................... 33
6. INTERNATIONAL ASPECTS ..................................................................... 34
6.1. RESIDENT COMPANIES ....................................................................... 34
6.1.1. Foreign income and capital gains ............................................. 34
6.1.2. Foreign losses .................................................................... 34
6.1.3. Foreign capital ................................................................... 35
6.1.4. Double taxation relief .......................................................... 35
6.2. NON-RESIDENT COMPANIES .................................................................. 35
6.2.1. Taxes on income and capital gains ........................................... 35
6.2.2. Taxes on capital ................................................................. 37
6.2.3. Administration ................................................................... 37
6.3. WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES ........................... 38
6.3.1. Dividends .......................................................................... 38
6.3.2. Interest ............................................................................ 38
6.3.3. Royalties .......................................................................... 38
6.3.4. Other .............................................................................. 39
6.3.5. Withholding tax rates chart ................................................... 39
7. ANTI-AVOIDANCE ............................................................................... 48
7.1. GENERAL ................................................................................... 48
7.1.1. The Anti-Tax Avoidance Directive ............................................ 49
7.2. TRANSFER PRICING .......................................................................... 50
7.3. LIMITATIONS ON INTEREST DEDUCTIBILITY ................................................... 50
7.4. CONTROLLED FOREIGN COMPANY ............................................................ 51
7.5. OTHER ANTI-AVOIDANCE RULES .............................................................. 52
7.5.1. Hybrid mismatches .............................................................. 52
8. VALUE ADDED TAX ............................................................................. 53
8.1. GENERAL ................................................................................... 53
8.2. TAXABLE PERSONS .......................................................................... 53
8.3. TAXABLE EVENTS ............................................................................ 53
8.4. TAXABLE AMOUNT ........................................................................... 53
8.5. RATES ...................................................................................... 53
8.6. EXEMPTIONS ................................................................................ 53
8.7. NON-RESIDENTS ............................................................................. 54
9. MISCELLANEOUS TAXES ....................................................................... 54
9.1. CAPITAL DUTY .............................................................................. 54
9.2. TRANSFER TAX .............................................................................. 54
9.2.1. Immovable property ............................................................ 54
9.2.2. Shares, bonds and other securities ........................................... 54
9.3. STAMP DUTY ................................................................................ 54
9.3.1. Stamp duty and stamp duty reserve tax ..................................... 54
9.3.2. Stamp duty land tax ............................................................ 54
9.3.2.1. SDLT on residential property ..................................... 55
9.3.2.2. SDLT on non-residential or mixed-use property ............... 55
9.3.3. Land and buildings transaction tax ........................................... 56
9.3.4. Land transaction tax ............................................................ 57
9.4. CUSTOMS DUTY ............................................................................. 58
9.5. EXCISE DUTY ................................................................................ 59
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TABLE OF CONTENTS DOING BUSINESS IN THE UNITED KINGDOM 2020
9.6. OTHER TAXES ............................................................................... 59

9.6.1. Digital services tax .............................................................. 59
INDIVIDUAL TAXATION ........................................................................... 61
ABBREVIATIONS ..................................................................................... 61
INTRODUCTION ...................................................................................... 61
1. INDIVIDUAL INCOME TAX ...................................................................... 61
1.1. TAXABLE PERSONS .......................................................................... 62
1.2. TAXABLE INCOME ............................................................................ 64
1.2.1. General ............................................................................ 64
1.2.1.1. Trust and estate income .......................................... 64
1.2.2. Exempt income ................................................................... 65
1.3. EMPLOYMENT INCOME ....................................................................... 65
1.3.1. Salary .............................................................................. 65
1.3.2. Benefits in kind .................................................................. 66
1.3.3. Pension income .................................................................. 67
1.3.4. Directors’ remuneration ....................................................... 68
1.4. BUSINESS AND PROFESSIONAL INCOME ....................................................... 68
1.4.1. Trades, professions and vocations ............................................ 68
1.4.2. Property businesses ............................................................. 69
1.5. INVESTMENT INCOME ........................................................................ 70
1.6. CAPITAL GAINS .............................................................................. 70
1.7. PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS ......................................... 74
1.7.1. Deductions ........................................................................ 74
1.7.1.1. Interest .............................................................. 74
1.7.1.2. Insurance premiums ................................................ 74
1.7.1.3. Donations ............................................................ 74
1.7.1.4. Alimony .............................................................. 75
1.7.1.5. Investment incentive reliefs ...................................... 75
1.7.1.5.1. ..Relief for investment in corporate trades........ 75
1.7.1.5.2. ..Seed Enterprise Investment Scheme............... 76
1.7.1.5.3. ..Social investment relief.............................. 77
1.7.1.5.4. ..Venture capital trust................................. 77
1.7.1.5.5. ..Individual Savings Account........................... 78
1.7.2. Allowances ........................................................................ 78
1.7.3. Credits ............................................................................ 79
1.8. LOSSES ..................................................................................... 79
1.9. RATES ...................................................................................... 80
1.9.1. Income and capital gains ....................................................... 80
1.9.1.1. Income tax – main rates and bands .............................. 80
1.9.1.2. The starting rate for savings income ............................ 81
1.9.1.3. Dividends ............................................................ 81
1.9.1.4. Trusts ................................................................. 81
1.9.1.5. Capital gains tax rates ............................................ 81
1.9.2. Withholding taxes ............................................................... 82
1.10. ADMINISTRATION ............................................................................ 82
1.10.1. Taxable period ................................................................... 82
1.10.2. Tax returns and assessment ................................................... 82
1.10.3. Payment of tax ................................................................... 83
1.10.4. Rulings ............................................................................. 83
2. OTHER TAXES ON INCOME .................................................................... 83
3. SOCIAL SECURITY CONTRIBUTIONS .......................................................... 84
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DOING BUSINESS IN THE UNITED KINGDOM 2020 TABLE OF CONTENTS
4. TAXES ON CAPITAL ............................................................................. 85

4.1. NET WEALTH TAX ........................................................................... 85
4.2. REAL ESTATE TAX ........................................................................... 85
5. INHERITANCE AND GIFT TAXES ............................................................... 86
5.1. TAXABLE PERSONS .......................................................................... 86
5.2. TAXABLE BASE .............................................................................. 86
5.3. PERSONAL ALLOWANCES ..................................................................... 88
5.4. RATES ...................................................................................... 88
5.5. DOUBLE TAXATION RELIEF ................................................................... 88
6. INTERNATIONAL ASPECTS ..................................................................... 88
6.1. RESIDENT INDIVIDUALS ...................................................................... 88
6.1.1. Foreign income and capital gains ............................................. 88
6.1.2. Foreign capital ................................................................... 89
6.1.3. Double taxation relief .......................................................... 89
6.2. EXPATRIATE INDIVIDUALS .................................................................... 89
6.2.1. Inward expatriates .............................................................. 89
6.2.1.1. Foreign domiciliaries .............................................. 90
6.2.1.2. Special provisions for expatriates ............................... 91
6.2.2. Outward expatriates ............................................................ 91
6.3. NON-RESIDENT INDIVIDUALS ................................................................. 91
6.3.1. Taxes on income and capital gains ........................................... 92
6.3.1.1. Employment income ............................................... 92
6.3.1.2. Business and professional income ............................... 93
6.3.1.3. Investment income ................................................. 93
6.3.1.4. Capital gains ........................................................ 93
6.3.2. Taxes on capital ................................................................. 94
6.3.3. Inheritance and gift taxes ..................................................... 94
6.3.4. Administration ................................................................... 94
KEY FEATURES ..................................................................................... 95
8
CORPORATE TAXATION DOING BUSINESS IN THE UNITED KINGDOM 2020
UNITED KINGDOM
This chapter is based on information available up to 1 March 2020.
Abbreviations
Abbreviation English definition

ATAD Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 of 12
July 2016)
ATAD II Council Directive (EU) 2017/952 of 29 May 2017 amending Directive
(EU) 2016/1164 as regards hybrid mismatches with third countries
ATED Annual tax on enveloped dwellings
CAA 2001 Capital Allowances Act 2001
CTA 2009 Corporation Tax Act 2009
CTA 2010 Corporation Tax Act 2010
ECJ Court of Justice of the European Union
FA Finance Act
ITA 2007 Income Tax Act 2007
ITTOIA 2005 Income Tax (Trading and Other Income) Act 2005
LBTT Land and buildings transactions tax (Scotland)
TCGA 1992 Taxation of Chargeable Gains Act 1992
TIOPA 2010 Taxation (International and Other Provisions) Act 2010
VATA 1994 Value Added Tax Act 1994
Introduction
Companies are subject to corporation tax, which is levied on corporate profits and
other forms of income, as well as on chargeable gains (i.e. capital gains) made by com-
panies. The tax is an annual tax, imposed by the annual Finance Act (FA).
Employers pay national insurance (social security) contributions on salaries. A value
added tax (VAT) system applies.
Special rules apply to companies deriving profits from North Sea oil and gas activities.
There is an optional regime for shipping companies (i.e. the tonnage tax regime).
For tax purposes in general, the United Kingdom comprises Great Britain and Northern
Ireland, i.e. England, Wales, Scotland and the six counties in the north-east of the
island of Ireland. It also includes the United Kingdom’s Continental Shelf. Guernsey,
Jersey, the Isle of Man, and Gibraltar do not form part of the United Kingdom for tax
purposes. By virtue of powers devolved, or to be devolved, to the law-making bodies of
Scotland, Wales and Northern Ireland, these regions have powers regarding the care
and management of certain taxes, or aspects thereof. Such matters are mentioned
where relevant in this survey.
Brexit
The United Kingdom is a Member State of the European Union, and, as such, applies EU
law where required. However, following a referendum held on 23 June 2016, voters in
the United Kingdom voted to leave the European Union. The government of the United
Kingdom triggered the formal process of leaving the European Union by invoking article
9
DOING BUSINESS IN THE UNITED KINGDOM 2020 CORPORATE TAXATION
50 of the Treaty on European Union (TEU) on 29 March 2017. The United Kingdom was
thus officially due to cease to be a member of the European Union with effect from
23:00 (GMT) on 29 March 2019.
On 31 January 2020, with effect from 23:00 (GMT), after several extensions of the
article 50 deadline, the United Kingdom withdrew from the European Union and
entered into a transition period which will last until at least 31 December 2020 (see
below).
On 17 October 2019, the European Union and the United Kingdom agreed on (a revised
text of) the Agreement on the Withdrawal of the United Kingdom of Great Britain and
Northern Ireland from the European Union and the European Atomic Energy Commu-
nity (the Withdrawal Agreement). This agreement sets out the terms of the United
Kingdom’s orderly withdrawal from the European Union.
The Withdrawal Agreement consequently entered into force on 1 February 2020.
During the transition period, the United Kingdom will be treated as if it were a Member
State (i.e. EU law still applies – with certain procedural exceptions). This transition
period may, however, be extended by 12 or 24 months. Any extension would, however,
need to be agreed upon by 1 July 2020.
Some of the more important tax aspects of the Withdrawal Agreement are the follow-
ing:
– goods, the transportation of which started before the end of the transitional period
but ended after that period, are subject to EU customs, VAT and excise duty pro-
visions;
– rights and obligations under the EU VAT Directive (2006/112) will apply until 5 years
after the end of the transition period, to transactions that are within the scope of
the EU VAT Directive (2006/112) at the end of the transition period (exceptions
apply for cross-border VAT refunds and amendments to VAT MOSS);
– EU social security regulations will remain applicable to EU and UK citizens who, at
the end of the transition period, are residents or are subject to the legislation of
the United Kingdom or European Union, respectively, as well as to their family
members and survivors;
– the United Kingdom will no longer be in a customs agreement with the European
Union. Northern Ireland will de jure be in the customs territory of the United King-
dom, but will de facto remain in the EU customs union and EU single market, and,
therefore, be subject to the rules of the EU customs legislation, for at least 4 years
after the end of the transition period. The Northern Ireland Assembly may subse-
quently vote to continue this arrangement for 4-year periods;
– the Mutual Assistance Directive for the recovery of claims (2010/24) will apply until
5 years after the end of the transition period between the Member States and the
United Kingdom for, inter alia, claims relating to amounts/transactions that
became due/took place before the end of the transition period;
– for State aid granted before the end of the transition period and concerning the
United Kingdom, the European Commission will, for a period of 4 years after the
end of the transition period, be competent to initiate new administrative proce-
dures governed by Council Regulation (EU) 2015/1589. The European Commission
will continue to be competent after the end of the 4-year period for procedures ini-
tiated before the end of that period;
– the Court of Justice of the European Union (ECJ) remains competent for all judicial
procedures (including appeals and referrals) concerning the United Kingdom regis-
10
tered before the end of the transition period, and those procedures should con-
tinue until a final binding judgment is given in accordance with EU rules;
– within 4 years from the end of the transition period, the ECJ will still have juris-
diction over infringement cases against the United Kingdom concerning breaches of
EU law occurring before the end of 2020;
– within 4 years from the end of the transition period, the United Kingdom may also
bring before the ECJ cases for non-compliance with an administrative decision of
an EU institution or body taken before the end of the transition period or, for
certain procedures identified in the Withdrawal Agreement, after the end of the
transition period;
– ECJ decisions made before the end of the transition period are still binding.
Retained EU law should be interpreted by domestic courts in accordance with pre-
vious ECJ case law and any retained general principles of EU law; and
– both the European Union and the United Kingdom must ensure in their respective
legal orders primacy and direct effect, as well as consistent interpretation with the
case law of the ECJ handed down until the end of the transition period. Under the
Withdrawal Agreement, all EU law (including judgments of the ECJ) in force as at
the date of withdrawal will, at least initially, remain on the statute book. Such law
is referred to as “retained EU law”.
The currency of the United Kingdom is the pound sterling (GBP).
1. Corporate Income Tax
1.1. Type of tax system
1.1.1. The current system
Corporation tax is chargeable on the worldwide profits (income and capital gains) of
companies resident in the United Kingdom. However, see section 6.1.1. as to the avail-
ability of an election for the profits of a foreign permanent establishment not to be
subject to UK corporation tax. Corporation tax is also charged on the profits of a non-
resident company carrying on a trade of dealing in or developing UK land. In respect of
accounting periods beginning after 5 April 2019, non-resident companies directly or
indirectly disposing of interests in UK land are also liable to corporation tax on any gain
arising. From 6 April 2020, the charge to corporation tax will also apply to non-resident
companies carrying on a UK property business or having other UK property income. See
also section 1.2.
The tax is an annual tax, imposed by the annual FA for the next financial year. Thus,
FA 2019 imposes the charge to corporation tax for the financial year 2020, which is the
year beginning 1 April 2019 (the financial (corporation tax) year runs from 1 April to 31
March).
Until 6 April 2016, a resident company receiving an exempt “qualifying distribution”
was entitled to a non-repayable tax credit equal to one ninth of the distribution. An
exempt qualifying distribution was one that met the conditions for the distribution
exemption; see further section 2.2. A qualifying distribution may be made by either a
resident or non-resident company. With effect from 6 April 2016, tax credits have been
abolished by section 5 of and Schedule 1 to FA 2016.
Corporation tax is charged by reference to the results of a company in an “accounting
period”. An accounting period is normally coextensive with the company’s financial
year but may not exceed 12 months. Special rules apply to companies commencing or
ceasing to trade (see further section 1.8.1.).
11
1.1.2. Surplus advance corporation tax

Some companies may still have unrelieved surplus advance corporation tax (ACT). This
was a payment, due before 6 April 1999, of corporation tax in respect of a qualifying
distribution of the company. The ACT could be set off as a credit against mainstream
corporation tax payable by the company on its taxable profits. Where there were
insufficient profits in any year, this surplus ACT could be carried forward.
The maximum amount of this surplus ACT that may be set off in any year is 20% of
taxable profits less “shadow ACT” equal to 20/80 of distributions made by the
company since 5 April 1999.
1.2. Taxable persons
Companies incorporated under the Companies Acts are taxable persons for corporation
tax purposes (section 2 of CTA 2009). In addition, persons liable to corporation tax
include unincorporated associations, building societies (housing loan financing associ-
ations), mutual insurance societies, state-owned industries, public utility companies,
and crown corporations. A non-resident company is liable to corporation tax in respect
of taxable profits attributable to its UK permanent establishments and (with respect to
disposals after 4 July 2016) from a trade of dealing in or developing UK land (sections
5 to 5B of CTA 2009).
In relation to accounting periods beginning after 5 April 2019, non-resident companies
are also liable to corporation tax on their chargeable gains from direct or indirect dis-
posals of interests in UK land.
From 6 April 2020, non-resident companies without a UK permanent establishment will
also be liable to corporation tax on their income from UK immovable property; this
income is currently subject to income tax. The necessary legislation is included in
FA 2019 (section 17 and Schedule 5), which became law on 12 February 2019.
Charities are generally exempt from the charge to corporation tax, unless they are
trading and the trade is not exercised in the course of carrying out the primary purpose
of the charity, or the trade is carried on mainly by its beneficiaries.
This survey is restricted to UK-incorporated public and private limited companies, as
well as to foreign-incorporated entities of a similar description, whether or not they
are resident in the United Kingdom. These entities are referred to in the text as com-
panies.
General partnerships are treated as transparent for tax purposes.
1.2.1. Residence
Companies incorporated in the United Kingdom are treated as resident there (section
14 of CTA 2009). Companies incorporated elsewhere are treated as resident in the
United Kingdom if their central management and control takes place in the United
Kingdom. The tax authorities, Her Majesty’s Revenue & Customs (HMRC), take a sub-
stantive view of “central management and control”.
If a company is resident in the United Kingdom under domestic law, but, under the tie-
breaker rules in a relevant tax treaty, is treated as resident in another country, that
company is treated as not resident in the United Kingdom for most purposes, even
beyond the application of the particular tax treaty. However, this rule is disapplied for
12
the purposes of the controlled foreign companies (CFC) rules, with the result that such
a company would nevertheless be treated as UK resident for the purposes of the CFC
rules.
1.3. Taxable income
1.3.1. General
Resident companies are chargeable to corporation tax on their worldwide profits,
defined as income and chargeable (i.e. capital) gains (section 5 of CTA 2009). However,
a company may elect for the profits of its foreign permanent establishments to be left
out of account in calculating its taxable profits (sections 18A to 18S of CTA 2009).
Where such an election is in place, losses of those permanent establishments are sim-
ilarly not allowable.
The computation of annual profits and losses is based on commercial accounts, as
adjusted for tax purposes (section 46 of CTA 2009). In general, income and expenses
are accounted for on an accruals basis.
Trading income is generally accounted for at the value received. There are some
exceptions to this principle, whereby the market value is taken instead of the amount
actually received. These include:
– transfer pricing rules for transactions between connected companies;
– the Sharkey v. Wernher principle, whereby the market value is entered on the
transfer of trading stock from one of the taxpayer’s trades to another, or from a
trade to private use; and
– the appropriation of assets to trading stock.
The government has announced a proposal to introduce a digital services tax (DST) to
take effect from 1 April 2020. For details, see section 9.6.1.
1.3.2. Exempt income
The main item of exempt income is “qualifying distributions” (e.g. dividends) received
by most large and medium-sized companies, and also, in certain stipulated situations,
by small companies (Part 9A of CTA 2009) (see section 2.2.).
1.3.3. Deductions
1.3.3.1. Deductible expenses
General rule
Expenses are generally deductible in computing trading profits, provided that the
expenses are of a revenue (i.e. not capital) nature, and that they are wholly and exclu-
sively laid out for the purposes of the trade (section 54 of CTA 2009). Also, they must
not be such as are disallowed by statute.
Dividends
Dividends and other distributions are not deductible (section 1305 of CTA 2009),
whereas, generally, interest and royalty payments are deductible, subject to restric-
tions (see below). However, certain payments of interest and royalties may be classi-
fied as dividends for tax purposes.
13
Interest
The loan relationships legislation applies where a company is a creditor or debtor for
a money debt (Part 5 of CTA 2009). The money debt should arise from a transaction for
the lending of money. Loan relationships are broadly categorized as either “trading”
loan relationships or “non-trading” loan relationships, depending on the purpose for
which the loan was taken out. In addition to credits and debits regarding interest, the
loan relationships regime applies to any profits or losses arising on loans.
Interest is treated as trading expenditure where it is paid in respect of a loan taken out
for trading purposes.
For non-trading loan relationships, a net deficit of interest receipts over payments is
deductible as a non-trading item from the total profits of the company. The same
applies to management expenses if these are not incurred in a trade, e.g. those of an
investment company.
For limitations on the deductibility of interest (including the overall restriction by ref-
erence to “tax EBITDA”), see section 7.3.
Intellectual property
A separate regime applies to the taxation of intellectual property, goodwill and other
intangible assets created or acquired from unrelated parties after 31 March 2002 (Part
8 of CTA 2009). The cost of such assets is treated as deductible expenditure in accor-
dance with accounting principles and amortized accordingly. Disposals give rise to
income also in accordance with accounting principles. All such items are aggregated
and brought into account as trading or non-trading debits and credits.
Charges on income
Some costs are deductible as annual charges, which means that they are not treated as
expenditure in computing the profit or loss of a trade, but instead the gross amount of
the payment is taken as a deduction from the company’s total profits (including
chargeable gains). The only significant example of such a charge is the payment of
charitable donations (Part 6 of CTA 2010).
Pre-trading expenditure
Qualifying pre-trading expenditure incurred, and annual charges paid, in the 7 years
before the commencement of trading, are deductible on the commencement of trad-
ing.
1.3.3.2. Non-deductible expenses
There are special provisions disallowing the deduction of expenses for business gifts
and business entertainment (section 1298 of CTA 2009), although such expenses may
be deducted when they are made in respect of employees. Exceptions apply for certain
small gifts.
No deductions are allowed in respect of capital expenditure (section 53 of CTA 2009) or
depreciation, except in the context of the capital allowances regime (see section
1.3.4.).
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1.3.4. Depreciation and amortization

General
In general, no deductions for depreciation are allowable, as these represent capital
expenditure. Instead, “capital allowances” are given under separate legislation (i.e.
the Capital Allowances Act 2001). Capital allowances must be claimed in order to be
obtained, and they are available regarding qualifying expenditure, including the fol-
lowing:
– plant and machinery (very broad definition) generally, at 18% (Part 2 of CAA 2001);
– certain plant and machinery assets in a “special rate pool” (see below), at 6% (Part
2, Chapter 10A of CAA 2001). The rate was 8% before 1 April 2019 (for businesses
within the charge to corporation tax) or 6 April 2019 (for businesses within the
charge to income tax);
– construction or conversion costs of non-residential buildings and structures where
the cost is incurred after 28 October 2018 qualify for a 2% p.a. straight-line allow-
ance once the building or structure first comes into non-residential use (Part 2A of
CAA 2001);
– (previously) renovation of business premises in certain designated areas, at 100%.
The allowance was available for expenditure incurred before 1 April 2017 for cor-
poration tax purposes, and 6 April 2017 for income tax purposes (Part 3A of CAA
2001);
– certain expenditure on mineral extraction, at 10% on mineral assets and at 25% on
certain other expenditure (Part 5 of CAA 2001);
– research and development (R&D), at 100% (Part 6 of CAA 2001);
– certain dwelling houses let for assured tenancies (on which the expenditure was
incurred before 1 April 1992), at 4% (Part 10 of CAA 2001); and
– dredging, at 4% (Part 9 of CAA 2001).
The “special rate pool” is prescribed for long-life assets, thermal insulation, and “inte-
gral features”.
First-year allowances
First-year allowances are available for certain qualifying expenditure on plant and
machinery (Part 2 Chapter 4 of CAA 2001). Most of these are limited to a particular
period or to expenditure in respect of trade in a special geographical area. In general,
they are aimed at R&D activities, environmentally friendly technologies, and certain
development areas. First-year allowances are available for the following types of
expenditure:
– certain expenditure on unused energy-saving plant or machinery and water-effi-
cient technology assets incurred before 1 April 2020 (for businesses within the
charge to corporation tax) or before 6 April 2020 (for businesses within the charge
to income tax) – at a rate of 100%;
– expenditure on new cars with low carbon dioxide emissions, incurred between 17
April 2002 and 31 March 2021 – at a rate of 100%;
– expenditure on plant or machinery for certain gas refuelling stations, incurred
before 31 March 2021 – at a rate of 100%;
– expenditure on zero emissions goods vehicles, incurred between 1 April 2010 and
31 March 2021 (for businesses within the charge to corporation tax) or between
15
1 April 2010 and 5 April 2021 (for businesses within the charge to income tax) – at
a rate of 100%;
– expenditure on electric vehicle charging points, incurred between 23 November
2016 and 31 March 2023 (for businesses within the charge to corporation tax) or
between 23 November 2016 and 5 April 2023 (for businesses within the charge to
income tax);
– expenditure on plant or machinery for use wholly in a North Sea ring fence trade
(see section 3.2.) – at a rate of 100%;
– expenditure on environmentally beneficial plant or machinery incurred before 1
April 2020 (for businesses within the charge to corporation tax) or before 6 April
2020 (for businesses within the charge to income tax); – at a rate of 100%; and
– expenditure on plant or machinery for use in designated assisted areas, at a rate of
100%.
The Annual Investment Allowance
An Annual Investment Allowance (AIA) is available for expenditure on most plant and
machinery, up to a specified threshold (Part 2, Chapter 5 of CAA 2001). This is tanta-
mount to a 100% deduction for qualifying expenditure up to that amount. The thresh-
old was revised to GBP 200,000 in respect of expenditure incurred from 1 January
2016. It has been temporarily increased to GBP 1 million, for the 2 years beginning 1
January 2019.
Pooling of expenditure
Expenditure on plant and machinery is generally pooled for the purposes of claiming
capital allowances, although certain assets, e.g. ships and “short-life assets”, are allo-
cated to their own single-asset pool (Part 2 Chapters 9 and 12 of CAA 2001). FA 2008
provides that unrelieved expenditure in a long-life asset pool which was in existence
before 1 April 2008 may be transferred to a special rate pool. The provision applies to
companies in respect of chargeable periods ending on or after 1 April 2008.
How relief is given
For pooled expenditure on plant and machinery, relief is given on the reducing-balance
basis.
Regarding patent rights and know-how, the intangible assets regime applies for corpo-
ration tax purposes. The general rule is amortization at 4% on a straight-line basis. This
rule applies to qualifying expenditure incurred by companies on or after 1 April 2002.
However, for income tax purposes (e.g. in the case of a trade carried on by a sole
trader or a partnership), capital allowances are available at the rate of 25% on the
reducing-balance basis.
Relief for capital expenditure on qualifying R&D is given at a rate of 100%. For revenue
expenditure on R&D, see section 1.7.1.
Both first-year allowances and writing-down allowances may be claimed in whole or in
part. Normally, a claim for reduced allowances does not lead to entitlement to higher
allowances in a subsequent tax year. However, writing-down allowances on ships may
be postponed under certain circumstances.
Tax consequences upon disposal
Disposal events for this purpose include the sale or exchange of an asset, but also such
events as the destruction or loss of an asset (sections 60 to 64 of CAA 2001).
16
Upon disposal, a balancing charge or a balancing allowance may arise.

A balancing charge could arise, for example, upon disposal of the asset at a gain. The
rationale of the balancing charge is to claw back from the taxpayer any excess capital
allowances to which it was (in hindsight) not entitled. The point in this example is
that, as the asset was sold at a gain, there should not have been an entitlement to
capital allowances (capital allowances being, in effect, compensation for the depre-
ciation that clearly did not happen). The amount of the balancing charge is added to
the taxpayer’s taxable profits.
A balancing allowance might arise if, upon disposal, it becomes apparent that not
enough capital allowances were claimed by the taxpayer. The outstanding allowances
are then available for deduction.
For pooled assets, the disposal value is brought into account to reduce the pool and, if
it exceeds the pool, may result in a balancing charge (for plant and machinery).
For the general pool and the special rate pool, there is no balancing charge until the
trade is discontinued. In other cases, a balancing charge or a balancing allowance may
arise.
Interaction with capital gains tax
The capital gains tax position of the taxpayer is not affected by the treatment of an
asset for capital allowances purposes. However, writing-down allowances may reduce
an allowable capital loss. For the purposes of the capital gains tax computation,
capital allowances are deducted from the acquisition cost to the extent that a loss
would otherwise arise. In fact, all capital losses on plant and machinery are excluded,
as there will always be a deemed capital allowance equal to the difference between
the capital expenditure incurred and the disposal value.
1.3.5. Reserves and provisions
Reserves that are constituted by appropriations of profits (e.g. a deferred taxation
reserve and a reserve for future dividends) are not deductible. Neither are general
contingency reserves, such as a reserve for deferred repair and maintenance, which
might be charged in the profit and loss account.
Provisions are deductible so long as they are in respect of a specific liability the
amount of which has not been determined, e.g. an admitted product liability claim.
A general provision for doubtful debts such as one based on a percentage of total debts
is not deductible. However, provisions for bad debts are deductible in a number of cir-
cumstances for specific proven bad debts.
Provisions for self-insurance are not deductible.
1.4. Capital gains
All capital gains of a company are subject to corporation tax at the rate applicable to
the company (see section 1.6.; but see below for the increased tax rate on the disposal
of certain high-value dwellings). However, there is no charge to tax on the transfer of
assets within a qualifying group (sections 171 to 175 of TCGA 1992). The same applies
in the case of certain reorganizations of share capital. In both cases, the tax-advan-
taged treatment applies to both the company or companies involved and the share-
holders.
17
There are specific anti-avoidance provisions for attributing to resident shareholders

the gains of a closely held non-resident company which would be a “close company”
(see section 7.4.) if it were resident in the United Kingdom. However, this provision
could be disapplied before 6 April 2019 in certain circumstances where a non-resident
company made a non-resident capital gains tax (NRCGT) gain (see section 6.2.1.).
In the case of assets acquired before 1 January 2018, the acquisition cost or base cost
deducted in computing a taxable gain had previously been indexed by reference to
changes in the retail price index from 31 March 1982, or from the date of acquisition of
the asset in question, if later. The indexation allowance cannot turn a gain into a loss
or increase a loss. Assets owned before 31 March 1982 acquire a new base cost, which
is their fair market value at that date for the purpose of computing the gain, making
gains up to that date tax free. An election may be made to use the actual cost, if that
produces a smaller gain. However, assets acquired after 31 December 2017 do not
qualify for indexation at all, whereas for older assets, indexation allowance on dis-
posal is frozen at its December 2017 value (i.e. no adjustment is available for any infla-
tionary increase from January 2018 onwards).
Under the substantial shareholdings exemption, there is an exemption for disposals of
substantial (at least 10%) shareholdings in a trading company or the holding company
of a trading group (Schedule 7AC of TCGA 1992). The shares must have been held for a
12-month period. Losses on such disposals are correspondingly not allowable. Detailed
conditions and anti-avoidance provisions apply.
Rollover relief is available on the disposal of business assets of a qualifying class, pro-
vided that the proceeds from the disposal are used to acquire other business assets of
a qualifying class (or an interest in such assets) (section 152 of TCGA 1992). The relief
operates by:
– treating the taxpayer as having disposed of the old asset for such an amount as
gives rise to neither a gain nor a loss; and
– reducing the base cost of the replacement asset by an amount equal to what would
have been the chargeable gain on the disposal of the old asset, if the relief were
not available. This reduction in the base cost of the replacement asset ensures a
bigger gain upon the later disposal of that asset.
Where only part of the consideration is so used, the relief is reduced proportionately.
The acquisition of new assets must take place in a period beginning 12 months before
and ending 3 years after the disposal. Alternatively, an unconditional contract for the
acquisition must be concluded within the same period, in which case the relief is
granted provisionally, with the necessary adjustments taking place when all facts are
subsequently ascertained.
The following classes of assets are qualifying assets for the purposes of the rollover relief,
i.e. buildings and land, fixed plant or machinery, ships, aircraft and hovercraft, satellites,
space stations and spacecraft, goodwill and a number of agricultural and fish quotas.
Where the replacement asset is a depreciating asset, the gain is not “rolled over” into
the base cost of that asset as described above. The gain is instead “held over”, i.e. it
is frozen until the first of the following events:
– the disposal of the replacement asset;
– the taxpayer ceases to use that asset for the purposes of its trade; and
– the expiration of a 10-year period beginning with the acquisition of the replace-
ment asset.
18
There was a capital gains tax charge of 28% on the disposal of residential property
valued at more than a prescribed amount, where the property was held by certain non-
natural persons, i.e. certain companies, partnerships with company members and col-
lective investment schemes, and subject to ATED (the annual tax on enveloped dwell-
ings). These gains were known as “ATED-related gains”. The tax charge took effect
from 6 April 2013. Although the tax charge applied only to gains attributable to periods
of ownership after 5 April 2013, the taxpayer could elect for the gains or losses to be
attributed to the entire period of ownership. See section 5.2.2. for a summary of the
rules on the taxation of such high-value residential property.
The ATED-related gains regime was abolished with effect from 6 April 2019 and
replaced by the general charge to corporation tax on chargeable gains from the direct
or indirect disposal by a non-resident company of an interest in UK land. An indirect
disposal is one in which the non-resident company disposes of an interest in an entity
directly or indirectly deriving at least 75% of its value from UK land and in which the
company has an investment of 25% or more. There are exemptions for e.g. land used
exclusively or substantially exclusively for trading purposes. The necessary legislation
can be found in FA 2019, Schedules 1 and 2.
1.5. Losses
1.5.1. Ordinary losses
A fundamental reform of loss relief has taken effect, under which a distinction is made
between losses incurred in accounting periods beginning after 31 March 2017 (“post-1
April 2017 losses”) and those incurred in previous periods (“pre-1 April 2017 losses”).
However, no change was made to relief for losses in the current period or to the carry-
back of losses; the reform affects relief for losses carried forward only.
Trading losses may be set off against the company’s other taxable profits (if any) and
chargeable capital gains of the same accounting period.
Trading losses (whenever incurred) may also be carried back for 1 year (to accounting
periods falling wholly or partly within the period of 12 months immediately preceding
the beginning of the loss-making period).
Losses may also be carried forward indefinitely. In the case of pre-1 April 2017 losses,
these may be set off only against the profits of the same and continuing trade (by
deduction from those profits), provided that the company remains within the charge to
corporation tax (section 37 of CTA 2010). In the case of post-1 April 2017 losses
(excluding certain restricted losses), these may be carried forward and deducted from
the company’s “total profits” of subsequent periods (section 45A of CTA 2010). Total
profits include trading profits, non-trading profits and chargeable capital gains. This
part of the reform therefore extends the scope of relief by including non-trading
profits in those available for set-off. Where the exceptions apply, the restricted losses
may be carried forward and deducted from the trading profits of subsequent periods,
as may pre-1 April 2017 losses (section 45B of CTA 2010).
The second part of the reform introduced a restriction on the total amount of trading
losses carried forward that may be deducted in any period. Broadly speaking, each
stand-alone company or group of companies containing two or more companies
chargeable to UK corporation tax has a “deductions allowance” of GBP 5 million, some
or all of which may be allocated to trading profits (the “trading profits deductions
allowance”). The maximum amount of pre-1 April 2017 trade losses (together with any
restricted post-1 April trade losses) that may be set off in any accounting period begin-
19
ning after 31 March 2017 is the sum of its trading profits deduction allowance (if any)
and 50% of its trading profits in excess of that allowance. Similarly, in the case of post-
1 April 2017 trade losses, the maximum amount available for set-off against total
profits is the sum of so much of the company’s deductions allowance as has not been
allocated to trading profits and 50% of total profits in excess of the allowance.
Similar rules apply to expenses of management of an investment company and certain
other special forms of activity.
A claim must be made in order to deduct an amount of a loss carried forward; it is no
longer an automatic process, but neither is deduction to the full extent possible man-
datory against the earliest available profits. The company may specify how much of
the loss brought forward it wishes to deduct in any period.
Losses in a UK property business may be set off against the total profits of the company
and to the extent that this is not possible be carried forward to subsequent periods
indefinitely, for deduction from total profits, subject to the making of a claim. Losses
from an overseas property business are not available for set-off against total profits,
however, but may only be carried forward for set-off against subsequent profits from
the overseas property business.
Terminal losses may in general be carried back for 3 years and set off against profits of
any description.
Any other non-trading income losses (other than terminal losses) cannot in general be
set off against trading profits. Such losses are generally carried forward and set off
against the same class of income. However, in the case of non-trading deficits from
loan relationships (these occur when non-trading debits from such relationships, such
as interest expense on a non-trading related loan, exceed non-trading credits, such as
interest income from a non-trading related loan) incurred in accounting periods begin-
ning after 31 March 2017, these are available for deduction from the total profits of
the company, subject to the making of a claim, and subject to the same restrictions as
to the amount that applies to trading losses.
There are restrictions on the carry-back and carry-forward of losses where there is
both a change in the ownership of the company and a major change in the nature or
conduct of the trade within a 5-year period (beginning no more than 3 years before the
change of ownership) (section 673 et seq. of CTA 2010).
Targeted rules are in place to defeat certain tax avoidance arrangements using brought
forward trading losses, brought forward non-trading deficits, brought forward man-
agement expenses, and terminal losses of companies with investment business.
Special loss restriction rules are in place for banks. With effect from 1 April 2015, the
proportion of a bank’s annual taxable profit that may be offset by losses carried
forward is limited to 25%. This restriction applies only to losses that have accrued
before 1 April 2015. In this respect, special allowances apply to groups headed by a
building society These rules apply in addition to the general corporate interest restric-
tion rules.
For group relief and consortium relief, see section 2.1.2.
1.5.2. Capital losses
Capital losses are automatically set off against capital gains of the same period. Unre-
lieved losses may be carried forward to be set off against capital gains of subsequent
years (Part 4 of CTA 2010). At Budget 2018, the government announced proposals to
20
include capital losses within the GBP 5 million allowance, and to apply to capital losses
the 50% restriction already in effect (as of 1 April 2017) for other categories of losses.
Legislation to effect this is expected in the Finance Bill 2019-20, and was published in
draft form in July 2019, but will have effect from 1 April 2020 (subject to anti-fore-
stalling measures effective from 29 October 2018).
1.6. Rates
1.6.1. Income and capital gains
For the three financial years 2017, 2018 and 2019 (i.e. the period from 1 April 2017 to
31 March 2020), the main rate of corporation tax is 19% (section 3 of CTA 2010). This
rate applies to all the profits of a company, except North Sea oil and gas ring fence
profits.
FA 2016 provides that, for financial year 2020, the corporation tax rate will be 17%.
There is a surcharge of 8% on the profits of banking companies.
Finance (No. 2) Act 2015 introduced a special rate of corporation tax, applicable to
payments of “restitution interest” (Part 8C of CTA 2010). This is a rate of 45%. The
special rate applies where a company has made a common law claim against HMRC in
respect of tax paid under a mistake of law, and where the company has received a res-
titution award (whether under a court judgement, or as a result of an agreement) in
respect of the claim. The tax charge applies to that part of the award that represents
compensation for the time value of money (i.e. the interest element). Upon making a
payment of a restitution award, HMRC is obliged to withhold an amount representing
corporation tax, at the 45% rate, on the restitution interest. The 45% rate took effect
from 21 October 2015.
By virtue of the Corporation Tax (Northern Ireland) Act 2015, power has been devolved
to the Northern Ireland Assembly to set the corporation tax rates for Northern Ireland.
The Northern Ireland Assembly has indicated a rate of 12.5%, originally intended to
take effect from April 2018, but now unlikely to be introduced before 1 April 2020 at
the earliest.
Before financial year 2015, the United Kingdom had both a main rate of corporation tax
and a “small profits” rate. The main rate applied to companies with taxable profits
above GBP 1.5 million, and to all closely owned investment-holding companies,
regardless of the level of profits. For financial year 2014, the main rate was 21%. The
small profits rate for that financial year was 20% and it applied to companies with
profits of up to GBP 300,000. A form of “marginal relief” applied for companies with
profits between GBP 300,000 and GBP 1.5 million.
In financial year 2015, the main rate was reduced to 20%, and was thereby merged with
the small profits rate. The main rate henceforth applies to all profits, except those
arising from relevant North Sea oil and gas activities.
For North Sea oil and gas ring-fenced profits, the main rate of corporation tax is 30%,
and the small profits rate is 19%. Marginal relief applies to profits in the bracket
between GBP 300,001 and GBP 1,500,000; see further section 3.2.
For the rate of the proposed digital services tax (DST) – which is to take effect from 1
April 2020 – see section 9.6.1.
21
1.6.2. Withholding taxes on domestic payments

There are no withholding taxes on any payments to resident companies.
For withholding taxes on payments for non-residents, see section 6.3.
1.7. Incentives
1.7.1. Research and development relief
For R&D, an immediate write-off of the qualifying expenditure is allowed.
For small and medium-sized enterprises (SMEs), there is a special regime increasing
the allowable deduction for expenditure on R&D from 100% to 230%, subject to certain
conditions (Part 13 of CTA 2009). If the additional deduction creates a loss, this may be
surrendered in exchange for a cash repayment equal to 14.5% of the “surrenderable
loss”.
“Small and medium-sized enterprise” has the same definition as for EU law purposes.
For large companies, there is an “above-the-line” (ATL) tax credit (also known as an
“R&D expenditure credit”). The credit is equivalent to 12% of qualifying expenditure
(11% in relation to expenditure incurred before 1 January 2018).
For accounting periods beginning before 1 April 2016, large companies could choose
between an enhanced deduction and the ATL tax credit. The enhanced deduction
amounted to 130% of qualifying expenditure. The enhanced deduction is not available
for accounting periods beginning on or after 1 April 2016.
A large company is one that is not a small or medium-sized company. Charities and
institutions of higher education do not qualify as companies for the purposes of the
R&D tax credits.
1.7.2. Tonnage tax
There is a special beneficial regime for shipping, whereby profits from the operation of
qualifying ships and connected qualifying activities, within certain limits, are exempt
from corporation tax (section 82, Schedule 22 of FA 2000). Instead, corporation tax is
levied on a deemed tonnage tax profit, computed by reference to the net tonnage of
ships operated by the company in question. There are elaborate ring-fencing provi-
sions excluding from the beneficial regime profits from other activities carried on by
the company.
1.7.3. Real estate investment trusts
A special regime exists for real estate investment trusts (REITs). REITs are UK-listed
public companies investing in commercial real estate. The objective is that there
should be no difference in tax terms between an investor who invests directly in real
property, and one who does so through the use of REITs. Taxation of REITs is provided
for in Part 12 of CTA 2010.
The REIT must pay out, in the form of dividends to its shareholders, at least 90% of its
profits from its property rental business.
REITs are exempt from corporation tax in respect of any profits and gains from their
property rental business. They are, however, chargeable to corporation tax in respect
of any profits and gains from their other trades or activities.
22
Distributions from real estate investment trusts (REITs) in respect of their tax-exempt
business are made under deduction of 20% basic rate income tax. Distributions from
the tax-exempt business of a REIT are known as property income distributions (PIDs).
Payments may be made gross where the payer reasonably believes that the person
beneficially entitled to the distribution is, inter alia:
– a UK resident company;
– a company carrying out a trade in the UK through a permanent establishment that
is required to bring the distribution into charge in calculating its profits chargeable
to UK tax;
– a local authority;
– a charity;
– a scheme administrator of a registered pension scheme (and certain sub-schemes);
and
– the account manager of an Individual Savings Account. For more on Individual
Savings Accounts, see Individual Taxation section 1.7.1.5.4.
It is possible for a group of companies to be organized as a REIT. Such a structure is
referred to as a “Group REIT”. Every Group REIT has a principal company, and only this
company may distribute PIDs.
1.7.4. Patent box
FA 2012 introduced a patent box regime, which took effect from 1 April 2013 but was
substantially amended by FA 2016 (Part 8A of CTA 2010). Further amendments relating
to cost-sharing were made by Finance (No. 2) Act 2017.
The relief takes the form of a deduction in the calculation of trading profits for the rel-
evant accounting period. Broadly, the deduction is of an amount equal to the com-
pany’s relevant intellectual property profits (RIPP). The legislation sets out very
detailed and formulaic rules for calculating the RIPP.
The deduction has effect as if a 10% rate were applied to the relevant profits. As such,
the legislation refers to a “lower rate”, applicable to profits falling within the regime.
The relief was phased in for financial years 2013, 2014, 2015 and 2016. Full relief is
granted with effect from financial year 2017.
For financial year 2013, the relevant deduction was 60% of RIPP. For financial year
2014, the figure was 70% of RIPP. For financial years 2015 and 2016, the figures were
80% and 90% of RIPP, respectively.
FA 2016 introduced amendments to the patent box regime, to ensure compliance with
OECD recommendations (made in October 2015, as part of the OECD BEPS package for
reform of the international tax system to tackle tax avoidance). These amendments to
the patent box regime apply for new entrants from 1 July 2016.
1.8. Administration
Corporation tax is administered and collected by HMRC, which appoints collectors and
inspectors acting under its direction.
1.8.1. Taxable period
Unlike individual income tax and capital gains tax, which is based on the tax year (6
April to 5 April), corporation tax is imposed for a “financial year” (section 9 of CTA
2009). The financial year runs from 1 April to 31 March.
23
Companies pay tax on a current year basis, with respect to basis periods (accounting
periods). They are chargeable on the profits of the accounting period ending in the
financial year.
The accounting period is the period ending on an accounting date in the financial year
not less than 12 months after the trade commenced. Otherwise, the accounting period
is the period following the one that ended in the preceding financial year. Company
profits arising in an accounting period are time-apportioned between the financial
years in which the accounting period falls. This is particularly significant if there is a
change in the corporation tax rate partway through the accounting period.
Taxpayers may change the accounting date in the first 3 years following commence-
ment of trading. Thereafter, a change of the accounting date may be accepted if
certain conditions are met.
1.8.2. Tax returns and assessment
Assessments are made under a self-assessment regime whereby companies must
compute and pay the corporation tax due 9 months and 1 day from the end of the
accounting period. A quarterly instalment payment regime applies to large companies;
see further section 1.8.3.
Corporation tax returns must be filed within 12 months of the end of the accounting
period covered, or within 3 months of receipt of a notice to file a tax return (Schedule
18 paragraph 14 of FA 1998). Changes may be made in the return within 12 months from
the statutory filing date. HMRC has 12 months to decide whether to enquire into the
return.
1.8.3. Payment of tax
Large companies are required to pay their corporation tax in four instalments, i.e. on
the 14th day of the 7th, 10th, 13th and 16th months following the beginning of the
accounting period. Special rules apply in the case of accounting periods shorter than 1
year.
A large company is a company with annual taxable profits of more than GBP 1.5 mil-
lion. If a company has one or more active companies in its “51% group” (including non-
resident companies), the threshold is reduced to an amount equal to GBP 1.5 million
divided by the number of active companies in the group.
With effect for accounting periods beginning on or after 1 April 2019, companies with
annual taxable profits exceeding GBP 20 million (so-called very large companies) are
required to make instalment payments earlier than set out above. The payments are
due instead in the 3rd, 6th, 9th and 12th month of the accounting period to which the
corporation tax liability relates.
Any income tax withheld (e.g. in respect of a payment to the company) is credited
against the corporation tax liability.
1.8.4. Rulings
There is no general statutory system of advance rulings. However, a number of legis-
lative provisions (e.g. the rules governing relief for corporate reorganizations) contain
rules on clearance procedures, allowing taxpayers to ascertain before entering into a
specified transaction whether the relevant legislation will be applicable.
24
Also, there is legislation in force providing for advance pricing agreements (APAs) (see
section 7.2.). HMRC also has in place procedures for advance thin capitalization agree-
ments (ATCAs).
In addition, upon a taxpayer’s request, HMRC may make known its views on the inter-
pretation and application of tax law. In some cases, such expressed views have been
held by the courts to be binding on HMRC under general administrative law.
2. Transactions between Resident Companies
2.1. Group treatment
2.1.1. General
Although company law requires consolidated accounts to be prepared, for tax pur-
poses there are no provisions for fiscal unity or other forms of consolidation. Each
company in a group or consortium structure is separately assessed to corporation tax.
There are, however, a number of provisions covering the transfer of losses and the
transfer of assets within a group or a consortium.
A group is made up of a parent company and its 51% or 75% subsidiaries, depending on
the type of group treatment being claimed (for 51% groups, the only relief applicable
is a special arrangement for payment of tax) (sections 151 to 153 of CTA 2010). A con-
sortium consists of 20 or fewer UK resident companies that each own 5% or more, and
together own 75%, of a company. Consortia may qualify for the transfer of losses only.
Despite the United Kingdom’s departure from the European Union on 31 January 2020,
EU law (including Directives and ECJ decisions – under conditions) will still apply in the
United Kingdom until at least 31 December 2020. For more details, see Introduction.
2.1.2. Group and consortium relief
Companies in a group with taxable profits may claim relief on the basis of losses arising
in other group companies (Part 5, Chapter 1 of CTA 2010). This means that losses of a
company (the surrendering company) may be set off against profits of another (the
claimant company). Anti-avoidance provisions exist to combat inappropriate acquisi-
tions of losses.
Apart from trading losses, the following may be surrendered by way of group relief:
– excess capital allowances;
– non-trading deficits on loan relationships (see section 1.3.3.1.);
– charges on income (see section 1.3.3.1.);
– UK property business losses (i.e. losses arising from a business such as the letting of
real property);
– management expenses; and
– non-trading losses on intangible fixed assets (see section 1.3.3.1.).
For the purposes of the relief, groups and consortia may be established through com-
panies resident anywhere in the world. Group relief extends to UK permanent estab-
lishments of non-resident companies and to overseas permanent establishments of UK
companies in specified circumstances. A UK permanent establishment of a non-resi-
dent company is able to claim losses surrendered by other UK resident group compa-
nies as group relief and is able to surrender its own losses as group relief, where those
losses are not relievable (other than against profits within the charge to UK corpora-
25
tion tax) in the country of residence. A UK company is in a similar manner able to sur-
render losses attributable to an overseas permanent establishment, provided that
those losses are not relievable (other than against profits within the charge to UK cor-
poration tax) in the other country and the company has not elected to exempt the
profits of its foreign permanent establishments from UK corporation tax.
A UK resident parent company may claim group relief for losses of a non-resident sub-
sidiary resident in EEA countries (i.e. EU Member States and Iceland, Liechtenstein and
Norway), or the relevant losses of a permanent establishment in the EEA, where all
scope for claiming non-UK relief for the losses has been exhausted (Part 5 Chapter 3 of
CTA 2010).
Losses may be surrendered upwards, downwards or sideways, within (at least) a 75%
group structure.
For consortium relief purposes, losses may similarly be surrendered upwards, down-
wards or sideways within the consortium or from a surrendering company held indi-
rectly, being a 90% subsidiary of an intermediary company.
Group relief takes precedence over consortium relief.
The losses being surrendered, and the profits against which they are surrendered,
must be from the same accounting periods of the relevant companies (but see below).
Adjustments are made where accounting periods overlap. Not all losses arising in an
accounting period need be surrendered or claimed. A company may surrender a part of
its losses, and relieve the remainder in another way, e.g. by carry-forward.
Payments made for the surrender of losses are not treated as taxable receipts of the
surrendering company.
Rules were introduced in Finance (No. 2) Act 2017 allowing for surrender of carried-
forward losses, non-trading deficits, etc. within a group. They apply to losses incurred
in accounting periods beginning after 31 March 2017 that would otherwise be available
for set-off against total profits (see section 1.5.).
2.1.3. Transfer of capital assets within a group
There is no tax charge on the transfer of assets within a group of companies. The effect
of the legislation is that the transferee company takes over the acquisition cost of the
transferor. This relief does not apply to capital losses accrued or realized by a company
before it joined the group. A chargeable gain arises when the asset (or the transferee
company) leaves the group. A group for these purposes comprises a parent and 75%
subsidiaries. Excluded from its scope is any company where the parent does not have
the entitlement to more than 50% both of any profits available for distribution and of
any assets available in its winding-up. This means that relief is not available except for
effective 51% subsidiaries. Anti-avoidance provisions apply. Because this provision
(section 171 of TCGA 1992) limits relief to transfers to companies within the UK tax net
and does not allow for a deferment of the tax charge in other cases, a first-instance
judgment has held it to be in breach of EU law and effectively allowed for tax-free
transfers of assets to non-UK group companies. The judgment is under appeal and draft
legislation has been published that would allow for payment by instalments of the exit
charge where the asset is transferred to a company in another EEA state.
This tax neutral treatment on the transfer of assets within a group is useful where one
group company has unused capital losses, and another has an asset to be disposed of
outside the group, where that disposal would result in a gain. The asset could be trans-
26
ferred to the company that has unused losses, so that, on the disposal of the asset by
that company, any resulting gain is offset against its existing capital loss. However,
there is no need for a group company actually to transfer the asset to the other group
company. Provisions apply for the gain to be “matched” with the loss in the other com-
pany. Both companies may elect to transfer the chargeable gain or allowable loss from
one company to the other, as required.
The rollover relief provisions (see section 1.4.) also apply between companies in a 75%
group. For these purposes, all the trades carried on by the members of the group
company are treated as a single trade. Accordingly, the gain on the disposal of a busi-
ness asset by one group company, may be rolled over into the acquisition cost of
another asset acquired by a group company. The hold-over relief provisions also apply.
Regarding rollover relief, both companies must be within the charge to UK corporation
tax, which means that non-resident companies trading in the United Kingdom through
a permanent establishment may qualify.
2.2. Intercompany dividends
Dividends derived by a resident corporate shareholder are, in practice, mainly exempt
from corporation tax.
The exemption applies to most dividends received by large and medium-sized compa-
nies, irrespective of the source (i.e. whether domestic or foreign).
The Corporation Tax Act 2009 contains a list of “exempt classes”, and the exemption
applies to dividends coming within any of these classes (Part 9A Chapter 3 of CTA 2009).
The classes are as follows:
– distributions from controlled companies (the recipient must control the payer, or if
not, must, together with other conditions, be one of two persons who, taken
together, control the payer);
– distributions in respect of non-redeemable ordinary shares;
– distributions in respect of portfolio holdings (holdings – in respect of share capital,
income rights, and capital rights – representing less than 10% of their class of
share);
– dividends derived from transactions not designed to reduce tax; and
– distributions of certain shares accounted for as liabilities.
However, the dividends must not be paid under a transaction falling within a list of
excluded schemes. These are as follows:
– schemes involving manipulation in order to come within the controlled company
exempt class;
– schemes involving quasi-preference or quasi-redeemable shares;
– schemes involving manipulation in order to come within the portfolio holdings
exempt class;
– schemes in the nature of loan relationships;
– schemes involving distributions for which deductions are given;
– schemes involving payments for distributions;
– schemes involving payments not on arm’s length terms; and
– schemes involving diversion of trading income in cases where a dividend would
have fallen to be treated as trading income.
27
Effective for distributions received on or after 1 July 2009, distributions received by

small companies qualify for exemption if they fall into an exempt class and are not paid
in connection with an excluded scheme (see above). Additionally, however, the paying
company must be resident in the United Kingdom or in a territory with which the United
Kingdom has a double tax treaty containing a non-discrimination clause. A small company
is as defined in the Annex to Commission Recommendation 2003/361. However, excluded
from the scope of small companies are open-ended investment companies, authorized
unit trusts, insurance companies and friendly societies. In respect of distributions paid
by a company resident in a qualifying territory, the exemption does not apply if the
paying company is an “excluded company”. An excluded company is one that is excluded
from the benefits of any tax treaty for the time being in force in relation to that territory.
A list of territories with such companies is available in HMRC’s International Tax Manual.
The distribution to a small company must not be part of an arrangement to avoid tax.
For foreign-source dividends that do not qualify for the exemption, see section 6.1.4.;
for dividends paid to non-resident companies, see sections 6.2.1. and 6.3.1.
3. Other Taxes on Income
3.1. General
There are no local income taxes for companies. Aside from the corporation tax, the
diverted profits tax (see section 3.3.) and the bank surcharge (see section 5.4.), there
are no taxes on corporate income.
3.2. Oil taxes
Companies engaged in oil and gas production may be subject to corporation tax (and a
supplementary charge) and petroleum revenue tax (PRT). However, there is no PRT
charge in respect of income from fields given development consent on or after 16
March 1993.
3.2.1. Corporation tax
The corporation tax rate applicable to profits from oil extraction and rights is 30% (sec-
tion 279A of CTA 2010).
The small profits rate is 19%. This applies to companies with relevant profits not
exceeding GBP 300,000.
For companies with profits between GBP 300,000 and GBP 1.5 million, tax is first cal-
culated at the relevant rate of 30%, from which “marginal relief” is deducted, mar-
ginal relief being:
I
11/400 x (M – P) x
P
where:
M = an upper threshold of GBP 1.5 million;
P = the profits subject to corporation tax plus certain exempt distributions; and
I = the profit subject to corporation tax.
28
If the company has one or more active companies in its “51% group” (including non-res-
ident companies) at any time during the accounting period, the reduced rate of
tax/marginal relief applies only if its profits do not exceed the amount produced by
dividing either 300,000 or 1.5 million by the number of active companies in the group.
In general, the normal rules apply for assessing a company to corporation tax. How-
ever, under special ring fencing rules, the oil and gas production of a company is
treated as a separate trade distinct from other activities of the company. The aim of
this is to prevent income from oil and gas production from being offset against losses
from a company’s other activities. Losses from oil and gas production may, however, be
set off against income from other activities. The ring fencing rules apply on an overall
basis to a company’s oil and gas production (but not on a per-field basis).
Companies engaged in North Sea oil and gas activities are liable to a supplementary
charge at the rate of 10% of their adjusted taxable profits (Part 8, Chapter 6 of CTA
2010) for accounting periods commencing on or after 1 January 2016. Before that time,
the rate was 20%. Various allowances are in place which mainly operate by reducing
the amount of profits within the ambit of the supplementary charge. These include:
– the investment allowance, giving relief for 62.5% of qualifying investment expen-
diture;
– the cluster area allowance, giving relief for 62.5% of qualifying expenditure; and
– the onshore allowance, giving relief for 75% of qualifying expenditure in relation to
an onshore site.
3.2.2. Petroleum revenue tax
Petroleum revenue tax (PRT) is levied only on income from fields given development
consent on or before 15 March 1993. The relevant legislation is found in Oil Taxation
Act 1975. FA 2016 (permanently) reduced the rate of PRT to zero, with effect for all
chargeable periods ending after 31 December 2015.
For earlier chargeable periods, the tax rate was 50%.
Petroleum revenue tax is deductible for corporation tax purposes although, following
the introduction of the zero rate, this is of diminished relevance. Related expenses are
deductible. No deduction is allowed for interest expense. Instead, a 135% deduction is
given for capital expenditure incurred before the oilfield income exceeds the cumu-
lative costs of the field. An oil allowance applies with the effect of exempting from
petroleum revenue tax a specified amount of production from each field. There are
also rules to prevent petroleum revenue tax from being charged if the return is too
low.
Losses may be carried forward or back to reduce income of the same field. An overall
loss realized after the abandonment of the field may be set off against income of
another field of the taxpayer.
3.3. Diverted profits tax
The diverted profits tax has effect for relevant profits arising on or after 1 April 2015.
It is aimed at catching profits being diverted away from the United Kingdom, typically
by multinational enterprises. The rules target two main types of transaction: (i) where
UK profits are diverted away by the exploitation (by foreign enterprises) of the per-
manent establishment rules; and (ii) where tax advantages are created by means of
transactions or entities lacking economic substance. Detailed provisions apply. Several
exemptions from the diverted profits tax apply, including for small and medium-sized
29
companies, companies with limited UK sales or expenses, and where arrangements

give rise to loan relationships only. The relevant legislation is set out in Part 3 of FA
2015 (sections 77 to 116).
The DPT is not an allowable deduction for the purposes of corporation tax.
Where it is just and reasonable to do so, a tax credit is allowable where a company has
paid UK corporation tax (or a foreign tax corresponding to UK corporation tax) on any
profits that are subject to the DPT. The tax credit is allowable against the DPT liability
of the company that paid the relevant corporation tax. It may also be allowed against
the DPT liability of another company where this relates to the same diverted profits.
The DPT rate is 25% plus any notional interest on late-paid tax that begins to run 6
months after the end of the accounting period until the day the charging notice is
issued. In the case of ring fence profits (or notional ring fence profits) from the oil and
gas sector, the DPT rate is 55% plus any applicable interest.
A company that is within the charge to DPT must notify HMRC of that fact. Failure to
notify will attract a penalty and will extend the timeframe within which an officer of
HMRC may issue a preliminary notice (see below).
The duty to notify is disapplied in certain prescribed circumstances, broadly (i) where
the tax benefit is not significant; (ii) where, ultimately, there would be no DPT pay-
able; (iii) where the company had furnished HMRC with relevant information, which
had then been examined by HMRC; and (iv) where the company had previously notified
HMRC that it was within the DPT charge, and there have been no material changes in
its circumstances since that notification.
Notification must be made within 3 months of the end of the accounting period to
which the notification relates. However, for accounting periods ending on or before 31
March 2016, this must be done within 6 months of the end of the relevant accounting
period.
The charging mechanism is as follows: where, in any particular case, a designated
officer of HMRC considers that the tax should apply, he is authorized to issue a prelim-
inary notice to that effect, setting out, inter alia, the reasons for the charge, the
amount of the charge, and the basis upon which the charge has been calculated. The
recipient has 30 days within which to respond to this notice, and then a further 30 days
are available to the HMRC officer within which to consider the response of the recip-
ient. At the end of that period, he may issue a charging notice stating the original
charge or a revised charge. It is also open to him to conclude that no charge in fact
arises. Any tax demanded must be paid within 30 days of the charging notice. Penalties
apply for late payment. Appeals against charging notices may be made under the
general rules that apply to tax appeals.
3.4. Charge to income tax on offshore receipts
With effect from 6 April 2019, FA 2019 has introduced an income tax charge on off-
shore receipts in respect of intangible property (the “ORIP charge”). This is a charge to
UK income tax, at a rate of 20%, on the full amount of “UK-derived” amounts con-
nected to intangible property received by persons who are neither resident in the
United Kingdom nor in a jurisdiction having a double tax treaty with the United
Kingdom containing a non-discrimination article. The amounts caught by the charge
are not limited to royalties and may take the form of capital or revenue but must arise
in respect of the enjoyment or exercise of rights constituting intangible property
directly or indirectly facilitating or promoting services, goods or other property pro-
30
vided in the United Kingdom or to persons in the United Kingdom (“UK sales”). There is
a de minimis exemption for persons whose UK sales are no more than GBP 10 million in
the tax year. Exemptions are available for income that is taxed at appropriate levels
and income relating to intangible property that is supported by sufficient local sub-
stance (Part 5, Chapter 2A of the Income Tax (Trading and Other Income) Act 2005
(ITTOIA 2005)).
An anti-avoidance measure targets transactions designed to avoid the new charge,
which take place after 28 October 2018.
4. Taxes on Payroll
4.1. Payroll tax
FA 2016 introduced, with effect from 6 April 2017, an apprenticeship levy. The levy
applies across the United Kingdom and is charged on employers. The rate of the levy is
0.5% of an employer’s “total pay bill” for the tax year to the extent that it exceeds GBP
15,000 (this allowance has to be shared among connected companies). It follows that
the apprenticeship levy will be payable only by employers whose total pay bill exceeds
GBP 3 million.
4.2. Social security contributions
National insurance contributions (NICs) paid by the employer are known as
“employer’s secondary Class 1 contributions”. The amount of contributions payable is
fixed by reference to the earnings of the employee.
An employer is liable at the rate of 13.8% on weekly earnings above the “weekly sec-
ondary threshold” of GBP 166 (for 2019/20).
Most employers (but only one within a group of companies) have an allowance of GBP
3,000 per year to set against their liability to employer’s secondary Class 1 contribu-
tions. From 2020/21, this will be restricted to employers with an annual NIC liability of
less than GBP 100,000.
Before 2016/17, there was a system of rebates regarding employees who were con-
tracted out of the state scheme. This applied where the employer operated an occu-
pational pension scheme which contracted the employees out of the State Earnings
Related Pension Scheme (SERPS).
United Kingdom-based host employers of seconded employees continuing to be
employed by a non-resident employer (the employer not having a business presence in
the United Kingdom), are obliged to pay the contributions of the non-resident
employer.
Social security contributions are deductible for corporation tax purposes. The main
governing legislation is the Social Security Contributions and Benefits Act 1992.
For social security contributions payable by employees, see Individual Taxation section
3.
5. Taxes on Capital
5.1. Net worth tax
The United Kingdom does not levy a net worth tax.
31
5.2. Real estate tax

5.2.1. The National Non-Domestic Rate
The National Non-Domestic Rate (NNDR) (commonly known as “business rates”) is
payable by every occupier of business premises. Local authorities collect the tax by
charging a Uniform Business Rate (UBR), which is set by the government.
Rateable values, which are reassessed every 5 years, are based on market rents, i.e.
the annual rent the property might reasonably be expected to fetch if it were let on
the open market, and subject to certain assumptions. Transitional relief applies to
phase in significant increases or decreases in rateable value over a period of years.
For the year ending 31 March 2020, the UBR for England is 50.4% (and estimated to be
51.6% for the year beginning 1 April 2020). For small businesses, the UBR is 49.1% (and
estimated to be 50.3% for the year beginning 1 April 2020). The multiplier in Wales for
the year beginning1 April 2019 is 52.6%; a different system of relief applies for small
businesses.
The NNDR is a deductible expense for corporation tax purposes.
The government has proposed the abolition of uniform business rates, with the effect
that each local authority will set its own rates.
Power is devolved to the Scottish rating authorities, so that, with effect from 31
October 2015, the Scottish rates are set by these local bodies.
At Budget 2018, the government announced that it would temporarily reduce business
rates by one third for retail properties with a rateable value below GBP 51,000. The
reduction would apply for 2 years from 1 April 2019, subject to State aid limits.
5.2.2. Annual tax on enveloped dwellings
FA 2013 introduced an annual tax on enveloped dwellings (ATED). The relevant legis-
lation can be found in sections 94 to 174 of FA 2013. This is an annual charge on UK res-
idential properties valued at over GBP 500,000 (initially GBP 2 million), where such
properties are owned by certain non-natural persons, e.g. certain companies, collec-
tive investment schemes, and partnerships with company members. The taxable
amount is determined based on the band into which the property falls. The rules took
effect from 1 April 2013.
Relief from ATED is available in certain circumstances, for example, where the prop-
erty has been let to a third party on a commercial basis, and was at no time occupied,
or was available for occupation by the owner or anyone connected with the owner.
Relief is also available for property that is being developed for resale in the course of
the trade of a property developer and for property included in the trading stock of the
business of a property trader, for the sole purpose of resale. Finally, relief is available
in respect of property that is open to the public for at least 28 days in the year. The
reliefs may reduce or even eliminate the ATED liability.
Exemptions apply, for example, where the property is being used by a charity, for char-
itable purposes. There are also exemptions for certain prescribed public bodies and
bodies established for national purposes. The latter category includes bodies such as
the Historic Buildings and Monuments Commission for England and the Trustees of the
Natural History Museum.
32
The ATED bands are as follows:
Property value (GBP) Charge 2018/19 Charge 2019/20

(GBP) (GBP)
Above 500,000 but not exceeding 1,000,000 3,600 3,650
Above 1,000,000 but not exceeding 2,000,000 7,250 7,400
Above 20,000,000 226,950 232,350
Along with the ATED, FA 2013 introduced a capital gains tax rate of 28% on gains from
the disposal of such high-value properties (i.e. valued at over GBP 500,000 (initially
GBP 2 million)) held by certain non-natural persons (these gains were referred to as
“ATED-related gains” – see section 1.4.). An increased stamp duty land tax charge
(regarding high-value properties) was introduced earlier by FA 2012 (see section 9.2.).
With effect from 6 April 2019, the ATED-related gains regime has been subsumed into
the general charge to capital gains tax or corporation tax on chargeable gains from dis-
posals of interests in UK land (see 1.4.and 6.2.1.).
5.3. Other taxes
FA 2011 introduced a bank levy (Schedule 19), which took effect for accounting periods
ending on or after 1 January 2011. The bank levy applies to UK banks, banking groups
and building societies, as well as UK banks and banking sub-groups within non-banking
groups. Also liable are foreign banking groups operating in the United Kingdom through
permanent establishments and subsidiaries.
The levy is based on the total chargeable equity and liabilities as reported in the rel-
evant balance sheets of the taxpayer at the end of the chargeable period. Under leg-
islation currently before Parliament, the levy will apply to equity and liabilities
recognized on the UK balance sheet of a bank only, and no longer to worldwide equity
and liabilities.
The levy does not apply to the first GBP 20 billion of chargeable liabilities.
Following the introduction of the surcharge for banking companies (see section 5.4.),
changes have been made to the rates of the bank levy.
Set out below are the applicable rates with effect from 1 January 2018.
Effective date Chargeable equity and long-term Short-term chargeable

chargeable liabilities (%) liabilities (%)
1 January 2018 0.08 0.16
1 January 2019 0.075 0.15
1 January 2020 0.07 0.14
1 January 2021 and onwards 0.05 0.10
5.4. Bank surcharge

With effect from 1 January 2016, a surcharge applies to prescribed profits of banking
companies. The surcharge is 8% of the excess of the banking company’s “surcharge
profits” over a “surcharge allowance”, as defined. The surcharge is treated as an
amount of additional corporation tax payable by the banking company. Where a
33
banking company had an accounting period that straddled 1 January 2016, the
accounting period was treated as split, with the surcharge applying to a notional
period treated as commencing on 1 January 2016.
For rules regarding restriction of loss relief for banking companies, see section 1.5.
6. International Aspects
6.1. Resident companies
For the concept of residence, see section 1.2.1.
6.1.1. Foreign income and capital gains
Resident companies are taxed on their worldwide income (section 5 of CTA 2010). The
legal form of foreign investments is generally respected, except under specific anti-
avoidance legislation (see section 7.4.).
A company may elect that its profits attributable to its foreign permanent establish-
ments be left out of account for UK corporation tax purposes, effectively exempting
such profits from UK corporation tax (sections 18A to 18S of CTA 2009) (branch exemp-
tion rules). Foreign losses attributable to the permanent establishment are corre-
spondingly not allowable for UK tax purposes. This election is irrevocable once made
and must apply to all the company’s foreign permanent establishments.
There is an exemption for foreign dividends received by large and medium-sized com-
panies, and in certain cases, by small companies (see section 1.3.2.). Where the
exemption is not available, credit relief for foreign tax applies. A recipient may opt for
the exemption not to apply.
HMRC may allow any UK corporation tax due to remain uncollected if it is payable in
respect of foreign-source income or gains that cannot be remitted because of restric-
tions in the source country.
Upon transfer of a company (or its assets) outside the UK there is a (notional) disposal
at market value of those assets. This gives rise to a so-called “exit charge”, which, in
principle, is due immediately. If, however, the company migrates to another jurisdic-
tion in the EEA, the liability may be settled through a payment plan, i.e. in instalments
(under conditions). With effect from 1 January 2020, however, this payment plan is
only available if the transfer is to an EU Member State, or an EEA state that has con-
cluded an agreement concerning the mutual collection of tax debts with either the
European Union or the United Kingdom. FA 2019 amended the rules relating to the exit
charge for the transfer of assets or tax residence between the United Kingdom and an
EEA state by companies resident in the United Kingdom or an EEA state, in order to
comply with the Anti-Tax Avoidance Directive (2016/1164) of 12 July 2016 (ATAD).
6.1.2. Foreign losses
As a result of the abolition of the schedular system, there is generally an amalgama-
tion, for tax purposes, of income from both UK and non-UK sources.
However, a difference in the tax treatment could still arise in certain circumstances,
such as where the legislation provides for a different tax treatment for the relief of
overseas losses. See also, however, section 6.1.1. on the branch exemption rules.
34
6.1.3. Foreign capital

The United Kingdom does not levy a net worth tax.
Immovable property situated abroad is not subject to any UK taxes applicable to real
estate.
6.1.4. Double taxation relief
In general, relief is available from double taxation under the ordinary credit method,
both unilaterally and under tax treaties. As an alternative to unilateral credit relief,
an election may be made for the foreign tax to be treated as a deductible expense.
Credit relief is given for those foreign taxes, including national, provincial and munic-
ipal taxes, that correspond to UK corporation tax or that are covered by an applicable
tax treaty (HMRC Statement of Practice of 26 July 1991). The credit is limited to the UK
corporation tax attributable to the foreign income or gains, calculated on a source-by-
source and item-by-item basis. The credit is also limited to what the foreign tax would
have been if all reasonable steps had been taken to minimize the amount of foreign
tax. Any unused credit may be carried back for 1 year or carried forward indefinitely to
be set off against corporation tax on income or gains from the same source.
In the case of dividends not qualifying for the distribution exemption (e.g. in the case
of certain small company recipients, see section 1.3.2.), credit relief is additionally
given for foreign tax on the corporate income underlying the distribution. To qualify
for this credit, the resident company must have at least 10% of the voting power in the
non-resident distributing company. Where a lower degree of participation is required
under tax treaties, such requirements prevail over those of the UK domestic law.
Credit relief may also be claimed for UK tax or foreign tax on the profits of lower-tier
related companies, i.e. when profits are transferred trough a chain of related compa-
nies to fund dividends paid by a non-UK resident company. A company is related to
another company for this purpose if it controls, directly or indirectly, or is a subsidiary
of a company which controls directly or indirectly, at least 10% of the ordinary share
capital, or 10% of the voting power in the other company.
The foreign tax credit may be surrendered to another company in the same group.
Relief by exemption may be given for certain types of income or gains under tax trea-
ties. For a list of tax treaties in force, see section 6.3.5.
6.2. Non-resident companies
For the concept of residence, see section 1.2.1.
6.2.1. Taxes on income and capital gains
Non-resident companies are subject to UK corporation tax if they are trading in the
United Kingdom through a permanent establishment or carrying on a trade of dealing
in or developing UK land (sections 5 to 5B of CTA 2009) or, from 6 April 2020, if they
have income from UK land. The charge relating to permanent establishments attracts
trading income arising through the permanent establishment, income from property or
rights held by, or for, or used by, the permanent establishment, and gains from the dis-
posal of assets used by the permanent establishment. The charge relating to dealing or
developing UK land applies in relation to disposals after 4 July 2016 only (subject to
transitional provisions relating to disposals made to associated persons no earlier than
15 March 2016).
35
The treatment of non-resident companies trading in the United Kingdom generally

follows the same rules that apply to resident companies. However, if a non-resident
company ceases to trade in the United Kingdom through its permanent establishment,
or removes an asset from the United Kingdom, there is a deemed disposal whereby
unrealized capital gains become chargeable.
There is no general force of attraction principle in UK tax law.
The trading and other income and capital gains of a UK permanent establishment are
subject to corporation tax at the main rate of corporation tax (see section 1.6.1.).
An anti-fragmentation rule was introduced into the domestic definition of “permanent
establishment”. This rule denies access to the “preparatory or auxiliary activities”
exemption from the definition of a permanent establishment where the activities have
been artificially fragmented to gain access to said exemption. This has effect for
accounting periods beginning on or after 1 January 2019, with transitional provisions
for accounting periods straddling this date.
Withholding taxes (where applicable; see section 6.3.) apply to relevant payments to
non-resident companies other than payments attributable to a trade carried on in the
United Kingdom through a permanent establishment. Regarding payments to perma-
nent establishments, exemption applies only when the payments are included in the
taxable profits of the permanent establishment. Otherwise, where applicable, tax
must be withheld.
If a non-resident company is not trading in the United Kingdom through a permanent
establishment, it is subject to income tax on its UK-source income at the 20% basic rate
of income tax, subject to an income tax limitation. The income tax limitation effec-
tively exempts income in respect of which tax is not withheld at source. For the situ-
ation where there is a UK representative, see section 6.2.3. Income tax also applies to
the income of a non-resident company trading in the United Kingdom, in respect of UK-
source income that is not attributable to the trade. On certain kinds of investment
income, such as interest, the rate is the 20% savings income tax rate. Interest on bank
deposits and Eurobonds is exempt. Under legislation contained in FA 2019, referred to
earlier (see section 1.2.), non-resident companies carrying on a property business in
the United Kingdom or otherwise deriving other income from UK land will be charged
to corporation tax, instead of income tax. The relevant legislation will take effect
from 6 April 2020.
Capital gains derived by a non-resident company from assets situated in the United
Kingdom are generally not taxable unless they are attributable to a trade being carried
out in the United Kingdom through a branch or agency, or, in relation to disposals made
after 4 July 2016, they are gains from a disposal of land in the United Kingdom treated
(under Part 8ZB of CTA 2010) as profits of a trade of dealing in or developing UK land.
With effect for gains arising after 5 April 2015 and before 6 April 2019, non-residents
were subject to tax on the disposal of a “UK residential property interest”. Such a dis-
posal was known as a “non-resident CGT (NRCGT) disposal”. Regarding disposals by
non-resident companies, the tax charge applied only to closely held companies and to
offshore funds that did not meet a “genuine diversity of ownership” test. In both
cases, the NRCGT charge was 20%. The chargeable part of the gain was that part relat-
ing to the period after 5 April 2015. This was determined either by ascertaining the
market value of the property as at that date (so-called rebasing), or by applying a
straight-line time apportionment. Generally speaking, it was the taxpayer’s choice.
36
Where the disposal was also subject to ATED-related CGT (see section 5.2.2.), the
ATED-related CGT rules took precedence. Any gains not caught by the ATED-related
CGT were then subject to tax under the NRCGT rules. A form of indexation allowance
applied. There was also provision for pooling (in order to offset gains and losses) within
qualifying groups.
NRCGT losses were generally ring-fenced against NRCGT gains. They could not be
offset against ATED gains (see section 5.2.2.).
With effect from 6 April 2019, the NRCGT regime has been subsumed within the
general charge to corporation tax on the direct or indirect disposal of an interest in UK
land. An indirect disposal of an interest in UK land is chargeable to corporation tax
where it is a disposal of an asset (wherever situated) that derives at least 75% of its
value from UK land and the company making the disposal has a “substantial indirect
interest” in that land. An asset is regarded as deriving at least 75% of its value from UK
land if it consists of a right or interest in a company (such as a share) and at least 75%
of the market value of that company’s assets (except for those assets that are not an
interest in UK land and are matched by related-party liabilities) at the time of the dis-
posal derives directly or indirectly from interests in UK land. A company has a substan-
tial indirect interest in UK land if at any time in the period of 2 years immediately
preceding the disposal, it has an investment of at least 25% in the company. Exceptions
are made for land held for trading purposes and certain collective investment funds.
These rules apply for disposals after 5 April 2019 and, broadly, apply to that part only
of the chargeable gain that relates to the period after that date. This is determined
either by ascertaining the market value of the property as at that date (so-called
rebasing), or by applying a straight-line time apportionment from the later of 31 March
1982 and the acquisition date. Generally speaking, it is the taxpayer company’s
choice. Unused losses may be carried forward.
The ATED-related and NRCGT gains regimes have been abolished (see also section
1.4.).
6.2.2. Taxes on capital
There is no net worth tax.
Non-resident companies are subject, just as resident companies, to either the non-
domestic rate in respect of business premises or other forms of property tax on resi-
dential property (see section 5.2.) in respect of their immovable property located in
the United Kingdom.
See section 5.2.2. for the annual tax on enveloped dwellings (ATED).
For the bank levy, see section 5.3.
6.2.3. Administration
Assessment and collection of taxes are administered through the non-resident com-
pany’s UK representative. The definition of representative is broad and includes a UK
permanent establishment. However, irregular agents, brokers and investment manag-
ers are normally not treated as UK representatives. In the absence of a representative,
the tax liability is limited to the tax withheld at source.
37
6.3. Withholding taxes on payments to non-resident companies

Withholding taxes apply to certain payments to non-resident companies other than
payments attributable to a trade carried on in the United Kingdom through a perma-
nent establishment.
6.3.1. Dividends
There is no withholding tax on dividends.
In general, no imputation credit is allowed on distributions to non-resident sharehold-
ers. Some tax treaties, however, provide for repayment of an imputation credit to
foreign corporate shareholders, subject to a minimum holding requirement. Such
repayment is subject to withholding tax at the appropriate treaty rate.
6.3.2. Interest
Tax is generally withheld at the 20% basic rate of income tax on payments of interest to
persons “whose usual place of abode” is outside the United Kingdom (section 874 of ITA
2007). An exemption applies for interest on quoted Eurobonds. Interest on deposits in
banks may be paid free of withholding tax provided a declaration of non-residence is
filed with the bank.
Under the domestic law provisions implementing the EU Interest and Royalties Direc-
tive (2003/49), outbound interest and royalty payments are exempt from withholding
tax, provided that the beneficial owner is an associated company of another EU
Member State or such a company’s permanent establishment situated in another
Member State. The relevant companies must have a legal form listed in the Annex of
the Directive and must be subject to corporate income tax (without being exempt). A
company is an “associated company” of another company if (i) it has a direct minimum
holding of at least 25% of the capital or voting power in the other company; or (ii) a
third company has such a holding in both the borrower and lender companies. No
minimum holding period is required.
6.3.3. Royalties
Tax must be withheld at the 20% basic rate of income tax on payments of royalties or
payments of any other kind for the use of, or for the right to use, intellectual property.
This includes payments for literary, artistic or scientific copyright, trademarks,
designs, models, plans and secret formulae, but excludes film-related copyright roy-
alties. Before 28 June 2016, the obligation to deduct tax applied to specific types of
royalty only, chiefly patent royalties and copyright royalties, except in the case of
copyrights on films (sections 903, 906 and 907 of ITA 2007). For the Interest and Roy-
alties Directive, see section 6.3.2.
A company paying cross-border royalties may self-assess its obligation to withhold tax
under the terms of the relevant double taxation treaty without seeking prior clear-
ance.
FA 2016 introduced measures (section 917A of ITA 2007) to widen the circumstances in
which withholding tax should be deducted from payments to non-residents. The aim is
to counter the use of contrived arrangements to exploit the provisions of double tax-
ation treaties.
38
6.3.4. Other
On payments of annuities and annual charges, other than interest, tax must be with-
held at the 20% basic rate of income tax. The same applies to payments of rent for
immovable property; however, such rental income may be paid gross, upon approval
from HMRC (sections 971 and 972 of ITA 2007 and the Taxation of Income from Land
(Non-residents) Regulations 1995, SI 1995/2902).
For distributions from Real Estate Investment Trusts (REITs), see section 1.7.3.
6.3.5. Withholding tax rates chart
The following chart contains the withholding tax rates that are applicable to dividend,
interest and royalty payments by UK companies to non-residents under the tax treaties
in force as at the date of review. Where, in a particular case, a treaty rate is higher
than the domestic rate, the latter is applicable. There is no withholding tax on divi-
dends.
Relief at source may be granted on application.
Dividends Interest1,2 Royalties

Individuals, Qualifying
companies companies3,4
(%) (%) (%) (%)
Domestic Rates
Companies: 0 0 0/20 0/20
Individuals: 0 n/a 20 20
Treaty Rates
Treaty With:
Albania 10 5/155 6 0
Algeria 15 5 7 10
Antigua and Barbuda 0 0 –6 0
Argentina 157 107 127 3/5/10/157,8
Armenia 10 0/5/159 510 5
Australia 15 0/511 0/1012 5
Austria 10 0/1513 0 0
Azerbaijan 15 1014 10 5/1015
Bahrain 0 0/1516 017 0
Bangladesh 15 1018 7.5/1019 10
Barbados 0 0/1516 0 0
Belarus 5 5/1516 5 0/520
Belgium 10 0/1521 0/1022 0
Belize 0/15 0/15 –6 0
Bolivia 1523 10/1524 1523 0/1525
Bosnia and
Herzegovina26 1527 527 10 10
Botswana 12 5 10 10
Brunei 027 027 –6 0
Bulgaria 5 0/1528 0/529 5
Canada 15 0/530 0/1031 0/1032
39

(%) (%) (%) (%)
Chile 15 533 4/5/10/1534 2/5/1035
China (People’s Rep.) 10 5/1516 10 1036
Colombia 0/1597 533 0/1037 10
Croatia 10 0/5/1538 0/539,40 540
Cyprus 0/1541 0/15 0 0
Czech Republic 15 5 0 0/1042
Denmark 15 0 0 0
Egypt 20 20 15 15
Estonia 15 5 0/1043 0/5/1044
Eswatini (formerly
Swaziland) 15 15 –6 0
Ethiopia 10 10/1516 0/545 7.5
Falkland Islands 10 518 0 0
Faroe Islands 15 0/546 0 0
Fiji 1527 027 10 0/1547
Finland 0 0 0 0
France 15 048 0 0
Gambia 1527 1527 15 12.5
Georgia 0 0/1516 0 0
Germany 15 5/1049 0 0
Ghana 15 7.518 12.5 12.5
Greece –6 –6 0 0
Grenada 0 0 –6 0
Guernsey 0 0/1516 –/050 –/051
Guyana 15 1018 15 10
Hong Kong 0 0/1516 017 3
Hungary 10 0/1552 0 0
Iceland 15 0/553 0 0/554
India 10 10/1516 10/1519 10/1555
Indonesia 027 027 10 10/1555
Ireland 15 518 0 0
Isle of Man 0 0/1516 –/050 –/051
Israel 15 0/556 0/5/1057 0
Italy 1527 518,27 0/1058 8
Ivory Coast 15 15 15 10
Jamaica 1527 0/1527 12.5 10
Japan 10 059 0/1060 0
Jersey 0 0/1516 –/050 –/051
Jordan 10 10 10 10
Kazakhstan 15 518 1061 1061
Kenya 1527 027 15 15
Kiribati 1527 027 –6 0
40

(%) (%) (%) (%)
Korea (Rep.) 15 5 10 2/1062
Kosovo 0 0/1516 0 0
Kuwait 15 518 0 10
Latvia 15 5 10 0/5/1063
Lesotho 10 5/1564 0/1065 7.5
Libya 0 0/1516 0 0
Liechtenstein 0 0/1516 0 0
Lithuania 15 5 0/1066 0/5/1067
27
Luxembourg 15 527 0 5
27
Malawi 15 027 0/–68 0/–68
Malaysia 10 518 10 8
27
Malta 0 027 10 10
Mauritius 0 0/1516 0/–69 15
Mexico 0 0/1516 0/5/10/1570 10
Moldova 10 0/571 0/572 5
Mongolia 15 518 7/1019 5
Montenegro26 1527 527 10 10
56
Montserrat 0 056 –6 0
Morocco 25 1018 10 10
Myanmar 0 0 –6 0
Namibia 0 0 –6 0/573
Netherlands 10 0/1574 0 0
New Zealand 15 15 10 10
Nigeria 15 12.518 12.5 12.5
North Macedonia 15 0/575 0/1076 0
Norway 15 077 0 0
Oman 0 0/1516 0 8
78
Pakistan 15/20 15/2078 15 12.5
Panama 15 079 0/580 5
Papua New Guinea 17 17 10 10
Philippines 2527 1518,27 10/1581 15/2582
Poland 10 083 0/584 5
Portugal 15 10 10 5
Qatar 15 0/1516 0/–17 5
Romania 1527 1027 10 10/1515
Russia 10 10 0 0
Saudi Arabia 5 5/1516 0 5/855
St. Kitts and Nevis 0 0 –6 0
Senegal 10 5/8/1585 10 1086
Serbia26 1527 527 10 10
Sierra Leone 0 0 –6 0
41

(%) (%) (%) (%)
Singapore 0 0/1516 0/587 8
Slovak Republic 15 5 0 0/1042
Slovenia 15 088 0/589 5
Solomon Islands 15 0 –6 0
South Africa 10 5/1590 0 0
Spain 10 0/1552 0 0
Sri Lanka 15 15 0/1012 0/1091
27
Sudan 15 027 15 10
Sweden 5 0/1592 0 0
Switzerland 15 077 0 0
Taiwan 10 10 10 10
Tajikistan 10 93 5/1593,94 0/1095 7
Thailand 1527 027 10/2596 5/1515
Trinidad and Tobago 2027 027 10 0/1047
Tunisia 20 12 10/1219 15
Turkey 20 15 15 10
Turkmenistan 15 5 10 10
Tuvalu 1527 027 –6 0
Uganda 15 15 15 15
Ukraine 0/1597 533 0/598 5
United Arab Emirates 0 0/1516 0/–99 0
United States 15 0/5100 0101 0
Uruguay 15 0/553 0/10102 10
Uzbekistan 10 5/1590 5103 5103
Venezuela 10 018 0/5 5/7104
Vietnam 15 7/10105 10 10
Zambia 5 5/1516 10 5
27
Zimbabwe 20 027 10 10
1. Many treaties provide for an exemption for certain types of interest, e.g. interest paid to or by the
state, local authorities, the central bank, export credit institutions, or in relation to sales on credit.
Such exemptions are not considered in this column.
2. In the case of relations between EU Member States, interest and royalties payments between related
companies may be exempt if the conditions of the EU Interest and Royalties Directive 2003/49/EC are
met.
3. Unless stated otherwise, the reduced treaty rates given in this column generally apply if the beneficial
owner is a company which holds, directly or indirectly, at least 25% of the capital or the voting power,
as the case may be, of the company distributing dividends.
4. In the case of relations between EU Member States, dividend payments from subsidiaries to parent
companies may be exempt if the conditions of the Parent Subsidiary Directive 2011/96/EU are met.
5. The 5% rate applies if the beneficial owner is (i) a company that holds directly at least 25% of the
capital in the company paying the dividends; or (ii) a pension scheme. The 15% rate applies, under
conditions, to dividends paid out of income derived directly or indirectly from immovable property by
certain investment vehicles.
6. The domestic rate applies; there is no reduction under the treaty.
7. A most favoured nation clause may be applicable with respect to dividends, interest and royalties.
42
8. The 3% rate applies to royalties paid for news; the 5% rate applies to copyright royalties (other than
films, etc.); the 10% rate applies to industrial royalties.
9. The 0% rate applies if the beneficial owner is a pension scheme. The 5% rate applies if the beneficial
owner holds, directly or indirectly, at least 25% of the capital of the company paying the dividends and
has invested at least GBP 1 million (or equivalent) in its capital. The 15% rate applies, under condi-
tions, to dividends paid out of income derived directly or indirectly from immovable property by
certain investment vehicles.
10. A most favoured nation clause may be applicable with respect to interest.
11. The 0% rate applies where the beneficial owner is a company that has owned shares representing 80%
or more of the voting power in the paying company for a 12-month period ending on the date the div-
idend is declared (subject to listing conditions and entitlement to treaty benefits, etc.). The 5% rate
applies if the beneficial owner holds directly at least 10% of the voting power in the paying company.
12. The 0% rate applies to interest paid to financial institutions (as defined).
13. The 0% rate applies if the beneficial owner is (i) a pension scheme; or (ii) holds, directly or indirectly,
at least 10% of the voting power of the company distributing the dividends. The 15% rate applies to
dividends paid by a relevant investment vehicle.
14. The 10% rate applies if the beneficial owner is a company that (i) controls directly or indirectly at least
30% of the voting power in the company paying the dividends or (ii) has invested at least USD 100,000
(or equivalent) in the company paying the dividends.
15. The lower rate applies to copyright royalties.
16. The 15% rate applies, under conditions, to dividends paid out of income derived directly or indirectly
from immovable property by certain investment vehicles.
17. The 0% rate applies, inter alia, to interest (i) paid to an individual, a pension scheme, a financial insti-
tution and a company in whose principal class of shares there is substantial and regular trading on a
stock exchange, provided that such interest is not paid as part of an arrangement involving back-to-
back loans; and (ii) interest paid by the state or a bank, or interest on a quoted Eurobond. The domes-
tic rate applies in other cases (no reduction under the treaty).
18. The rate applies if the beneficial owner holds, directly or indirectly, at least 10% of the capital or the
voting power, as the case may be, of the company distributing the dividends.
19. The lower rate applies to interest paid to financial institutions (as defined).
20. The general rate under the treaty is 5%. However, in respect of royalties relating to the use of or right
to use industrial, commercial or scientific equipment the following applies: (i) the 5% rate is limited
to the amount calculated as the difference between the gross amount of the payment and confirmed
expenses related thereto, and (ii) a 0% rate applies where the contract under which the payments are
made was concluded, and the equipment provided under the contract was delivered to the territory of
the other contracting state, before 26 September 2017.
21. The 0% rate applies to: (i) participations held for an uninterrupted period of at least 12 months, rep-
resenting directly at least 10% of the capital of the company paying the dividends; and (ii) pension
schemes (conditions apply). The 15% rate applies, under conditions, to dividends paid out of income
derived directly or indirectly from immovable property by certain investment vehicles.
22. The 0% rate applies, inter alia, to (i) interest paid in respect of a loan granted or a credit extended by
an enterprise to another enterprise; and (ii) interest paid to a pension scheme (under conditions).
23. A most favoured nation clause may be applicable with respect to dividends and interest.
24. The general rate under the treaty is 15%. However, by virtue of a most favoured nation clause, the rate
is reduced to 10% if the beneficial owner is a company (other than a partnership) which holds directly
at least 25% of the capital of the company paying the dividends. Under the Bolivia and Spain treaty the
rate applicable to such dividends is 10%.
25. The general rate under the treaty is 15%. However by virtue of a most favoured nation clause the rate
is reduced to 0% for royalties for the use of, or the right to use, any copyright of literary, dramatic,
musical or artistic work (excluding royalties relating to cinematograph films, videotapes for use in
connection with television, or magnetic gramophone records or tapes). Under the Bolivia and Spain
treaty, the rate for such royalties is 0%.
26. The treaty concluded between the United Kingdom and the former Yugoslavia.
27. Special provisions may apply in respect of UK tax credits, see the treaty provisions for details.
28. The 0% rate applies to companies and pension schemes. The 15% rate applies, under conditions, to div-
idends paid out of income derived directly or indirectly from immovable property by certain invest-
ment vehicles.
43
29. The 0% rate applies to interest paid (i) in case of the sale on credit of any equipment, merchandise or
services, (ii) on any loan of whatever kind granted by a financial institution, (iii) to a pension scheme
or (iv) between companies, where one company holds directly at least 10% of the capital of the other
company for at least 1 year prior to the payment of the interest or where both companies are held by
a third company which holds directly at least 10% of the capital of both aforementioned companies for
at least 1 year prior to the payment of the interest.
30. The 0% rate applies if the beneficial owner is a pension scheme (conditions apply). The 5% rate applies
if the beneficial owner holds, directly or indirectly, at least 10% of the voting power of the company
paying the dividends.
31. The 0% rate applies, inter alia, if the beneficial owner of the interest is a resident of the other Con-
tracting State and is dealing with the payer at arm’s length, unless the interest is contingent or depen-
dent on the use of or production from property or unless it is computed by reference to revenue,
profit, cash flow, commodity price or any other similar criterion, or if it is computed by reference to
dividends paid or payable to shareholders of any class of shares of the capital stock of a company.
32. The lower rate applies to copyright royalties (excluding films), computer software, patents and know-
how.
33. The rate applies if the recipient company holds, directly or indirectly, at least 20% of the capital or the
voting power, as the case may be, of the company distributing dividends.
34. The interest rates under the treaty are 5% and 15%. The 5% rate applies to interest from loans granted
by banks and insurance companies, bonds or securities that are regularly and substantially traded on
a recognized securities market, and to interest in relation to sales on credit. However, by virtue of a
most favoured nation clause, under the Chile-Japan treaty the rates are reduced as follows:
(a) from 1 January 2017, the rate for certain types of interest is reduced to 4% (restrictions may
apply to back-to-back loans); and
(b) from 1 January 2019, the general rate is reduced to 10%.
For further details, including the updated text of article 11, see Circular No. 22/2018 issued by the
Chilean tax administration and the update of 28 February 2018 issued by HMRC.
35. The royalty rates under the treaty are 5% and 10%. The 5% rate applies to equipment leasing. However,
by virtue of a most favoured nation clause, the rate for equipment leasing is reduced to 2%. Under the
Chile and Japan treaty the rate for such royalties is 2%.
For further details, including the updated text of article 12, see Circular No. 22/2018 issued by the
Chilean tax administration and the update of 28 February 2018 issued by HMRC.
36. For royalties received as a consideration for the use of, or the right to use, industrial, commercial, or
scientific equipment, this rate applies to 60% of the gross amount of the royalties.
37. The 0% rate applies when the interest is paid (i) to a public body or a pension scheme, (ii) in respect
of a debt claim or a loan guaranteed or issued or subsidized by a contracting state, (iii) in connection
with sale on credit of industrial, commercial or scientific equipment, (iv) in connection with the sale
on credit of any merchandise by one enterprise to another enterprise (v) in respect of a loan or credit
granted for a period of not less than three years by a bank and, (vi) by financial institutions of both
contracting states.
38. The 0% rate applies if the beneficial owner is a pension scheme. The 5% rate applies if the beneficial
owner holds at least 25% of the capital of the company paying the dividends. The 15% rate applies,
under conditions, to dividends paid out of income derived directly or indirectly from immovable prop-
erty by certain investment vehicles.
39. The 0% rate applies for interest paid (i) in connection with the sale on credit of any industrial, com-
mercial or scientific equipment, (ii) in connection with the sale on credit of any merchandise by one
enterprise to another enterprise, or (iii) on any loan of whatever kind granted by a bank.
40. A most favoured nation clause may be applicable with respect to interest and royalties.
41. The higher rate applies to dividends paid out of income (including gains) derived directly or indirectly
from immovable property by an investment vehicle which distributes most of this income annually and
whose income from such immovable property is exempted from tax, other than where the beneficial
owner of the dividends is a pension scheme in the other contracting state.
42. The lower rate applies to copyright royalties (including films, etc.).
43. The rate under the treaty is 10%. However, by virtue of a most favoured nation clause, the rate is
reduced to 0% on interest paid to a bank (as defined). Under the 2005 amending protocol of the
Estonia-Netherlands treaty, the rate on such interest is 0%. In addition, the tax rate on interest paid
in respect of a loan made, guaranteed or insured by a financial institution of a public character is also
reduced to 0%. Under the 2014 amending protocol of the Estonia-Switzerland treaty, the rate on such
interest is 0%.
44
44. The rates under the treaty are 5% (equipment rentals) and 10%. However, by virtue of a most favoured
nation clause the rates are reduced to 0% for royalties (as defined). Under the 2014 amending protocol
of the Estonia-Switzerland treaty, the rate is 0%.
45. The0% rate applies to interest paid by the state, local authorities or the central bank.
46. The 0% rate applies if the beneficial owner is an exempt pension fund. The 5% rate applies if the ben-
eficial owner holds directly at least 10% of the capital of the company distributing dividends.
47. The 0% rate applies to copyright royalties (excluding films, etc.).
48. The 0% rate applies if the beneficial owner is (i) a company liable to corporation tax that holds,
directly or indirectly, at least 10% of the capital of the company paying the dividends and (ii) is a res-
ident of the other contracting state.
49. The 5% rate applies if the recipient company holds, directly or indirectly, at least 10% of the capital of
the company distributing dividends. The 10% rate applies if the beneficial owner is a pension scheme.
50. The 0% rate applies, inter alia, to interest paid to public bodies, an individual, pension scheme, bank
or any unrelated financial institution, a company in whose principal class of shares there is substantial
and regular trading on a recognized stock exchange, a company with a holding of less than 25% of non-
residents of the recipient state or any other person provided that the competent authority determines
that the establishment, acquisition or maintenance of such person does not have as its main or one of
its main purposes to secure the treaty benefits, or if the interest is paid by the state or local author-
ities. Otherwise the domestic rate applies.
51. The 0% rate applies, inter alia, to royalties paid to public bodies, an individual, a company in whose
principal class of shares there is substantial and regular trading on a recognized stock exchange, a
company with a holding of less than 25% of non-residents of the recipient state or any other person
provided that the competent authority determines that the establishment, acquisition or mainte-
nance of that person does not have as its main or one of its main purposes to secure the treaty ben-
efits. Otherwise the domestic rate applies.
at least 10% of the voting power of the company distributing the dividends. The 15% rate applies,
53. The 0% rate applies if the beneficial owner is a pension scheme (conditions apply). The 5% rate applies
if the beneficial owner holds, directly at least 10% of the voting power of the company paying the div-
idends.
54. The higher rate applies to payments for the use of, or the right to use, film copyrights and a trademark
associated with, or any information concerning industrial, commercial or scientific experience pro-
vided in connection with, a rental or franchise agreement.
55. The lower rate applies to equipment rentals.
56. The lower rate applies for pension schemes. The 5% rate applies if the beneficial owner of the divi-
dends is a company (not a partnership or investment trust) that holds directly at least 10% of the
capital of the company paying the dividends during 365 days period (under conditions).
57. The lower rate applies if the interest is paid: (i) to or by public bodies (ii) to a pension scheme, (iii) to
a resident of a contracting state on corporate bonds traded on a Stock Exchange in the other con-
tracting state (under conditions).
58. Lower rate applies to interest paid in connection with sale on credit of industrial, commercial or sci-
entific equipment; or sale on credit of goods delivered by one enterprise to another enterprise.
59. The 0% rate applies if the beneficial owner is a pension scheme (conditions apply) or if the beneficial
owner is a company that has owned, directly or indirectly, at least 10% of the shares of the company
distributing dividends for a period of 6 months ending on the date on which entitlement to the divi-
dends is determined.
60. The 10% rate applies to interest determined by reference to receipts, sales, income, profits or other
cash flow of the debtor, to any change in the value of any property of the debtor or to any dividend,
partnership distribution or similar payment.
61. The protocol contains a ‘ most favoured nation’ clause where, if Kazakhstan signs a tax treaty with an
OECD member providing for a lower withholding tax rates for interest and royalties, such lower rate
will apply with respect to this treaty.
62. Lower rate applies to equipment rentals.
63. The rates for royalties under the treaty are 5% for equipment rentals and 10% in all other cases. How-
ever, by virtue of a most favoured nation clause the rate is reduced to 0%. Under the Japan-Latvia
treaty the rate is 0%.
45
64. The 5% rate applies if the beneficial owner directly holds at least 10% of the capital of the company
distributing the dividends. The 15% rate applies, under conditions, to dividends paid out of income
derived directly or indirectly from immovable property by certain investment vehicles.
65. The lower rate applies when the interest is derived and beneficially owned by a public body.
66. The lower rate applies to interest paid (i) to or by the government of Lithuania or a political subdivi-
sion thereof; or (ii) in respect of a loans made, guaranteed or insured by the Bank of Lithuania; or (iii)
in connection with sale on credit of industrial, commercial or scientific equipment to a Lithuanian
enterprise by a UK enterprise (unless they are related parties).
67. The rates for royalties under the treaty are 5% for equipment leasing and 10% in all other cases. How-
ever, by virtue of a most favoured nation clause, from 1 January 2019, the rates for certain types of
royalties (as defined) are reduced to 0%. Under the Japan-Lithuania treaty the rate is 0% for certain
types of royalties.
68. The domestic rate applies if the recipient company controls more than 50% of the voting power in the
UK company.
69. The 0% rate applies to interest paid to banks; the domestic rate applies in other cases (no reduction
under the treaty).
70. The 0% rate applies to interest paid to or by a public body; the 5% rate applies to interest paid to banks
and insurance companies and to interest on bonds and securities regularly and substantially traded on
a recognized securities market; the 10% rate applies to interest paid by a bank or by a purchaser of
machinery and equipment in connection with a sale on credit.
71. The 0% rate applies (i) to a pension scheme; and (ii) if the beneficial owner holds, directly or indi-
rectly, at least 50% of the capital of the company paying the dividends and has invested at least GBP1
million (or equivalent) in the capital of the company paying the dividends at the date of payment of
the dividends. The 5% rate applies if the beneficial owner holds, directly or indirectly, at least 20% of
the capital of the paying company.
72. The lower rate applies to interest paid to or by a public body, to interest paid to a financial institution,
and to interest paid in connection with a sale on credit of any industrial, commercial or scientific
equipment.
73. The 0% rate applies to copyright royalties (excluding films, etc.) and the lower of 5% or half of the
domestic rate applies to all other royalties.
74. The 0% rate applies (i) to a pension scheme; (ii) a cultural, scientific or educational organization; or
(iii) if the beneficial owner holds, directly or indirectly, at least 10% of the voting power of the
company distributing dividends. The 15% rate applies, under conditions, to dividends paid out of
income derived directly or indirectly from immovable property by certain investment vehicles.
75. The 0% rate applies (i) to a pension scheme; or (ii) if the beneficial owner holds directly at least 25%
of the capital of the company paying the dividends for an uninterrupted period of at least 12 months.
The 5% rate applies if the beneficial owner holds directly at least 10% of the capital of the paying com-
pany.
76. The lower rate applies to interest paid on a loan by one enterprise to another.
at least 10% of the capital of the company distributing the dividends.
78. The lower rate applies to dividends if the beneficial owner is a company and the higher rate in all
other cases.
79. The 0% rate applies if the beneficial owner is (i) a company, the capital of which is wholly or partly
divided into shares and which is a resident of the other contracting state and holds directly at least
15% of the capital of the company paying the dividends (additional conditions apply); or (ii) a con-
tracting state, or a political subdivision or local authority thereof; or (iii) a pension scheme.
80. The lower rate applies to interest paid (i) to a public body; or (ii) in connection with agreements con-
cluded between the governments of the contracting states; or (iii) to a pension scheme; or (iv) to one
enterprise by another, in connection with sale on credit of merchandise or equipment.
81. The lower rate applies to interest paid by a company in respect of the public issue of bonds, etc.
82. The lower rate applies to films, etc.
83. The 0% rate applies if the beneficial owner holds at least 10% of the capital of the company paying the
dividends for an uninterrupted period of at least 24 months.
84. Lower rate applies to interest paid (i) to public body; or (ii) to a bank; or (iii) in connection with sales
on credit of any industrial, commercial or scientific equipment.
85. The 5% rate applies if the beneficial owner holds at least 25% of the capital of the company paying the
dividends. The 8% rate applies if the beneficial owner is a pension scheme. The 15% rate applies,
46
86. The rate applies on 60% of the gross amount of the royalties in the case of payments for the use of, or
the right to use, industrial, commercial or scientific equipment.
87. The0% rate applies, inter alia, to interest paid to or by a bank or similar financial institution.
88. The rate applies if the recipient company holds directly at least 20% of the capital of the company dis-
tributing dividends.
89. The 0% rate applies to interest paid to or by public bodies. It also applies where the payer and the
recipient are both companies and either company owns directly at least 20% of the capital of the other
company, or a third company, being a resident of a contracting state, holds directly at least 20% of the
capital of both the paying company and the recipient company.
90. The 5% rate applies if the beneficial owner holds, directly or indirectly, at least 10% of the capital of
the company distributing the dividends. The 15% rate applies, under conditions, to dividends paid out
of income derived directly or indirectly from immovable property by certain investment vehicles.
91. The lower rate applies to copyright royalties.
92. The 0% rate applies if the beneficial owner is holds, directly or indirectly, at least 10% of the voting
power of the company distributing the dividends. The 15% rate applies, under conditions, to dividends
paid out of income derived directly or indirectly from immovable property by certain investment vehi-
cles.
93. A most favoured nation clause may be applicable with respect to dividends.
94. The 5% rate applies if the beneficial owner is (i) a company that holds, directly or indirectly, at least
10% of the capital in the company paying the dividends; or (ii) a pension scheme. The 15% rate applies,
95. The 0% rate applies if the beneficial owner is a bank or a pension scheme, provided that such interest
is not derived from the carrying on of a business by the pension scheme or through an associated
enterprise.
96. The lower rate applies to interest derived by a bank or any other financial institution (including an
insurance company).
97. The 0% applies if the beneficial owner of the dividends is a pension scheme.
98. The lower rate applies to interest paid (i) to or by a public body; or (ii) in respect of a loans made, pro-
vided, guaranteed or insured by the contracting state paying the interest.
99. The 0% rate applies, inter alia, to interest (i) paid to an individual, a pension scheme, an unrelated
financial institution, a company in whose principal class of shares there is substantial and regular
trading on a recognized stock exchange or any other company provided that the competent authority
determines that the establishment, acquisition or maintenance of such company does not have as its
main or one of its main purposes to secure the treaty benefits; and (ii) interest paid by the state. The
domestic rate applies in other cases (no reduction under the treaty).
100. The 0% rate applies if the beneficial owner is (i) a qualifying pension scheme; or (ii) owns 80% or more
of the voting stock in the company paying the dividends for the 12-month period ending on the date
the dividends are declared and (ii) owned at least 80% of such stock prior to 1 October 1998 or qualifies
under certain provisions of the limitation on benefits article of the treaty. The 5% rate applies if the
beneficial owner holds, directly or indirectly, at least 10% of the voting power of the company dis-
tributing the dividends.
101. Interest determined by reference to receipts, sales, income, profits or other cash flow of the debtor,
to any change in the value of any property of the debtor or to any dividend, partnership distribution
or similar payment may be taxed at 15%.
102. The 0% rate applies to interest paid (i) to a financial institution on a loan of at least 3 years for the
financing of investment projects and (ii) to a pension scheme (under conditions).
103. A most favoured nation clause may be applicable with respect to interest and royalties.
104. The lower rate applies to royalties for patents and know-how.
105. The 7% rate applies if the beneficial owner holds, directly or indirectly, at least 50% of the voting
power in the company paying the dividends or has invested at least GBP 7 million in the share capital
of the company paying the dividends. The 10% rate applies if the beneficial owner holds, directly or
indirectly, at least 25% but less than 50% of the voting power in the company paying the dividends.
47
7. Anti-Avoidance
7.1. General
General anti-abuse rule
FA 2013 introduced a general anti-abuse rule (GAAR) (sections 206 to 215 of FA 2013).
The GAAR took effect from 17 July 2013. The GAAR applies to abusive arrangements
undertaken on or after that date. It targets abuse, and not avoidance.
The GAAR provisions empower HMRC to counteract tax advantages where these arise
from abusive schemes.
There is an independent GAAR Advisory Panel, and HMRC must seek the opinion of the
Panel in respect of what HMRC consider to be abusive arrangements. Although the
opinion of the Panel is not binding on HMRC, it will form part of the evidence in any
subsequent hearing. The scope of the GAAR encompasses income tax, corporation tax
(and amounts treated as corporation tax), capital gains tax, inheritance tax, stamp
duty land tax (SDLT), the annual tax on enveloped dwellings (ATED), the diverted
profits tax, the apprenticeship levy and petroleum revenue tax (PRT). By virtue of the
National Insurance Contributions Act 2014, national insurance contributions (NICs) also
come within the scope of the GAAR.
By virtue of amendments made by FA 2016, HMRC may now issue notices of proposed
counteraction in respect of arrangements that are considered to be substantially the
same and issue pooling notices grouping those arrangements together instead of acting
against each individually, and before referring the arrangements to the GAAR Advisory
Panel. If the taxpayer takes corrective action, the notices are withdrawn and consid-
ered never to have been issued, so referral to the GAAR Advisory Panel does not take
place. In the absence of corrective action, the matter is referred to the Panel.
Judicial anti-avoidance doctrine?
A long line of case law led to the view in some quarters that the United Kingdom had a
judicial general anti-avoidance rule. The so-called Ramsay doctrine (arising from WT
Ramsay Ltd v. IRC [1981] STC 174, HL) states that the court must look at the context
and scheme of the relevant taxing act, as well as at the purpose of the act. This dictum
was widely interpreted as establishing a judicial GAAR. However, in Barclays Mercan-
tile Business Finance v. Mawson [2005] STC 1, HL, the House of Lords held that Ramsay
was more concerned with statutory interpretation than with the creation of a judicial
GAAR, i.e. that the main point of Ramsay was to authorize the courts to apply to tax
cases the common principles of statutory interpretation prevailing elsewhere. Thus,
that what Ramsay was really saying was that the courts should look to the purpose of
the taxing act and should not confine themselves to a strictly literal interpretation of
the act. It is nevertheless incontrovertible that Ramsay marked a definitive break with
the previous literal interpretation of taxing statutes, epitomized by the Duke of
Westminster case ([1936] AC 1).
Disclosure of tax avoidance schemes
Under the disclosure of tax avoidance schemes (DOTAS) rules (Part 7 of FA 2004), “pro-
moters” of prescribed tax avoidance schemes (and, in certain prescribed circum-
stances, the “introducers” and users of such schemes) must notify HMRC about the
scheme. The DOTAS rules apply to certain prescribed schemes relating to income tax,
48
capital gains tax, inheritance tax, corporation tax, the annual tax on enveloped dwell-
ings, stamp duty land tax, stamp duty reserve tax, petroleum revenue tax, the appren-
ticeship levy and national insurance contributions.
Separate disclosure rules have now been introduced in respect of VAT and other indi-
rect taxes, namely all excise duties, insurance premium tax, landfill tax, soft drinks
industry levy, aggregates levy, climate change levy and customs duties.
Specific anti-avoidance rules
Specific anti-avoidance legislation applies in different areas of the tax code. There are
over 300 such rules in the UK tax legislation. Examples include:
– group or consortium relief: provisions denying group or consortium relief for losses
where there are arrangements to transfer a relevant company to another group or
consortium;
– insurance special purpose vehicles: provisions targeting insurance securitization
companies that have an “unallowable purpose”;
– tax arbitrage rules (see section 7.5.1.);
– anti-avoidance related to loan relationships (e.g. rules concerning loan relation-
ships for unallowable purposes, transactions not at arms’ length, and connected
parties);
– rules cancelling tax advantages from certain transactions in securities;
– provisions relating to manufactured dividends or interest; and
– avoidance involving leases of plant and machinery.
With effect from 1 April 2015, a special tax is applied to profits diverted away from the
United Kingdom (the “diverted profits tax”). For details, see section 3.3.
FA 2016 introduced an obligation on large businesses to publish, on the Internet, their
tax strategy in relation to UK taxation and, with effect from 6 April 2016, introduced
a new regime of warnings and escalating sanctions to tackle tax avoidance.
7.1.1. The Anti-Tax Avoidance Directive
On 21 July 2016, the ATAD was adopted. This Directive applies to all taxpayers subject
to corporate income tax (including permanent establishments of companies based in
third countries) and contains several rules to prevent tax avoidance. The ATAD was
later amended by Council Directive (EU) 2017/952 of 29 May 2017 (ATAD II – see also
section 7.5.1. below), which amends the ATAD to address hybrid mismatches involving
third countries.
Even though it is formally no longer a Member State of the European Union (see Intro-
duction), below is an overview of the implementation status of the ATAD in the United
Kingdom:
Provision Implemented
Interest limitation rule Yes (see section 7.3.)
Exit taxation Yes (see section 6.1.1.)
General anti-abuse rule (GAAR) Yes (see section 7.1.)
Controlled foreign company rule (CFC) Yes (see section 7.4.)
Hybrid mismatches Yes (see section 7.5.1.)
49
7.2. Transfer pricing
The arm’s length principle applies, in general, to transactions between related com-
panies, whether or not resident in the United Kingdom. Apart from the purchase and
sale of goods, transactions covered include the letting and hiring of property, grants
and transfers of rights, interests or licences, financial transactions and the giving of
business facilities of any kind. Exemption is available for small and medium-sized
enterprises (as defined for EU purposes). The transfer pricing rules are contained in
Part 4 of TIOPA 2010.
Two companies are related if one controls the other, or if they are both under common
control. A company has “control” over another company, (i) if it has the power to
ensure that the affairs of that other company are conducted in accordance with its
wishes; and (ii) this power is exercised either by means of the holding of shares or the
possession of voting power, directly or indirectly, or by virtue of any powers conferred
in the articles of association or other document regulating that company. The regime
also encompasses loans and other financing arrangements where any persons act
together in relation to such arrangements (e.g. certain private equity transactions).
The UK transfer pricing rules are aligned with the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (2017). This alignment is acknowl-
edged within UK tax legislation.
Under the self-assessment regime, companies are obliged to apply any necessary
transfer pricing adjustments. Penalties are imposed for non-compliance.
The United Kingdom has implemented the OECD Model for country-by-country report-
ing. Under the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting)
Regulations, SI 2016/237), the UK resident ultimate parent entity of a multinational
group must file a country-by-country (CbC) report in respect of any accounting period
immediately following the first accounting period ending after 31 December 2015 in
which the group’s total consolidated group revenue equals or exceeds EUR 750 million.
Where the ultimate parent entity of such a group is not resident in the United Kingdom
and is not itself obliged to file a CbC report, a UK resident entity within the group may
be required to do so.
7.3. Limitations on interest deductibility
The United Kingdom has no thin capitalization rules as such. Such rules are, however,
implicit in the transfer pricing legislation (see section 7.2.).
A regime to restrict the tax deduction in respect of the finance expenses of groups of
companies was introduced by FA 2009 (and formerly contained in Part 7 of TIOPA 2010).
The regime (known as the “worldwide debt cap” regime) took effect for periods of
account of the worldwide group beginning after 31 December 2009 and has been
repealed in relation to periods of account beginning after 31 March 2017, subject to
transitional provisions. Under the worldwide debt-cap regime, UK companies (in a
worldwide group) that had net finance expenses, had their available aggregate deduc-
tion for interest (or similar payments) restricted to the consolidated gross finance
expense of the group. The rules applied only to large worldwide groups.
50
In order to ensure conformity with the OECD recommendations on interest deductibil-

ity (under the OECD Base Erosion and Profit Shifting (BEPS) Project), the United
Kingdom has now abolished the worldwide debt cap regime and replaced it with a new
regime (the corporate interest restriction) with effect for periods of account beginning
after 31 March 2017 (Part 10 of TIOPA 2010). This provides that, broadly, where a
worldwide group is subject to an “interest restriction” in respect of any period of
account of the worldwide group, any UK members of that group are not able in any
accounting period falling within that period of account to deduct net interest expense
exceeding their allocated share of the group’s interest allowance. A worldwide group
has an interest restriction in a period of account if its net interest expense exceeds its
“interest capacity”. Its interest capacity is A + B, where A is the group’s “interest
allowance” for the current period and B is the aggregate of unused interest allowances
brought forward from previous periods. The interest capacity cannot be less than GBP
2 million, however. The interest allowance is, in turn, also A + B, where in this case, A
is the group’s “basic interest allowance” and B is the aggregate of the group’s net
interest income (if any) for the period. The group’s basic interest allowance may be
calculated in one of two ways, using a fixed ratio of 30% of “tax EBITDA” (earnings
before interest, tax, depreciation and amortization) or a group ratio (net group inter-
est expense divided by group EBITDA). Very broadly, the net interest deduction that
may be made by UK members of a worldwide group is limited to, or by reference to,
30% of the group’s tax EBITDA. The allocation among those group members is the
responsibility of the group’s “reporting company”, which is responsible for filing the
group’s interest restriction return with the UK tax authorities for each period of
account. Affected companies are able to carry disallowed interest expense forward for
up to 5 years.
7.4. Controlled foreign company
A charge applies to UK resident companies with certain prescribed interests (broadly,
at least a 25% interest but also now, together with associated enterprises, an interest
of more than 50%) in controlled foreign companies (CFCs). The CFC rules are set out in
Part 9A of TIOPA 2010. The CFC charge is computed by reference to the chargeable
profits of the CFC.
The CFC charge operates by means of an apportionment of the CFC’s chargeable
profits to the relevant UK companies. Also apportioned to those companies is an
amount of creditable tax for relief against the UK tax charge.
There are certain entity-level exemptions, i.e. exemptions that apply to the CFC as a
whole. These are:
– the temporary exempt period exemption (providing for a temporary period of
exemption for a non-resident company coming under the control of a UK resident
company);
– the excluded territories exemption (an exemption for companies that are resident
and carrying on business in certain specified territories);
– the low profits exemption (no CFC charge where a CFC’s profits do not exceed GBP
50,000 for the accounting period in question. Also, no CFC charge where the CFC’s
profits do not exceed GBP 500,000, but where, out of those profits, the amount
representing non-trading income does not exceed GBP 50,000);
– the low profit margin exemption (no CFC charge where the CFC’s accounting profits
do not exceed 10% of its relevant operating expenditure); and
51
– the tax exemption (exemption for a CFC that, in its territory of residence, pays an
amount of domestic tax – on its chargeable profits – that equates to at least 75% of
the corresponding UK tax).
The CFC charge applies to such of the CFC’s profits as pass through the so-called “CFC
charge gateway”. For each of the following five circumstances, special rules apply to
determine whether and how much of the profits actually pass through the CFC charge
gateway:
– where the CFC has profits attributable to UK activities;
– where the CFC’s profits include non-trading finance profits. Where certain condi-
tions are met, it is possible to elect for full or partial exemption from the CFC
charge. This rule was put in place as a form of finance company exemption, to
support intra-group lending to non-resident connected companies;
– where the CFC’s profits include trading finance profits;
– where the CFC’s profits include profits from captive insurance business; and
– where the CFC’s profits include any amounts falling within the rules on solo con-
solidation.
These rules were introduced by FA 2012, overhauling the previous CFC regime. They
took effect for accounting periods of a CFC beginning on or after 1 January 2013. The
European Commission has opened an investigation into whether certain aspects of the
new CFC regime are in contravention of the State aid rules.
7.5. Other anti-avoidance rules
7.5.1. Hybrid mismatches
Generally, the goal of the legislation on hybrid mismatches is to neutralize the effects
of arrangements that exploit differences in the tax treatment of an entity or instru-
ment under the laws of two or more countries.
Within the European Union, Member States are obliged through the ATAD, as amended
by ATAD II (see also section 7.1.1.), to implement into their domestic law the anti-
hybrid rules that address such mismatches between Member States, as well as between
Member States and third countries.
For more information on the rules regarding hybrid mismatches as contained in the
ATAD, see European Union – Corporate Taxation – 7.3.5.
The United Kingdom has implemented the hybrid rules contained in the ATAD into its
domestic law (see also below).
As regards the rules regarding reverse hybrid mismatches (the application of which
may be postponed until 1 January 2022), the UK government is reviewing whether
amendments to the existing legislation are necessary.
The United Kingdom has in place anti-avoidance rules that target the use of hybrid
entities and hybrid instruments in order to obtain a tax advantage (FA 2016 introduced
a Part 6A into TIOPA 2010 that contains (further) rules targeting a deduction/non-
inclusion mismatch and double deduction mismatch). These rules tackle cross-border
transactions which have (i) a deduction/non-inclusion outcome (where an item of
income is treated as a deductible expense in one jurisdiction, but not treated as
taxable in the other jurisdiction), (ii) a double deduction outcome (where the same
item of income is treated as a deductible expense in both jurisdictions), as well as
imported mismatches (these are arrangements whereby a party seeks to sidestep the
52
anti-hybrid rules by shifting the mismatch into a third jurisdiction). With effect from 1
January 2019, the rules also cover “disregarded permanent establishments” (i.e.
where a UK company carries on a business through a permanent establishment in
another jurisdiction, but that other jurisdiction does not recognize the existence of
that permanent establishment).
Despite its departure from the European Union on 31 January 2020, EU law (including
Directives and ECJ decisions – under conditions) will still apply in the United Kingdom
until at least 31 December 2020. For more details, see Introduction.
8. Value Added Tax
8.1. General
A comprehensive value added tax system applies to the supply of goods and services.
A taxable person is a person who is registered, or required to be registered, for VAT
purposes (section 3 of VATA 1994). The registration threshold is GBP 85,000, with effect
from 1 April 2017. The deregistration threshold is GBP 83,000, with effect from the
same date.
A person who makes or intends to make taxable supplies may apply for VAT registra-
tion. Input tax incurred on the acquisition of goods at any time before registration is
deductible, provided the goods are on hand when registration takes place. Input tax on
the receipt of services within 6 months of registration is deductible.
The registration threshold for intra-Community acquisitions is also GBP 85,000.
8.3. Taxable events
VAT is charged in respect of taxable supplies within the United Kingdom, the acquisi-
tion of goods from other EU Member States, and the importation of goods from outside
the European Union (section 4 of VATA 1994).
8.4. Taxable amount
The taxable amount is the consideration paid for the goods or services (section 19 of
VATA 1994). At importation it is the value for purposes of customs duties, increased by
the customs duties payable. In computing the final tax liability, the tax paid by the
taxable person on the purchase and importation of goods and services for the purpose
of a business is deducted, so that, in effect, only the value added is taxable.
8.5. Rates
The standard rate of VAT is 20% (section 2 of VATA 1994). A reduced rate of 5% applies,
inter alia, to supplies of fuel and power used in homes and by charities, certain resi-
dential building works and to the provision of advice promoting the welfare of old or
disabled people (Schedule 7A of VATA 1994).
Exports and intra-Community supplies are zero rated. The zero rate also applies to
supplies of a number of commodities, such as most foodstuffs, books, newspapers and
children’s clothing.
8.6. Exemptions
Exempt supplies include banking and insurance services, the letting of land and build-
ings (with an option to be taxed at the standard rate, for commercial letting), and edu-
cation and medical services (Schedule 9 of VATA 1994).
53
8.7. Non-residents
With effect from 1 December 2012, non-resident persons making supplies in the United
Kingdom must register for VAT, regardless of the level of turnover. This would affect
traders who, while not established in the United Kingdom, are temporarily present in
the country and making supplies there.
The registration threshold for distance sellers is GBP 70,000.
A refund scheme is in place.
9. Miscellaneous Taxes
9.1. Capital duty
Not applicable.
9.2. Transfer tax
9.2.1. Immovable property
Not applicable.
9.2.2. Shares, bonds and other securities
Not applicable.
9.3. Stamp duty
There are five separate forms of stamp tax on the transfer of property:
– stamp duty;
– stamp duty reserve tax;
– stamp duty land tax, which applies to the transfer of interests in land in England
and Northern Ireland;
– land and buildings transactions tax, which applies to transfers after 31 March 2015
of interests in Scottish land; and
– land transaction tax, which applies to transfers after 31 March 2018 of interests in
Welsh land.
Stamp taxes are levied on the purchaser of the relevant property.
9.3.1. Stamp duty and stamp duty reserve tax
Stamp duty and stamp duty reserve tax (SDRT) are payable on the purchase of shares
and securities. Stamp duty applies to paper transactions, while SDRT applies to paper-
less transactions, e.g. electronic transfers.
The standard rate of stamp duty and SDRT is 0.5%. A higher rate of 1.5% applies on
certain transfers of shares into a depositary receipt scheme or a clearance service.
The instruments chargeable to stamp duty are set out in Schedule 13 of FA 1999. The
SDRT was introduced by FA 1986 (sections 86 to 99).
9.3.2. Stamp duty land tax
Stamp duty land tax (SDLT) applies to transfers of interests in land in England and
Northern Ireland. Different SDLT rates apply as between transfers of residential prop-
erty and non-residential or mixed-use property. The method of charging also differs
between these different types of property.
54
9.3.2.1. SDLT on residential property

For residential property, the different rates (see relevant table below) apply to each
portion of value falling within that rate band with an effective date after 3 December
2014. For non-residential or mixed-use property, a similar system (with different rates)
applies after 16 March 2017. Previously, only one SDLT rate applied to the entire consid-
eration (see relevant table below). The relevant legislation is found in Part 4 of FA 2003.
FA 2016 increased, with effect for purchases with a completion date after 31 March
2016, the rates of SDLT on the acquisition by a taxpayer of additional residential prop-
erties. This includes the purchase of second homes and properties for residential let-
ting. As shown in the table below, the additional property rate is three percentage
points higher than the ordinarily applicable rate. The additional rates do not apply in
respect of transactions where exchange of contracts took place on or before 25
November 2015 but were not completed until 1 April 2016, or until a later date.
For chargeable transactions in residential property, the SDLT rates are as follows:
Property value (GBP) Rate (on relevant Additional

portion of value) (%) property rate (%)
Up to 125,000 0 3
125,000 – 250,000 2 5
250,000 – 925,000 5 8
925,000 – 1,500,000 10 13
Over 1,500,000 12 15
Net present value (NPV) of Rate (on portion of value above threshold) (%)
the lease (GBP)
Up to 150,000 0
Over 150,000 1
As an anti-avoidance measure, the SDLT rate is increased to 15% where the purchaser
is a prescribed non-natural person, such as a company, collective investment scheme,
or a certain type of partnership. The increased rate applies where the consideration
for the transfer exceeds GBP 500,000. The GBP 500,000 threshold applies to land trans-
actions with an effective date on or after 20 March 2014. Before this date, the relevant
threshold for the 15% rate was GBP 2 million. However, subject to prescribed excep-
tions, the GBP 2 million threshold remains applicable in relation to contracts entered
into before that date. Relief from the higher rate is available for genuine property
businesses.
9.3.2.2. SDLT on non-residential or mixed-use property
FA 2016 amended, with effect from 17 March 2015, the SDLT regime for non-residential
and mixed-use properties. The main changes introduced by the FA 2016 are the fol-
lowing:
– as regards each band within the SDLT rate structure (see table), SDLT is charged at
each rate, on the portion of the purchase price falling within each band (the so-
called slice system), rather than at a single rate on the entire transaction value
(the so-called slab system). This mirrors the situation in relation to residential
property, where similar rules were introduced for chargeable transactions having
an effective date after 3 December 2014 (see section 9.3.2.1.); and
– revisions of the rates and thresholds.
55
Chargeable transactions with an effective date after 16 March 2016 – Rates and
thresholds
Property value (GBP) Rate (on portion of value above threshold) (%)
Up to 150,000 0
150,000 – 250,000 2
Over 250,000 5
Net present value (NPV) of Rate (on portion of value above threshold) (%)
the lease (GBP)
Up to 150,000 0
150,000 – 5 million 1
Over 5 million 2
Chargeable transactions with an effective date before 17 March 2016 – Rates and
thresholds
Value of consideration Rate (on entire consideration for the transfer) (%)
(GBP)
Up to 150,000 0
150,000 – 250,000 1
250,000 – 500,000 3
Over 500,000 4
Net present value (NPV) of Rate (on entire NPV) (%)

the lease (GBP)
Up to 150,000 0
Over 150,000 1
9.3.3. Land and buildings transaction tax

The land and buildings transaction tax (LBTT) applies in Scotland with effect for
chargeable transactions with an effective date after 31 March 2015. Transitional pro-
visions apply. The relevant legislation is contained in the LBTT (Scotland) Act 2013.
A higher LBTT rate applies on purchases of additional residential properties. The rules
are broadly similar to those introduced in the United Kingdom (see section 9.3.2.1.).
The additional rate applies where the transaction is for chargeable consideration
exceeding GBP 40,000 and applies for transactions with an effective date after 31
March 2016. The additional rate is 4 percentage points (3 for transactions with an
effective date before 25 January 2019, subject to transitional provisions).
For chargeable transactions in residential property, the LBTT rates are as follows:
Value of consideration Rate (on relevant portion of Additional-property rate (on

(GBP) value) (%) relevant portion of value) (%)
Up to 40,000 0 0
40,000 – 145,000 0 4
145,001 – 250,000 2 6
250,001 – 325,000 5 9
325,001 – 750,000 10 14
Over 750,000 12 16
56
For chargeable transactions in non-residential or mixed property with an effective

date after 24 January 2019 (subject to transitional provisions), the LBTT rates are as
follows:
Relevant part of Rate (on relevant part of consideration) (%)

consideration (GBP)
First 150,000 0
Next 100,000 1
Remainder over 250,000 5
The rates in force previously are shown in the table below.
Relevant part of Rate (on relevant part of consideration) (%)

consideration (GBP)
Up to 150,000 0
150,001 – 350,000 3
Over 350,000 4.5
Leases: there is generally no charge to LBTT in respect of residential leases. However,

the exemption does not apply to certain qualifying long leases. Non-residential leases
are chargeable to LBTT. The LBTT charge for leases is 1% of the NPV above GBP
150,000. As to premiums, the rates and the thresholds are the same as in the tables
above, i.e. those applying to the transfer of immovable property, save that this does
not apply where the lease is exempt from LBTT. Special rules apply to the taxation of
a premium upon the lease of non-residential property where the annual rent exceeds
GBP 1,000.
9.3.4. Land transaction tax
The land transaction tax (LTT) applies in Wales to chargeable transactions with an
effective date after 31 March 2018. Transitional provisions apply. The relevant legis-
lation is contained in the Land Transaction Tax and Anti-Avoidance of Devolved Taxes
(Wales) Act 2017.
A higher LTT rate applies to purchases of additional residential properties. The rules
are broadly similar to those introduced for SDLT (see section 9.3.2.1.) and the Scottish
LBTT (see section 9.3.3.). The additional rate applies where the transaction is for
chargeable consideration exceeding GBP 40,000 and applies to transactions with an
effective date after 31 March 2018, with transitional provisions. The additional rate is
3 percentage points.
For chargeable transactions in residential property, the LTT rates are as follows:
Value of consideration Rate (on relevant portion of Additional-property rate (on

(GBP) value) (%) relevant portion of value) (%)
Up to 40,000 0 0
40,000 – 180,000 0 3 (on all of the value)
180,001 – 250,000 3.5 6.5
250,001 – 400,000 5 8
400,001 – 750,000 7.5 10.5
750,001 – 1,500,000 10 13
Over 1,500,000 12 15
57
For chargeable transactions in non-residential or mixed property, the LTTT rates are as
follows:
Value of consideration Rate (on relevant portion of value) (%)

(GBP)
Up to 150,000 0
150,001 – 250,000 1
250,001 – 1,000,000 5
Over 1,000,000 6
There is no charge to LTT in respect of the rental element of the consideration for a
residential lease, but tax is chargeable on any non-rental element (such as a pre-
mium). Non-residential leases and mixed leases are chargeable to LTT in full. The LTT
charge on the rental element is on the net present value (NPV) of the rents, as follows:
NPV of rents (GBP) Rate (%)

Up to 150,000 0
150,001 – 2,000,000 1
Over 2,000,000 2
As to premiums, the rates and the thresholds are the same as in the tables above, i.e.
those applying to the transfer of non-residential property. Special rules apply to the
taxation of a premium upon the lease of non-residential property where the annual
rent exceeds GBP 9,000.
9.4. Customs duty
On 31 January 2020, with effect from 23:00 (GMT), the United Kingdom withdrew from
the European Union and entered into a transition period which will last until at least 31
December 2020 (see Introduction). During this transition period, the United Kingdom
remains in the EU customs union. What tariffs, if any, will apply after this transition
period, is not yet known (and is the subject of current negotiations). Below is a
description of the EU customs union.
In the European Union, customs law is harmonized and applies only to movements of
goods between the European Union and third countries. Customs duties, as possibly
other taxes (for example VAT (see section 8.3.)), are imposed on the import of goods
into the EU customs union.
The EU customs union consists of the EU Member States, as well as Monaco, the
Channel Islands, the Isle of Man and the areas of Akrotiri and Dhekelia (Cyprus). Turkey,
San Marino and Andorra have separate customs agreements with the European Union.
The basis for calculating the customs duty is the customs value, which is generally the
sum of the price paid for the goods and any related insurance and shipping costs. A per-
centage (tariff), which depends on the type and origin of the good being imported, is
then applied to the customs value to determine the customs duty payable. The appli-
cable tariff can be found in the Common Customs Tariff (Council Regulation (EEC) No.
2658/87 of 23 July 1987).
58
EU customs legislation comprises the Union Customs Code (Regulation (EU) No.
952/2013), the Common Customs Tariff, the Customs Duty Relief Regulation and
various international agreements. The Union Customs Code, supplemented by the Del-
egated Act and Implementing Act, replaced the Community Customs Code (Regulation
(EEC) No. 2913/92) as from 1 May 2016.
One of the main differences between the Union Customs Code and the Community
Customs Code relates to the mandatory use of the “last sale” amount for valuation
purposes (i.e. the sale price immediately before the goods are brought into the terri-
tory of the European Union). Previously, a “first sale for export” valuation basis was
possible, under which duties were imposed on the manufacturer-to-middleman trans-
action price (which is generally lower than any subsequent sales).
9.5. Excise duty
Excise duties are charges levied on particular classes of goods, whether imported or
home-produced, to raise internal revenue. Most excise receipts are derived from
hydrocarbon oils, alcoholic drinks and tobacco.
9.6. Other taxes
9.6.1. Digital services tax
A digital services tax (DST) is to be introduced from 1 April 2020 at a rate of 2% on the
revenues of certain digital businesses deriving value from UK users from the provision
of search engines, social media platforms and online marketplaces. There will be an
annual allowance of GBP 25 million, and the tax is to apply only where annual revenues
within the scope of the tax exceed GBP 500 million. Legislation to effect this is
included in the Finance Bill 2019-20, which was published in draft form in July 2019.
59
INDIVIDUAL TAXATION DOING BUSINESS IN THE UNITED KINGDOM 2020
UNITED KINGDOM
This chapter is based on information available up to 1 March 2020.
Abbreviations
Abbreviation English definition

FA Finance Act
IHTA 1984 Inheritance Tax Act 1984
ITA 2007 Income Tax Act 2007
ITEPA 2003 Income Tax (Earnings and Pensions) Act 2003
ITTOIA 2005 Income Tax (Trading and Other Income) Act 2005
SI 1998/1870 Individual Savings Account Regulations 1998 (SI 1998 No. 1870) (as
amended)
TCGA 1992 Taxation of Chargeable Gains Act 1992
TIOPA 2010 Taxation (International and Other Provisions) Act 2010
TMA 1970 Taxes Management Act 1970
Introduction
Individuals are liable to income tax and capital gains tax (CGT). Social security contri-
butions are also levied. An inheritance tax also applies. For value added tax (VAT) and
miscellaneous indirect taxes, see Corporate Taxation sections 8. and 9., respectively.
For income tax and CGT purposes, the United Kingdom comprises England, Wales, Scot-
land, the six counties in the north-east of the island of Ireland, commonly known as
Northern Ireland, and the United Kingdom’s continental shelf. It does not include the
British Channel Islands of Guernsey and Jersey, or the Isle of Man. These dependent
territories are dealt with elsewhere in this publication.
By virtue of powers devolved, or to be devolved, to the law-making bodies of Scotland,
Wales and Northern Ireland, these countries have powers regarding the care and man-
agement of certain taxes, or aspects thereof. Such matters are mentioned where rel-
evant in this survey.
The United Kingdom is a Member State of the European Union, and, as such, applies
European Union law where required. However, in a referendum held on 23 June 2016,
voters in the United Kingdom voted to leave the European Union. The government of
the United Kingdom triggered the formal process of leaving the European Union by
invoking article 50 of the Treaty on European Union (TEU) on 29 March 2017. The
United Kingdom was thus officially due to cease being a member of the European Union
with effect from 23:00 (GMT) on 29 March 2019.
On 31 January 2020, with effect from 23:00 (GMT), after a series of extensions of the
article 50 TEU deadline, the United Kingdom withdrew from the European Union and
entered into a transition period which will last until at least 31 December 2020. During
this transition period, the United Kingdom will continue to be treated as an EU Member
State (but is formally no longer one). For more details of the United Kingdom’s depar-
ture from the European Union (“Brexit”), see Corporate Taxation – Introduction.
The currency of the United Kingdom is the pound sterling (GBP).
1. Individual Income Tax
The United Kingdom imposes income tax and capital gains tax on individuals.
61
DOING BUSINESS IN THE UNITED KINGDOM 2020 INDIVIDUAL TAXATION

Taxable persons comprise resident individuals and trusts (in the name of the trustees).
Non-resident individuals and trusts are taxable on their UK-source income.
Before 2013/14, there was no statutory definition of residence. Finance Act (FA) 2013
introduced a so-called Statutory Residence Test (SRT), which took effect from 6 April
2013.
The SRT (Schedule 45 of FA 2013) provides for three sets of tests in determining the
residence status of an individual. There are four automatic UK residence tests, five
automatic overseas tests, and the “sufficient ties tests”. An individual who is found to
be UK resident under the SRT will normally be treated as resident for the full tax year.
However, the legislation provides for circumstances in which the tax year could be
split.
The basic rule is that an individual is treated as UK resident if either the automatic res-
idence test or the sufficient ties test is met. Otherwise, the individual is treated as
non-resident.
The automatic UK tests
In order to be considered resident, an individual must meet at least one of the four
automatic UK residence tests, and none of the five automatic overseas tests.
The four automatic UK tests are broadly as follows:
– presence in the United Kingdom for 183 days or more in a tax year;
– having a home in the United Kingdom for all or part of a tax year, and, during the
period when the individual has that home, there is a period of at least 91 consec-
utive days (30 of which fall within the tax year) when either (i) the individual has no
home overseas; or (ii) the individual has a home (or homes) overseas, but spends no
more than a permitted amount of time in that home (or homes). This refers to
fewer than 30 days in the tax year;
– working sufficient hours in the United Kingdom over a period of 365 days without a
significant break from work, and all or part of the 365 days falls within the tax year.
“UK work days” (i.e. days on which at least 3 hours is spent working in the United
Kingdom) must account for at least 75% of the individual’s working days in the 365-
day working period; and
– where the individual, having been treated as UK resident under one of the above
automatic tests for each of the preceding 3 tax years, died while having a home in
the United Kingdom. This rule is disapplied where the individual was overseas in
the previous year in circumstances where split-year treatment was granted.
The automatic overseas tests
The five automatic overseas tests are as follows:
– where the individual spends fewer than 16 days in the United Kingdom, did not die
during that tax year, and was UK resident for one of the preceding 3 tax years;
– where the individual spends fewer than 46 days in the United Kingdom, and was not
resident in any of the preceding 3 tax years;
– where the individual works sufficient hours overseas without a significant break
from work. The individual must also have fewer than 31 UK work days in the year
(i.e. days on which he does at least 3 hours’ work in the United Kingdom), and must
spend fewer than 91 days in the United Kingdom in that tax year;
62
– in the case of an individual who died during the tax year, where that individual
spent fewer than 46 days within the United Kingdom, and was either (i) non-UK res-
ident for the 2 tax years preceding the tax year or death; or (ii) non-UK resident in
the tax year preceding the tax year of death, and the tax year before that was a
split year; and
– in the case of an individual who died during the tax year, where that individual had
already been non-UK resident under test (3) above: (i) for the 2 preceding tax
years; or (ii) for the tax year preceding the tax year of death, and the year before
that was a split year.
The sufficient ties test
Where an individual meets none of the automatic UK tests and none of the automatic
overseas tests, he will be treated as UK resident if he has “sufficient ties” to the
United Kingdom. The relevant ties depend on whether or not the individual was UK res-
ident for 1 or more of the 3 years preceding the relevant tax year. The ties to be con-
sidered are family ties, accommodation ties, work ties, 90-day tie (broadly, presence
in the United Kingdom for at least 90 days), and country tie (i.e. if the United Kingdom
is the country in which the individual was present at midnight for the greatest number
of days in that year). This will also apply where there is more than one such country
where the taxpayer has spent the greatest number of days, and one of those countries
is the United Kingdom.
Ordinary residence
Before 2013-14, the concept of ordinary residence existed in UK tax law and had an
impact on determining the extent of an individual’s tax liability. FA 2013 abolished the
concept of ordinary residence, except in very limited circumstances. The abolition
took effect from 6 April 2013, subject to transitional provisions.
Ordinary residence was never defined in the legislation but was generally considered
to be based on:
– an individual’s present and future intention as regarded his presence in the United
Kingdom; or
– habitual visits to the United Kingdom over 4 consecutive tax years averaging 91
days or more for each tax year, leading to residence as from the fifth year.
Ordinary residence is still a concept occurring in the law on social security contribu-
tions, however.
Domicile
For the concept of domicile and its significance with respect to the taxation of foreign
income and capital gains, see section 6.2.1.
Spouses, civil partners and children
As to married couples, each spouse is responsible for his or her own tax affairs. A basic
personal allowance is granted to each spouse, a part of which may be transferred by
one spouse to the other. Where one spouse was born before 6 April 1935, there is also
a married couple’s allowance, which may be shared between both spouses. The
income of a child is also taxed separately, unless such income stems from money or
property settled on the child by the parent.
Same-sex partners registered under the Civil Partnerships Act 2004 (i.e. civil partners)
are treated, for tax purposes, in the same way as married couples.
63
Partnership income
Individuals trading or exercising a profession in partnership are assessed separately on
their shares of the partnership income and capital gains (sections 848 and 850 of
ITTOIA 2005). General partnerships are treated as transparent for tax purposes.
1.2. Taxable income
1.2.1. General
A resident individual is taxable on his worldwide income. Different income tax rules
apply, based on the nature of the source of income, e.g. (immovable) property income,
trading and professional income, investment income, dividend income, foreign income
and employment income.
The rental value of an owner-occupied residence is generally not subject to tax on the
owner. However, with effect from 1 April 2013, an annual tax on enveloped dwellings
(ATED) applies to certain non-natural persons owning UK property valued at more than
GBP 500,000 (originally GBP 2 million).
An individual’s taxable income is calculated by ascertaining first his total income (sec-
tion 23 of ITA 2007). Total income comprises income from all sources, after all allow-
able deductions from each source of income have been made, less certain other
specified deductions (see section 1.7.1.). Personal allowances (see section 1.7.2.) are
then subtracted from this amount to arrive at the final figure of taxable income.
There are provisions for assessing the income of a non-resident company, trust or other
entity where such income accrues for the benefit of a UK resident.
1.2.1.1. Trust and estate income
Income from an interest in possession trust, broadly similar to usufruct income in civil
law countries, and income of a deceased’s estate in administration, is assessed to
income tax in the hands of the trustees or executors. Regarding interest in possession
trusts, although the trustees are liable for the payment of tax, the income is deemed
to arise directly to the life tenant (i.e. the person with a “present right to present
enjoyment”), and his tax position (e.g. his marginal rate of tax) is therefore relevant
in determining the ultimate tax liability.
Special rates apply in respect of income or gains of discretionary trusts and accumu-
lation trusts. A payment of income to a beneficiary of a discretionary trust is deemed
to carry a tax credit of 45%. If the beneficiary is a non-taxpayer or does not pay tax at
the higher rate or additional rate (see section 1.9.1.), he may make a claim for repay-
ment of tax. If the beneficiary is an additional rate taxpayer, he has no further tax lia-
bility.
For the relevant tax rates for trusts and trustees, see section 1.9.1. Non-resident ben-
eficiaries of a trust or of a deceased’s estate are generally not entitled to any repay-
ment of income tax borne by the trust or estate, unless provided for in a tax treaty.
Beneficiaries of an interest in possession trust or of an estate are treated as if the
income of the trust or estate belonged directly to them, and they may benefit from
any applicable reduced withholding tax rates.
64
1.2.2. Exempt income

The main types of income exempt from tax are:
– UK or foreign alimony received under a post-14 March 1988 court order, or under a
pre-15 March 1988 court order where an election has been made by the payer, in
effect, for exemption to apply;
– many, but not all, types of social security benefits; and
– income received under a post-14 March 1988 deed of covenant, such as a payment
to a separated spouse.
For other items of income exempt from tax, see section 1.5.; for exempt capital gains,
see section 1.6.
1.3. Employment income
1.3.1. Salary
Income received by an individual as salary and wages is subject to income tax as earn-
ings received from an office or employment (section 62 of ITEPA 2003). A deduction is
allowed for expenses incurred wholly, exclusively and necessarily in the performance
of the duties of the office or employment (section 336 of ITEPA 2003). Commuting costs
(i.e. costs of travelling from home to the workplace) are generally not deductible as
expenses because they are not incurred in the performance of the duties of employ-
ment.
Certain removal expenses reimbursed to an employee by an employer are exempt (Part
4 Chapter 7 of ITEPA 2003). The statutory exemption regime covers payments and ben-
efits received in connection with a change in the employee’s sole or main residence
resulting from:
– the employee’s becoming employed by a new employer;
– an alteration in the duties of an employee with his existing employer; or
– an alteration in the place where existing duties under the same employer are per-
formed.
There is no relief for removal expenses incurred by an employee but not reimbursed by
the employer.
A seafarer who is resident in the United Kingdom, or in an EEA state other than the
United Kingdom, is entitled to a 100% deduction from his salary attributable to the
period spent outside the United Kingdom if no more than one half of his time over a 1-
year period is spent in the United Kingdom (Part 5 Chapter 6 of ITEPA 2003). If he has
a UK employer, the tax office will issue a nil PAYE (see section 1.9.2.) tax code, so that
no tax is withheld from salary. Furthermore, any premium payments made by the
employee under a personal pension policy (see section 1.3.3.) continue to be paid net
of basic rate income tax.
FA 2013 introduced so-called “employee shareholder” rules. Under these rules, an
employer may offer to its employee shares in the company for which the employee
works. In return, the employee would give up certain specified employment rights.
Provided certain other conditions are satisfied, there was no capital gains tax on the
disposal of employee shareholder shares worth up to GBP 50,000 on receipt. There was
also an exemption from income tax and national insurance contributions for the first
GBP 2,000 of share value received by the employee shareholder. However, there is now
a lifetime limit of GBP 100,000 for CGT-exempt gains on the disposal of employee
65
shareholder shares acquired pursuant to an employee shareholder agreement entered

into after 16 March 2016, and the income tax and capital gains tax reliefs have been
removed for employee shares issued after, broadly, 30 November 2016.
1.3.2. Benefits in kind
There are complex provisions enabling the tax authorities, Her Majesty’s Revenue &
Customs (HMRC), to assess the value of benefits in kind received by employees and
directors. These are generally found in Part 3 of ITEPA.
Thus, in the case of cars provided by the employer and available for private use, the
annual taxable benefit is computed by applying a percentage to the capital cost of the
car (less any capital contributions by the employee to that cost). The percentage
depends on the CO2 emissions of the car (or its engine size in the case of older cars) and
can be as high as 37%. The taxable benefit so calculated may be reduced by any pay-
ments the employee makes towards the running costs of the car. If fuel is also pro-
vided, this gives rise to a separate charge.
Other taxable benefits (subject to specific exemptions) are:
– expenses payments;
– vouchers and credit tokens;
– living accommodation; and
– loans granted at beneficial rates of interest.
A special set of rules applies to shares and share options.
In general, employees acquiring shares in their employer company under a beneficial
scheme are subject to income tax on the benefit obtained, i.e. the difference between
the market value and the issue price. This rule applies whether or not the employee
acquires shares directly or through stock options. However, there are several different
schemes under which a charge to income (and capital gains) tax may be deferred or
avoided altogether. The UK tax position in this area is highly complex.
For company unapproved share option schemes, there is no income tax charge upon
grant; however, an income tax charge will arise on exercise of the options. The charge
is levied on the difference between the market value of the shares upon exercise and
the option exercise price. Also, upon disposal of the shares, any gains arising will be
subject to capital gains tax.
Under the rules for company share option plan (CSOP) schemes, compliant with Sched-
ule 4 to ITEPA 2003, options not exercisable within 3 years of being granted and not
giving rights to shares for the value of more than GBP 30,000 are exempt from income
tax. A capital gains tax (CGT) charge arises on the disposal of the shares acquired by
the employee. The schemes are subject to a number of restrictions.
Share Incentive Plans (SIPs) are plans compliant with Schedule 2 to ITEPA 2003 and
applying to all employees of a company. Under this type of scheme, the employee may
purchase shares out of untaxed income (these are referred to as “partnership shares”)
and may also be allocated shares directly or indirectly from the employer company.
These are referred to as “free shares”. The value of the partnership shares acquired by
an employee may not exceed the lower of GBP 1,800 and 10% of the employee’s salary
for the year. The value of the free shares allocated to an employee may not exceed
GBP 3,600 in any tax year. Provided that the shares are retained for at least 5 years, no
66
income tax charge arises on any award of shares under the plan. Also, the employee is
treated for CGT purposes as having acquired the shares for a consideration equal to the
market value when he exits the scheme.
Save As You Earn (SAYE) option schemes are all-employee share schemes compliant
with Schedule 3 to ITEPA 2003, under which employees acquire the option to buy
shares in the company at a later date. The exercise price is determined at the time the
option is granted and must not be manifestly less than 80% of the market value of
shares of the same class at that time (or at an earlier time determined in accordance
with HMRC guidance). Employees enter into a special savings contract with a bank or
building society designated by the employer, under which they save between GBP 10
and GBP 500 per month. The contract runs for either 3 or 5 years; however, employees
with 5-year savings contracts may leave the savings untouched for a further 2 years. At
the end of the savings contract, the employee may decide to exercise his option, using
the money saved to buy shares in the company. There is no income tax charge on the
grant or exercise of the option, and any bonus earned or interest arising is similarly
exempt. However, CGT (see section 1.6.) applies in the normal way on the disposal of
the shares.
Enterprise Management Incentives (EMIs) are aimed at smaller companies. Under such
schemes, key employees may be granted options in respect of shares with a total value
of no more than GBP 250,000 at the time. Where the individual limit has been reached,
no further options may be granted to an employee until 3 years after the last such
grant. A total limit of GBP 3 million for the company as a whole applies. There is no
income tax or national insurance contributions charge upon grant of the option. There
is also no income tax or national insurance contributions charge on the exercise of the
option where this takes place no later than 10 years from the date of grant, and pro-
vided that, in the meantime, none of the disqualifying events set out in the legislation
have taken place. Also, the employee must acquire the shares at a price at least equal
to their market value on the date the option was granted.
1.3.3. Pension income
Pension income is taxed in the same way as employment income, tax being deducted
at source under PAYE (see section 1.9.2.) by the payer of the pension. At the time of
commencement of the pension, part of the pension may be commuted to a tax-free
lump-sum payment. The relevant provisions are contained in Part 9 of ITEPA and Part 4
of FA 2004.
Other than the state pension scheme, there are two main types of private pension
scheme. These are: (i) occupational pension schemes; and (ii) personal pension
schemes.
Registered pension schemes have certain tax benefits, including that there is no
income tax charge on investment income. Gains of the fund are free of capital gains
tax.
For occupational pension schemes, premiums paid by employees whose salaries are
taxable under PAYE (see section 1.9.2.) are paid net of basic rate income tax. Relief
from higher rate tax takes the form of a deduction of the gross premium from salary.
Individuals contributing to registered pension schemes do so net of basic rate tax. They
may claim income tax relief on contributions of up to 100% of their taxable earnings,
subject to an annual allowance limit (GBP 40,000 for 2018/19 and 2019/20). With
effect from 6 April 2016, there is a tapered reduction in the annual allowance. This
67
applies to individuals with an “adjusted income” of over GBP 150,000. The annual
allowance is reduced by GBP 1 for every GBP 2 that the adjusted income exceeds GBP
150,000 (including any pension contributions made by the individual). The maximum
reduction is GBP 30,000.
An individual may bring forward any unused annual allowance from the 3 tax years
before the relevant tax year. However, where there has been a tapered reduction in
the annual allowance, the unused allowance to be carried forward will be determined
based on the unused tapered annual allowance.
All contributions (including employer contributions, in the case of occupational
pension schemes) above this limit will be subject to tax at the individual’s marginal
rate. There is also a lifetime limit of GBP 1,055,000 (amount for 2019/20) (GBP
1,030,000 for 2018/19) on the amount that an individual may accumulate free of tax in
one or more pension funds. Any excess over this limit will be taxed when the pension
benefits are drawn. If the amount in excess of the lifetime allowance is taken as a
lump sum, the lifetime allowance charge is 55% of the excess, and if it is taken as a
pension, the charge is 25% of the excess. In the case of the pension, the 25% charge is
additional to normal income tax on the pension received, at the taxpayer’s marginal
rate(s) of tax.
An individual who has no earnings may pay up to GBP 3,600 per annum into a personal
pension plan. As the payment is made net of basic rate tax (the basic rate being 20%),
this means that the individual actually pays out a maximum of GBP 2,880.
Income from a purchased life annuity is split, on an actuarial basis, between an income
element and a capital element. Only the income element is taxable.
A UK resident individual who receives a pension paid by or on behalf of a person
outside the United Kingdom is subject to tax on that income. If the pension is taxed on
the arising basis, the taxable amount is 100% (90% before 1 April 2017) of the full
amount of the pension income. If taxed on the remittance basis (see section 6.2.1.1.),
the taxable amount is 100% of the full amount. This rule will be subject to any contrary
provisions in a tax treaty.
1.3.4. Directors’ remuneration
Directors’ remuneration is taxed in the same way as other employment income.
1.4. Business and professional income
The profits of business and professional income are subject to income tax (section 5 of
ITTOIA 2005).
1.4.1. Trades, professions and vocations
An individual carrying on a trade, profession or vocation (either alone or in partner-
ship) is subject to income tax on the profits thereof (section 5 of ITTOIA 2005). Tax is
charged on the full amount of the profits of the tax year, which are calculated by ref-
erence to the “basis period” for that tax year (section 7 of ITTOIA 2005), since indi-
viduals are not restricted to drawing up their accounts to coincide with the tax year
but may draw up their accounts to any date they choose. The general rule for deter-
mining the basis period is that it is the period of 12 months ending in the tax year con-
cerned (section 198 of ITTOIA 2005). Special rules apply in the opening 2 tax years and
in the final tax year.
68
The profits of a trade, profession or vocation must be calculated in accordance with

generally accepted accounting principles, and then adjusted for tax purposes (section
25 of ITTOIA 2005). Small businesses may instead opt for a cash basis. A person may
elect for the cash basis to apply to him for a particular tax year if his aggregate
receipts for the tax year, calculated on the cash basis, do not exceed the greater of
GBP 150,000 and the VAT registration threshold at the end of the tax year (the VAT reg-
istration threshold on 5 April 2018 was GBP 85,000 and is so currently) (sections 25A
and 31B of ITTOIA 2005). If an individual has two or more businesses, the aggregate
receipts of all his businesses are to be taken into account for this purpose.
The general condition for the deduction of expenses is that they have been incurred
wholly and exclusively for the purposes of the business or profession.
There are restrictions on the deductibility of certain types of expenses. These include
expenses of a capital nature (but see Corporate Taxation section 1.3.4.), certain
entertainment expenses, and expenses incurred for private or domestic purposes.
From the tax year 2017/18, where the tax-adjusted profits of a trade, profession or
vocation do not exceed GBP 1,000, they are exempt from income tax but losses are
also not recognized (section 783AE of ITTOIA 2005), unless the individual elects not to
claim the relief (section 783AL of ITTOIA 2005). Where profits exceed GBP 1,000, the
individual will be taxed on the normal basis on the full amount of the profits or he may
elect to forgo deducting expenses and instead be charged to tax on the receipts of the
business reduced by GBP 1,000 (section 783AI of ITTOIA 2005).
1.4.2. Property businesses
An individual carrying on a “property business” (either alone or in partnership) is
subject to income tax on the profits of that business (section 268 of ITTOIA 2005).
A property business may be a “UK property business” or an “overseas property busi-
ness”. A UK property business consists of every business that the individual carries on
for generating income from land in the United Kingdom (usually in the form of rents
from commercial or residential property). An overseas property business consists of
every business that the individual carries on for generating income from land outside
the United Kingdom.
Tax is charged on the full amount of the profits arising in the tax year (section 270 of
ITTOIA 2005). Unlike the case of a trade, profession or vocation, accounts must be
drawn up on a tax-year basis.
With effect from the tax year 2017/18, the profits of a property business must be cal-
culated on a cash basis, unless the aggregate receipts for the tax year, calculated on
the cash basis, exceed GBP 150,000 or a number of other situations apply (section 271C
of ITTOIA 2005). In those situations, the profits of the property business must be cal-
culated in accordance with generally accepted accounting principles, and then
adjusted for tax purposes (section 271A of ITTOIA 2005).
Deductible expenses are generally those that are deductible when calculating the
profits of a trade, etc., but with certain restrictions and modifications (sections 271E,
272 and 272ZA of ITTOIA 2005).
From the tax year 2017/18, where the tax-adjusted profits of a property business do
not exceed GBP 1,000, they are exempt from income tax, but losses are also not rec-
ognized (section 783BE of ITTOIA 2005), unless the individual elects not to claim the
relief (section 783BJ of ITTOIA 2005). Where profits exceed GBP 1,000, the individual
69
will be taxed on the normal basis on the full amount of the profits or he may elect to
forgo deducting expenses and instead be charged to tax on the receipts of the business
reduced by GBP 1,000 (section 783BK of ITTOIA 2005).
1.5. Investment income
Dividends, interest, royalties and rental income are taxable (section 365 of ITTOIA).
Expenses incurred in producing investment income are generally deductible.
The following types of investment income are exempt (Part 9 of ITTOIA):
– interest on National Savings Certificates;
– individual savings account (ISA) income (see section 1.7.1.5.4.);
– up to GBP 7,500 of rent received from part letting of a sole or main residence (the
so-called Rent a Room relief); and
– the capital element of a purchased life annuity.
Before 2016/17, an imputation tax credit was in place for domestic dividends. The tax
credit attached to the dividend was equal to one ninth of the dividend. The individual’s
taxable income amounted to the “gross dividend”, i.e. the dividend plus the tax
credit, and the tax credit was then offset against the tax on the gross dividend. The tax
credit was abolished with effect from 2016/17. In its place is a tax-free dividend allow-
ance, amounting to GBP 2,000 (GBP 5,000 in 2016/17 and 2017/18) (section 13A of the
ITA 2007). The tax rates for dividends were also revised with effect from 2016/17. For
the tax rates applicable to dividends, see section 1.9.1.
1.6. Capital gains
General
An individual who is resident in the United Kingdom is subject to capital gains tax
(CGT) on his worldwide capital gains (section 1A of TCGA). Before the concept of ordi-
nary residence was abolished (with effect from 2013-14, see section 1.1.), an individ-
ual who was ordinarily resident in the United Kingdom was also subject to capital gains
tax on his worldwide income. For capital losses, see section 1.8.
For capital gains tax treatment of an emigrating individual, see section 6.2.2.
As with income tax, husband and wife, and civil partners, are taxed separately for
capital gains tax, and each is entitled to the basic annual exemption. Transfers
between spouses and civil partners are deemed to be for such consideration as would
give rise to neither a chargeable gain nor an allowable loss.
Certain profits and gains from disposals of land in the United Kingdom may be subject
to income tax as profits of a trade in lieu of capital gains tax, where the purpose of
acquiring or developing the land was to realize a profit from disposing of the land (Part
9A of ITA 2007).
Capital gains effectively form the top slice of a taxpayer’s income. If an individual’s
taxable income does not use up the entire basic rate band (for the basic rate limit, see
section 1.9.1.), any chargeable gains falling within the scope of the basic rate would
be subject to a lower rate of CGT. However, if he has taxable income up to the extent
of the basic rate limit, there would no longer be room within the basic rate band to
absorb any capital gains. In that case, any capital gains in excess of the basic rate limit
are subject to CGT at a higher rate. For the relevant CGT rates, see section 1.9.1.
70
Temporary non-residents
A non-resident is generally not subject to UK capital gains tax (but see below). How-
ever, special rules apply for temporary non-residents, i.e. individuals who become
non-UK resident for a period of up to 5 years and thereafter resume UK residence.
Where such an individual disposes of assets during his period of temporary non-resi-
dence, any gains thereon may be assessed on him in the year of his return to the United
Kingdom.
Non-residents and UK residential property
Although the general rule is that non-residents are not subject to capital gains tax, this
principle has been gradually eroded. Apart from the long-standing charge to CGT on
gains relating to assets used for the purposes of a non-resident’s business carried on in
the United Kingdom through a branch or agency, non-residents disposing directly or
indirectly of interest in UK land are potentially subject to a liability to CGT since 6
April 2019 (see below). Previously, non-residents could be liable to CGT on the disposal
of an interest in UK residential property in one of two situations.
ATED-related gains. A “non-natural person” who made an “ATED-related gain” on a
“relevant high-value disposal” after 5 April 2013 was chargeable to CGT regardless of
residence. This charge did not apply to individuals, trustees or the personal represen-
tatives of a deceased person, but was aimed at persons owning UK residential property
via a non-resident corporate vehicle. See further Corporate Taxation, section 5.2.2.
This charge has now been subsumed into the general charge on the disposal of an inter-
est in UK land, whether by an individual, trustee or personal representative
(section 1C of TCGA 1992) or by a legal person (section 2B of TCGA 1992).
NRCGT gains. A person who made a “non-resident CGT disposal” after 5 April 2015
could be chargeable to capital gains tax. A non-resident CGT disposal was, broadly
speaking, a disposal of a “UK residential-property interest” by an individual who was
not resident in the United Kingdom in the tax year in which the disposal was made. A
disposal of a “UK residential-property interest” took place where there was a disposal
of an interest in land situated in the United Kingdom and either:
– the land had at any time since the person’s acquisition of it (but no earlier than 6
April 2015) consisted of or included a dwelling or the interest subsisted for the
benefit of land that has at any time in that period consisted of or included a dwell-
ing; or
– the interest subsisted under a contract for an “off-plan purchase” (broadly speak-
ing, the purchase of a dwelling that had not yet been built).
With effect from 6 April 2019, there is now a general charge to CGT (or corporation
tax, where appropriate) on gains accruing to a non-resident person from the direct or
indirect disposal of an interest in UK land (whether residential or non-residential). An
indirect disposal is one in which the person disposes of an interest in an entity directly
or indirectly deriving at least 75% of its value from UK land and in which the person has
an indirect interest of 25% or more. There are exemptions in certain circumstances for
interests in land that is being used for trading purposes or within a collective invest-
ment scheme.
The ATED-related gains and NRCGT gains regime have been abolished.
71
Deceased taxpayers
The death of a taxpayer is not a chargeable event for capital gains tax purposes. The
deceased’s assets receive, in effect, a capital gains tax-free uplift, i.e. as though they
were disposed of for market value on death, but with no concomitant capital gains tax
charge (section 62 of TCGA 1992).
Exemptions
There is an annual exempt amount, which, for 2019/20, is GBP 12,000 for an individual
(GBP 11,700 for 2018/19), and GBP 6,000 for most trusts (section 3 of TCGA 1992).
Gains up to this amount are exempt from capital gains tax. Exemptions are also avail-
able on the disposal of, inter alia: the taxpayer’s sole or main residence (known as
private residence relief); racehorses; government stock; qualifying corporate bonds
(QCBs), being loan capital denominated in sterling and not convertible into share cap-
ital; and timber, standing or felled, sold by the occupier of a woodland or forest.
Chattels
Special rules apply to the disposal of chattels (section 262 of TCGA 1992). Chattels are
broadly defined as tangible, moveable property.
Where a chattel is disposed of for gross consideration not exceeding GBP 6,000, there
is no capital gains tax charge. Where a chattel is disposed of for consideration exceed-
ing GBP 6,000, there is a capital gains tax charge, but the chargeable gain is restricted.
The restricted gain is determined in the following manner:
– find the difference between the gross consideration for the disposal and GBP 6,000;
and
– multiply that amount by 5/3.
Where a chattel is disposed of at a loss, the allowable loss is not restricted if the gross
consideration exceeds GBP 6,000. However, if the gross consideration does not exceed
GBP 6,000, this latter figure is substituted for the gross consideration, i.e. the tax-
payer is deemed to have disposed of the chattel for GBP 6,000, thereby restricting his
allowable loss. Where a chattel was acquired for an amount not exceeding GBP 6,000,
and was disposed of for an amount below that figure, there is no allowable loss.
Wasting assets
A wasting asset is broadly defined as an asset with a predictable useful lifespan of less
than 50 years (section 44 of TCGA 1992). Such assets are generally exempt from capital
gains tax upon disposal. An exception to this rule would apply where the asset bene-
fited from capital allowances (i.e. depreciation allowances) during its lifetime.
Special rules apply to determine the useful lifespan of various assets, such as leases,
plant and machinery, franchises, goodwill, and trademarks.
Entrepreneurs’ relief
Entrepreneurs’ relief applies, to gains arising on, or in connection with, disposals of
the whole or part of a business (including, in certain circumstances, disposals of shares
or securities) (section 169N of TCGA 1992). Such gains are taxable at the reduced rate
of 10%. Relief is subject to a lifetime cap of GBP 10 million. Entrepreneurs’ relief
applies to “qualifying business disposals”. Special rules apply to gains deferred before
6 April 2008. Detailed anti-avoidance provisions apply.
72
Investors’ relief
Investors’ relief applies to gains on the disposal after 5 April 2016 of qualifying ordi-
nary shares in an unlisted trading company (or the holding company of a trading group)
held by individuals. In order to qualify, the shares must be newly issued to the claim-
ant, and have been acquired for new consideration after 16 March 2016. In addition,
the shares should be held for at least 3 years beginning from 6 April 2016 (or, if later,
the date of acquisition). Relief is subject to a lifetime cap of GBP 10 million (sections
169VA to 169VY of TCGA 1992).
Other reliefs
Other reliefs include (Part 5 of TCGA):
– rollover relief for approved share-for-share transactions which arise on company
takeovers or mergers, on the replacement of business assets and on the transfer of
a business to a UK resident company;
– reinvestment relief in a qualifying unquoted trading company which (i) the claim-
ant may control and be a director of; and (ii) may not be EIS shares (see section
1.7.1.5.1.);
– deferral of tax for approved share-for-QCB (i.e. qualifying corporate bonds) trans-
actions which arise on company takeovers and mergers. The tax on the original dis-
posal becomes payable on the disposal of the QCB, which itself is an exempt
transaction; and
– hold-over relief on the gift of an asset subject to inheritance tax (in practice, prop-
erty transferred to most trusts).
Attribution of foreign gains to a resident individual
Certain gains of a non-resident company that is a closely controlled company (and
would qualify as a “close company” were it resident in the United Kingdom) may be
attributed to and assessed on a person who is a direct or indirect participator in the
company and is either resident in the United Kingdom or a non-resident trustee of a
settlement, and who has an interest of more than 25% (related through a chain of any
number of non-resident companies) in the amount of the gain (section 3 of TCGA
1992). Gains subject to apportionment in this way are gains that are “connected to
avoidance”, are not connected to a foreign trade or to other “economically significant
foreign activities” and that would not otherwise be chargeable to UK corporation tax
on the company. Gains are “connected to avoidance” unless it can be shown that
neither the disposal nor the acquisition or holding of the asset from which they derive
formed part of arrangements for avoiding tax.
Gains of a non-resident trust may, in certain circumstances, be assessed on a resident
and domiciled settlor or beneficiary.
Such assessment may be precluded if the United Kingdom has a tax treaty with the res-
idence country of the non-resident company or trust, and the treaty contains a provi-
sion similar to article 13 of the OECD Income and Capital Model Convention.
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1.7. Personal deductions, allowances and credits

1.7.1. Deductions
1.7.1.1. Interest
Interest paid by an individual is allowable as a general deduction from income if it is
(section 383 of ITA 2007):
– loan interest, whether annual interest or not, but excluding interest on a bank
overdraft; and
– for a qualifying purpose.
Qualifying purposes include:
– the acquisition of 5% or more of the share capital of a close trading company;
– a loan to, or the acquisition of any shares in, a close trading company if the bor-
rower is involved for the greater part of his time in the conduct of its business;
– the acquisition of shares in an employee-controlled company;
– the acquisition of an interest in a partnership; and
– the acquisition of machinery or plant (for instance, a motor car) for use in a part-
nership or employment.
Other interest paid by an individual may qualify for relief as a deduction in computing
income from a particular source (see section 1.2.1.), rather than as a general deduc-
tion against income from all sources, e.g. payments in connection with a business are
deductible from business income.
Finance (No. 2) Act 2015 provided for changes in the way relief is given for mortgage
interest for buy-to-let properties. The effect is to phase out the system of granting
relief by means of deduction from income, and to replace this with a system where
relief is granted by tax credit, limited to the basic rate of tax (20%). With effect for
finance costs incurred on or after 6 April 2017, relief by deduction is being phased out,
to be replaced fully by a 20% tax credit in 2020/21.
1.7.1.2. Insurance premiums
Premiums paid to pension plans are deductible, subject to statutory limits (see section
1.3.3.). Life insurance premiums are generally not deductible.
1.7.1.3. Donations
An individual may obtain tax relief on gifts to UK charities made in accordance with the
gift aid or payroll giving schemes (section 413 et seq. of ITA 2007).
For gift aid, all donations made by an individual qualify for tax relief, provided the
individual is liable to tax at (at least) the basic rate. Gifts may be large or small,
regular or one-off. Relief is given by extending the taxpayer’s basic rate band by the
grossed-up amount of the gift. This has the effect of ensuring that more of the tax-
payer’s income is subject to tax at the basic rate, rather than at the higher or addi-
tional rates. For the basic rate band, see section 1.9.1.
Gifts may also be made under the payroll-giving scheme, whereby employees may
authorize their employers to deduct the charitable donations from their salary. The
donation is then taken before tax, ensuring that the individual obtains tax relief at his
marginal rate.
74
Special rules apply in respect of charitable gifts of specified shares, securities and UK
real estate. In such cases, tax relief may be given in the form of a deduction equivalent
to the market value of the shares, securities or real estate.
1.7.1.4. Alimony
Payments of alimony and maintenance to a child of a former marriage made under a
post-15 March 1988 court order are not deductible but are exempt for the recipient
(see section 1.2.2.). The payer receives an alimony credit. Payments under a court
order made before 15 March 1988 are deductible, and correspondingly taxable for the
recipient, but with an alimony exemption. Alternatively, the payer may elect for the
post-15 March 1988 rules to apply.
1.7.1.5. Investment incentive reliefs
1.7.1.5.1. Relief for investment in corporate trades
The Enterprise Investment Scheme (EIS) is the main relief for investment in corporate
trades. The provisions governing the EIS are found in Part 5 of ITA 2007 (sections 156 to
257). The main features are that:
– the investment must be a 3-year commitment made by a qualifying individual in eli-
gible shares in a qualifying company carrying on a qualifying business activity.
These are generally trading activities or research and development;
– a qualifying company is a company which is unquoted at the time of the issue of
shares under the scheme, provided that there is no arrangement at the time for the
company to become quoted;
– relief is granted at the rate of 30% on investments of up to GBP 1 million (additional
amounts of up to a further GBP 1 million may be invested in “knowledge-intensive
companies”);
– a taxpayer may elect for part of the relief to be “carried back” to the previous tax
year;
– there is an exemption from capital gains tax on the disposal of shares that qualified
for income tax relief as described above. In order to avail of the CGT exemption,
the income tax relief given must not have been withdrawn, and the investor must
have held the shares for at least 3 years;
– where an investor disposes of a chargeable asset, the gain is exempt from capital
gains tax to the extent that it is used to subscribe for EIS shares;
– relief is granted against either income tax or capital gains tax for a loss on the dis-
posal of shares on which the original relief has not been withdrawn;
– the taxpayer must not be an employee of the investee company or have a substan-
tial interest in that company. Broadly, “substantial interest” equates to possession
of, or entitlement to acquire, such rights as would enable him to receive 30% or
more of the company’s assets in the event of a winding-up. Nor must the taxpayer
be connected to the company in any other defined way;
– an investor previously unconnected with the company or its trade is allowed to
become a paid director while qualifying for relief;
– participation is limited to companies with gross assets of no more than GBP 15
million before the shares are issued, and no more than GBP 16 million after the
shares are issued. Where the company in question is the parent company of a
group, these limits apply to the gross assets of the whole group;
– the money raised must be employed for the purposes of the trade or research and
development within 2 years of the issue of the shares;
75
– no value, other than insignificant amounts, must be returned to the investor within
a period of beginning 12 months before the issue date and ending (broadly) on the
later of (i) the third anniversary of the issue date and (ii) the third anniversary of
the date on which the company began to carry on the qualifying business activity;
– it includes investment in non-resident companies that trade in the United Kingdom;
– relief is available for non-resident investors who are liable to pay UK tax; and
– the scheme does not extend to investment in private rented housing and certain
other sectors.
The relief may be withdrawn if the taxpayer disposes of the shares in the company
within the first 3 years or if he receives value, e.g. a loan, benefit, gift, etc., from the
company.
1.7.1.5.2. Seed Enterprise Investment Scheme
Seed Enterprise Investment Scheme (SEIS) relief is available on investment in compa-
nies carrying on new business (sections 257A to 257HJ of ITA 2007). The relief has
effect for qualifying shares issued on or after 6 April 2012.
The main features of SEIS are as follows:
– it is aimed at investors in small, early-stage companies;
– income tax relief is in the form of a tax reduction (i.e. a tax credit) of 50% (“the
SEIS rate”) of the lower of (i) the amount subscribed; and (ii) GBP 100,000;
– a taxpayer may elect for part of the relief to be “carried back” to the previous tax
year, although not to any tax year before 2012/13;
– there is no capital gains tax charge on a disposal of shares that qualified for, and
obtained SEIS relief that was not withdrawn;
gains tax to the extent that it is used to subscribe for SEIS shares. This relief is
subject to the GBP 100,000 ceiling mentioned above;
– the taxpayer must not be an employee of the investee company or have a substan-
tial interest in that company. Broadly, “substantial interest” equates to possession
of, or entitlement to acquire, such rights as would enable him to receive 30% or
more of the company’s assets in the event of a winding-up;
– the company must be a trading company, carrying on a “qualifying business activ-
ity”;
– participation is limited to companies with gross assets of no more than GBP 200,000
before the investment. Where the company in question is the parent company of a
group, this limit applies to the gross assets of the whole group;
– the company may not have more than 25 full-time equivalent employees when the
shares are issued. Where the enterprise in question is the parent company of a
group, this limit applies to the whole group;
– all the money raised from a share issue must be used for the purposes of the qual-
ifying business activity within 3 years of that SEIS issue; and
– a company issuing EIS shares (see section 1.7.1.5.1.) or venture capital trust (VCT)
shares (see section 1.7.1.5.3.) may also issue SEIS shares; however, the SEIS shares
must be issued first. The company should have spent at least 70% of the money
raised from the SEIS issue before issuing EIS or VCT shares.
76
1.7.1.5.3. Social investment relief

Social investment relief (SI relief) is available on investment by individuals in “social
enterprises” (sections 257J to 257TE of ITA 2007). The relief has effect for qualifying
investments made after 6 April 2014 and before 6 April 2021.
The main features of SI relief are as follows:
– it is aimed at investors in social enterprises, i.e. “community interest companies”,
“community benefit societies” that are not charities, charities; “accredited social-
impact contractors”, and other prescribed bodies;
– the investment may be in the shares or in the qualifying debentures (debt invest-
ments) of the enterprise;
– investment is limited to enterprises with gross assets of no more than GBP 15
million before an investment, and no more than GBP 16 million after the invest-
ment is made. Where the enterprise in question is the parent company of a group,
these limits apply to the gross assets of the whole group;
– the enterprise may not have more than 500 full-time equivalent employees when
the investment is made. Where the enterprise in question is the parent company of
a group, this limit applies to the whole group;
– income tax relief is in the form of a tax reduction (i.e. a tax credit) of 30% (the SI
rate) of the lower of (i) the amount invested and (ii) GBP 1 million;
– a taxpayer may elect for part of the relief to be carried back to the previous tax
year, although not to any tax year before 2014/15;
– there is no capital gains tax charge on a disposal no earlier than 3 years after their
acquisition of assets to which SI relief is attributable;
gains tax to the extent that it is used to invest in a social enterprise. This relief is
subject to the GBP 1 million ceiling mentioned above;
– the investor must not be an employee, partner, trustee or remunerated director of
the investee enterprise or a subsidiary or “linked company” (as defined);
– the enterprise must carry on a qualifying trade; and
– all the money raised from a qualifying investment must be used for the purposes of
carrying on or preparing to carry on the qualifying trade within 24 or 28 months of
the investment.
1.7.1.5.4. Venture capital trust
The venture capital trust (VCT) is a collective investment scheme of which the main
features are that:
– the VCT is an investment company that is quoted on the stock exchange;
– it may only invest in companies of a prescribed size and age carrying on a qualifying
activity;
– income tax relief is provided by way of a tax reduction, at the rate of 30% of the
amount subscribed for, up to GBP 200,000 per year;
– dividends from ordinary shares in VCTs are exempt from income tax. This relief
applies only to shares acquired (whether by subscription or otherwise) up to the
permitted maximum of GBP 200,000;
– there is exemption from capital gains tax on the disposal of shares on which relief
has not been withdrawn;
77
– the money invested by the company should be wholly employed for the purposes of
qualifying business activities within 2 years of issue of the relevant holding, or if
later, the commencement of the trade; and
– relief may be withdrawn if the VCT shares are disposed of within 5 years of issue.
The taxation of VCTs is provided for in Part 6 (sections 258 to 332) of ITA 2007.
1.7.1.5.5. Individual Savings Account
Individual Savings Accounts (ISAs) are tax-advantaged savings accounts. The main
benefit of an ISA is that all returns on investment are tax-free. Thus, there is no tax on
any dividends, interest or bonuses yielded from investment in an ISA. There is also no
capital gains tax on the disposal of an ISA investment (regulation 22 of SI 1998/1870).
Withdrawals from an ISA are made tax free.
ISAs are available to UK resident individuals.
Since 2017/18, the maximum annual investment in an ISA is GBP 20,000 (regulation
4ZA of SI 1998/1870).
Special types of ISAs (so-called Junior ISAs) are available for individuals aged below 18
who are not entitled to a child trust fund account. For 2018/19, the maximum annual
investment in a Junior ISA was GBP 4,260. In 2019/20, the limit is GBP 4,368.
At Budget 2016, the government announced the introduction of the Lifetime Individual
Savings Account (LISA), to take effect from 2017/18. The LISA is available to adults
under 40. A qualifying individual may save up to GBP 4,000 annually in a LISA and will
receive a 25% tax-free bonus from the government if he complies with the required
conditions. Funds from the LISA (as well as the bonus itself) may be drawn down 12
months after the account has been opened, if the purpose is to purchase a first home.
Otherwise, withdrawal will only be possible from age 60 onwards. The bonus will be
forfeited on the occasion of a non-compliant withdrawal. In all other cases, including
where a LISA is transferred to a different type of ISA (see above), a 25% withdrawal
charge is due.
1.7.2. Allowances
The personal allowance is an amount of the individual’s income that is treated as
falling outside the income tax net (sections 35 to 37 of ITA 2007). It takes the form of
a deduction from total income.
The personal allowance for 2019/20 is GBP 12,500 (GBP 11,850 for 2018/19).
The personal allowance is restricted where the taxpayer’s “adjusted net income”
exceeds GBP 100,000. The allowance is reduced for income exceeding this limit. The
rate of reduction is GBP 1 for every GBP 2 over GBP 100,000 until the allowance is com-
pletely extinguished.
The Blind Person’s Allowance is an additional allowance and, for 2019/20, it is set at
GBP 2,450 (GBP 2,390 for 2018/19)
A personal savings allowance is in place from 6 April 2016. For basic-rate taxpayers,
the amount of the allowance is GBP 1,000. For higher-rate taxpayers, it is GBP 500.
Basic-rate taxpayers and higher-rate taxpayers are entitled to relief from tax on their
savings income, up to the requisite amount of the personal savings allowance. For the
scope of savings income, as well as details of the income tax rate structure, see section
1.9.1.
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With effect from 2016/17 also, a “dividend nil rate” applies. It was initially set at GBP
5,000 of dividends subject to tax (i.e. the first GBP 5,000 of dividends were taxed at
0%), but the tax-free amount has been reduced to GBP 2,000 with effect from 2018/19.
With effect from 2015/16, spouses and civil partners may transfer a prescribed part of
their personal allowance from one to the other. For 2019/20, the amount transferred
may not exceed GBP 1,250 (GBP 1,190 for 2018/19) (sections 55A to 55E of ITA 2007).
The possibility to transfer in this way is open to married couples and civil partners born
after 5 April 1935. The transferring spouse or civil partner must not be liable to income
tax at a rate other than the basic rate (or the equivalent savings and dividend rates)
once his income is reduced by the amount transferred. The recipient spouse or civil
partner must also not be liable to income tax at a rate other than the basic rate (or the
equivalent savings and dividend rates).
For the married couple’s allowance, available for married couples and civil partners
born before 6 April 1935, and actually operating as a tax credit, see section 1.7.3.
1.7.3. Credits
Tax credits are available for married couples and civil partners of whom at least one
was born before 6 April 1935 (Part 3 Chapter 3 of ITA 2007). For the transferable per-
sonal allowance available to married couples and civil partners born after 5 April 1935,
see section 1.7.2.
The tax credit is limited to 10% of a base amount. For 2019/20, the minimum base
amount is GBP 3,450 and the maximum base amount is GBP 8,915 (GBP 3,450 and GBP
8,915, respectively, for 2018/19).
Where the income of the taxpayer exceeds GBP 29,600 (for 2019/20), the maximum
amount is reduced by GBP 1 for every GBP 2 of income in excess of the cap. The lowest
it can go is down to the minimum amount.
A child tax credit, which is a form of social security benefit, is also available in spec-
ified circumstances.
1.8. Losses
Trading losses
Trading losses may be set off against other income of the current or preceding year or
carried forward indefinitely in the same and continuing trade (sections 64 and 83 of ITA
2007). They may also be set off against capital gains of the current year.
Pre-trading expenditure incurred in the 7 years before commencement of trading is
deductible on the commencement of trading. Losses of the first 4 assessment years of
trading may be set off against income of the 3 tax years preceding the tax year in
which trading commences, taking the earlier years first.
Losses in the final 12 months of trade may be carried back and set off against the
profits of the previous 3 years of the trade (terminal loss relief).
Relief is also available in respect of certain qualifying payments or qualifying events
occurring within 7 years of the termination of a trade (post-cessation trade relief).
With effect from 2013-14, there is a limit on certain unrestricted loss reliefs. The rules
restrict the amount of relief that is claimed against general income. These include
reliefs for trade losses set off against general income, relief for early years’ trade
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losses (i.e. the first 4 assessment years of trading), and post-cessation trade relief.
Relief is restricted to the greater of (i) GBP 50,000 and (ii) 25% of the individual’s
adjusted total income for that tax year (section 24A of ITA 2007).
Losses of a property business have different, slightly more restrictive, rules (sections
117 to 127C of ITA 2007).
Capital losses
Capital losses are offset against capital gains of the same period, to produce net
taxable gains (sections 15 to 57 of TCGA 1992). If instead the result is a loss, this is
carried forward indefinitely for offset against the next available capital gains. Capital
losses may generally not be offset against income; however, there is an option to offset
losses on shares in unquoted trading companies against income of the current or pre-
ceding tax year. This loss relief is subject to the relief restriction rules discussed above
under trade losses.
Special rules apply where a chattel is disposed of at a loss; see section 1.6.
1.9. Rates
1.9.1. Income and capital gains
1.9.1.1. Income tax – main rates and bands
Set out below are the income tax rates and bands for 2018/19 and 2019/20:
Income tax band (GBP): Income tax band (GBP):

2018/19 2019/20
Basic rate (20%) Up to 34,500 Up to 37,500
Higher rate (40%) 34,501 – 150,000 37,501 – 150,000
Additional rate (45%) Over 150,000 Over 150,000
With effect from 6 April 2019, taxpayers with a main residence in Wales are subject to
Welsh rates of income tax as set by the Welsh Government. For 2019/20, the rates are
the same as for England and Northern Ireland (i.e. those set out in the table above).
From 2017/18, the Scottish Parliament has the power to set its own income tax bands
on the non-savings, non-dividend income of taxpayers resident in Scotland. For
2019/20 and 2020/21 (proposed in the Scottish Budget on 6 February 2020), the rates
are:
2019/201 2020/21 Budget1

Income band (GBP) Income band (GBP)
Starter rate (19%) 12,501 – 14,549 12,501 – 14,585
Scottish basic rate (20%) 14,550 – 24,944 14,586 – 25,158
Intermediate rate (21%) 24,945 – 43,430 25,159 – 43,430
Higher rate (41%) 43,431 – 150,000 43,431 – 150,000
Top rate (46%) Over 150,000 Over 150,000
1. For 2019/20, a personal allowance of GBP 12,500 is available (GBP 11,850 for 2018/19). The assump-
tion here is that the UK Budget 2020, which is scheduled for 11 March 2020, maintains the personal
allowance at GBP 12,500 in 2020/21.
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1.9.1.2. The starting rate for savings income

A “starting rate” of 0% applies to savings income, but up to a limit (with effect from
2017/18) of GBP 5,000. However, if a taxpayer’s non-savings income exceeds this limit,
the starting rate is not available for his savings income.
Savings income means, broadly, dividend income and income from savings sources,
e.g. bank and building society interest, government securities, National Savings First
Option Bonds, authorized unit trusts and loans and deposits, and the income element
of a purchased life annuity. Non-savings income generally covers earnings, pensions,
income from real estate, and profits from trades and professions.
1.9.1.3. Dividends
Dividends are taxed at special rates. For 2017/18, 2018/19 and 2019/20, these are as
follows:
Tax rate
(%)
Dividend ordinary rate (applicable to dividends that would otherwise fall within the
basic rate; see the table in section 1.9.1.1.) 7.5
Dividend upper rate (applicable to dividends that would otherwise fall within the
higher rate; see the table in section 1.9.1.1.) 32.5
Dividend additional rate (applicable to dividends that would otherwise fall within
the additional rate; see the table in section 1.9.1.1.) 38.1
The above dividend rates were revised with effect from 2016/17 as part of a package
of reforms to dividend taxation. Other aspects of the reform include the introduction
of a dividend nil rate (see section 1.7.2.) and the abolition of the imputation tax credit
that previously attached to domestic dividends (see section 1.5.).
The dividend rates and savings rates apply to UK-source income and to foreign income
taxed on an arising basis. With respect to foreign savings income and dividend income
taxed on the remittance basis, tax is levied, as applicable, at the basic rate, the higher
rate and the additional rate.
1.9.1.4. Trusts
Special rates are in place for trusts and trustees. For interest in possession trusts, the
relevant rates are the basic rate and the dividend rate, depending on the nature of the
income. The individual beneficiaries of such trusts or estates may be subject to income
tax at higher rates on the trust or estate income to which they are entitled.
For discretionary trusts and accumulation trusts, the rate structure is as follows (sec-
tions 9 and 491 of ITA 2007):
– up to GBP 1,000: 7.5% for dividend income and 20% for all other income; and
– above that amount: 38.1% (known as the “dividend trust rate”) for dividend income
and 45% (known as the “trust rate”) for non-dividend income.
1.9.1.5. Capital gains tax rates
Capital gains tax is levied as follows (section 1H of TCGA 1992):
– at 10% on gains up to the limit of the taxpayer’s available basic rate band; and
– at 20% on gains in excess of that limit (see section 1.6.).
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The above rates took effect from 2016/17. Before that time, the rates were 18% (for
gains within the available basic rate band) and 28% (for gains in excess of the basic rate
band).
For gains related to residential property not eligible for private residence relief and
for carried interest, the CGT rates are 18% and 28%, depending on whether or not the
gains fall within the basic rate band, as explained above.
For trustees and personal representatives, the CGT rate is 20% on all gains other than
residential property gains and carried interest gains, on which the rate is 28%.
1.9.2. Withholding taxes
Wages and salaries are subject to a PAYE (Pay-As-You-Earn) system for withholding tax
at source. Social security contributions are also collected by withholding. These with-
holding taxes do not represent the final determination of tax liability but are offset
against the amount of tax owed at the time the tax return is filed.
The payer of the following types of income has a duty to account for withholding tax on
the making of such payments:
Withholding at the 20% basic rate (section 874 of ITA 2007)
– Annual interest paid by a company, local authority or a partnership of which a
company is a member;
– interest paid to a person with a usual place of abode outside the United Kingdom;
and
– (before 6 April 2016 only) interest, other than short interest, paid by a bank or
other deposit taker in the United Kingdom.
Withholding at the 20% basic rate (sections 900 to 903 of ITA 2007)
– Annuities or annual payments;
– patent royalties; and
– certain specified rents, e.g. in respect of electricity line way-leaves.
For withholding taxes on amounts paid to non-residents, see section 6.3.1.
1.10. Administration
1.10.1. Taxable period
The tax year for income and capital gains runs from 6 April to 5 April in the next year
(section 4 of ITA 2007).
Trading and professional income is assessed on the basis of the accounting year ending
in the tax year (the current-year basis), so that, for example, profits for the account-
ing year ended 30 June 2019 are assessed in 2019/20. Other income is assessed in the
year of receipt (the actual-year basis), so that, for example, UK bank deposit interest
received on 30 September 2019 is assessed in 2019/20.
1.10.2. Tax returns and assessment
The United Kingdom operates a self-assessment system, whereby taxpayers are
required to complete a tax return and compute their own tax liability (section 8 of TMA
1970). There is no pre-assessment system. For tax returns from 2007/08 onwards, the
filing deadlines following the end of the tax year are 31 October for paper returns, and
82
31 January for online returns. Thus, for example, for the tax year 2019/20, the paper
return is due by 31 October 2020. Regarding online filing, the deadline would be 31
January 2021.
Spouses and civil partners (see section 1.1.) are taxed separately and each spouse or
partner is responsible for his or her own tax affairs.
1.10.3. Payment of tax
Salaries and social security contributions are subject to withholding at source, which
amounts are then credited against the final tax liability (see section 1.9.2.).
In respect of all other types of income, income tax for a tax year is payable by means
of two interim payments of equal amounts. These are normally based on the liability
for the previous year (section 59B of TMA 1970). The first payment is due on 31 January
in the tax year and the second payment is due on the following 31 July. A final balanc-
ing payment to take into account the difference between the estimated liability on
which these payments are based and the actual liability is due on the following 31
January when the return is filed.
Capital gains tax (CGT) for a tax year is payable in a single instalment on 31 January
following the end of the tax year.
From 6 April 2019, non-residents making a disposal of UK land will in most circum-
stances need to file a special return and make a payment on account of any CGT due
within 30 days of the disposal. The special return need not be made if the annual self-
assessment return is due to be filed on an earlier date. This new filing and payment
obligation will be extended to UK residents from 6 April 2020.
1.10.4. Rulings
There is no system of statutory rulings of general application to the UK tax code. A
number of legislative provisions – usually anti-avoidance provisions – incorporate what
are frequently referred to as “clearance procedures”. These procedures enable a tax-
payer to check before entering into a transaction whether HMRC will seek to invoke the
anti-avoidance measure against the transaction in question.
Outside these statutory provisions, the courts have applied the rules of general admin-
istrative law to cases where, as a matter of practice and at the request of a taxpayer,
HMRC makes known its views on the meaning or application of the tax code. These
administrative law rules secure that, in appropriate cases, taxpayers may rely upon
the views that HMRC expresses.
2. Other Taxes on Income
There are generally no other taxes on income. There is, however, a high-income child
benefit charge (see below).
High-income child benefit charge
A high-income child benefit charge has been in place from 2012/13 (Schedule 1 to FA
2012). The high-income child benefit charge is not strictly a tax on income. It is
imposed as a mechanism for withdrawing excess child benefit from high-earning cou-
ples.
Child benefit is a social security benefit paid out to individuals who are responsible for
looking after a person under 16, although, where the person is in full-time education of
a prescribed kind, payments may continue beyond the age of 16.
83
Child benefit is paid in all qualifying cases, regardless of the level of income of the
carers. The high-income child benefit charge aims to claw back some of the child
benefit payment where this is made to carers with income exceeding a set threshold.
The charge applies where a taxpayer has net adjusted income of GBP 50,000, and
either he or his partner is in receipt of child benefit in that year. Where both partners
have income exceeding this amount, the charge applies to the partner with the higher
income.
The charge applies at a rate of 1% of the amount of child benefit for every GBP 100 of
adjusted net income between GBP 50,000 and GBP 60,000. Where the taxpayer’s
income exceeds GBP 60,000, the charge is the full amount of child benefit received.
A taxpayer may elect out of the charge by opting not to receive child benefit.
3. Social Security Contributions
The main governing legislation is the Social Security Contributions and Benefits Act
1992.
For social security contributions payable by employees, see Corporate Taxation section
4.2.
Class 1 – Employees
Employees are required to pay primary Class 1 national insurance contributions.
The contribution rates for 2019/20 are:
– nil on the first GBP 166 (the weekly “primary threshold”) of weekly earnings;
– 12% on weekly earnings from GBP 166.01 up to the (weekly) “upper earnings limit”
of GBP 962; and
– 2% on weekly earnings exceeding the upper earnings limit.
For 2018/19, the weekly primary threshold was GBP 162, and the weekly upper earn-
ings limit was GBP 892.
The tax base on which Class 1 social security contributions are payable encompasses
gross pay before deducting pension premiums paid by the employee (but not pension
premiums paid by the employer), and without taking into account any deductions or
reliefs from earnings that are allowed for income tax purposes.
Class 1 – Employers
Employers are required to pay secondary Class 1 national insurance contributions
(NICs) on an employee’s relevant earnings. In 2018/19, the rate was 13.8% of the
employee’s weekly earnings exceeding GBP 162 (the weekly “secondary threshold”). In
2019/20, the 13.8% rate applies to weekly earnings exceeding GBP 166.
With effect from April 2016, most employers are entitled to an annual employment
allowance of GBP 3,000 per year, which may be offset against the employer’s second-
ary NIC liability for the year. From 2020/21, it is proposed that the employment allow-
ance will only be available to employers with an employer’s NIC liability below GBP
100,000 in the previous tax year.
With effect from 6 April 2015, employers are no longer required to pay Class 1 second-
ary NICs on remuneration – up to the so-called Upper Secondary Threshold for under
21s – paid to any employee under the age of 21. For 2019/20, the threshold is GBP 962
(GBP 892 for 2018/19).
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With effect from 6 April 2016, employers are no longer required to pay Class 1 second-
ary NICs on remuneration – up to the so-called Apprentice Upper Secondary Threshold
for under 25s – paid to apprentices under the age of 25. For 2019/20, the threshold is
GBP 962 (GBP 892 for 2018/19).
Class 2 – Self-employed
Self-employed persons pay a flat rate of GBP 3 per week (for 2019/20). For 2018/19,
the rate was GBP 2.95 per week. The government has proposed legislation to increase
the rate to GBP 3.05 per week for 2020/21.
Individuals whose earnings do not exceed the Small Profits Threshold of GBP 6,365 for
2019/20 (GBP 6,205 for 2018/19) are exempt from charge. Such individuals may, how-
ever, volunteer to pay the levy in order to protect entitlement to certain social secu-
rity benefits. The government has proposed legislation to increase the threshold rate
to GBP 6,475 for 2020/21.
Special rates apply for share fishermen and volunteer development workers.
Class 3 – Voluntary contributions
For 2019/20, the voluntary contributions payable by non-employed or non-resident
individuals to preserve their entitlement to the social security pension are set at GBP
15 per week (GBP 14.65 per week for 2018/19). The government has proposed legis-
lation to increase the rate to GBP 15.30 per week for 2020/21.
A further class of voluntary contributions, Class 3A, could be paid between 12 October
2015 and 5 April 2017 by individuals who would reach state pension age before 6 April
2016. The intention was that this would give such individuals the opportunity to make
voluntary payments in order to boost their Additional State Pension.
Class 4 – Self-employed
Contributions are payable by the self-employed at 9% of their annual earnings between
GBP 8,632 (the lower profits limit) and GBP 50,000 (the upper profits limit), and at 2%
on any excess above GBP 50,000 (2019/20 figures). The payment does not give any
entitlement to social security benefits and is de facto an additional income tax. No
payment is due from taxpayers who have reached pensionable age by the beginning of
the year of assessment. The government has proposed legislation to increase the lower
limit to GBP 9,500 per week for 2020/21.
Deductibility of social security contributions
Social security contributions are not deductible for income tax purposes. However,
employer social security contributions are so deductible; see Corporate Taxation
section 4.2.
4. Taxes on Capital
4.1. Net wealth tax
There is no net wealth tax.
4.2. Real estate tax
A tax on the occupation of property, known as the National Non-Domestic Rate (NNDR),
is payable by every occupier of business premises. Local authorities collect the tax by
charging a Uniform Business Rate (UBR), which is set by the government. The yield of
the tax is allocated to each local authority in proportion to its population.
85
Rateable values, which are reassessed every 5 years, are currently based on market
rents on 1 April 2017. Transitional relief applies to phase in significant increases or
decreases in rateable value over a period of years. For the year ending 31 March 2020,
the UBR for England is 50.4% (49.3% for the year ending 31 March 2019). For small busi-
nesses, the UBR is 49.1% for the year ending 31 March 2020 (48% for the year ending 31
March 2019). Similar rates apply in Scotland and Wales. The rates are increased annu-
ally in line with movements in the retail price index (RPI). There is a scheme in place
under which it is possible to defer 60% of the RPI increase, spreading the payment over
the following 2 years.
The tax is a deductible expense for income tax purposes for taxpayers engaged in a
business.
A council tax is levied by local authorities on the occupants of residential property sit-
uated within the area of the local authority. The tax payable is determined according
to the valuation band into which the property falls. There are exemptions for certain
properties, and for certain occupants. Discounts apply, inter alia, for properties in
single occupation, properties occupied by disabled persons and second homes or
holiday homes.
5. Inheritance and Gift Taxes
Inheritance tax is charged on the transfer of all property passing on death (chargeable
transfers). No general gift tax exists, but inheritance tax is also levied on certain gifts
made within the 7 years before the death of a person (potentially exempt transfers).
The scope of inheritance tax is further extended by the inclusion of gifts made outside
such 7-year period, but from which the deceased has not been entirely excluded for
the past 7 years prior to death (gifts with reservation). Certain transfers inter vivos are
taxed at the moment of the transfer (lifetime transfers).
An income tax charge is imposed on the annual value of any benefit exceeding GBP
5,000 derived by individuals from the use or enjoyment of assets that they previously
owned. The charge is determined as a percentage of the value of the asset. The rele-
vant percentage is the official interest rate. The taxpayer can opt out of the income
tax charge by electing for the asset concerned to be subject to the inheritance tax
rules.
Liability to pay inheritance tax falls on the donor in the case of a chargeable lifetime
transfer, although the donee may elect to pay the tax. In the case of a chargeable
transfer on death or deemed chargeable transfer, i.e. a potentially exempt transfer
within 7 years before death, the liability falls on the executor. In cases where the
passing of trust property gives rise to an inheritance tax charge, the trustees of a trust
are liable. If any of these persons fail to pay the tax due, the transferee is liable to pay
the tax (sections 199 to 210 of IHTA 1984).
5.2. Taxable base
Inheritance tax is levied on worldwide property of domiciled individuals and trusts
(section 5 of IHTA 1984). Non-domiciled individuals are liable to tax only on assets sit-
uated in the United Kingdom, except for holdings in certain UK collective investment
schemes. For the meaning of domicile, see section 6.2.1. The concept of domicile is,
however, extended for inheritance tax purposes. Thus, before 6 April 2017, an individ-
ual who was not domiciled in the United Kingdom acquired a deemed UK domicile for
inheritance tax purposes if he had been resident in the United Kingdom (see section
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1.1.) for 17 out of the previous 20 years. Also, where an individual abandoned his UK
domicile, including a deemed domicile for inheritance tax purposes, and acquired a
new domicile, his property remained subject to inheritance tax during the following 3
years.
As from 6 April 2017, however, the deemed-domicile rule has been changed so that an
individual who has been resident in the United Kingdom for at least 15 out of the last
20 tax years and for at least 1 of the last 4 years acquires a deemed UK domicile, as
does any individual born in the United Kingdom with a UK domicile of origin but who
has acquired a foreign domicile of choice and returns to the United Kingdom and
becomes resident there (section 267 of IHTA 1984).
A trust created by a non-domiciled individual and owning only property situated
outside the United Kingdom is excluded from inheritance tax (excluded property set-
tlement). This exclusion continues even if the settlor becomes domiciled in the United
Kingdom for inheritance tax purposes. However, from 6 April 2017, a direct or indirect
interest in a residential property in the United Kingdom is not excluded property even
if held through a non-resident entity or vehicle, and hence comes into the charge to
IHT.
Inheritance tax (which is actually an estate tax) is charged on the transfer of all prop-
erty passing on death (a chargeable transfer) or on the transfer inter vivos into most
types of trust or into a closely controlled company (a chargeable lifetime transfer)
(section 2 of IHTA 1984). Any other transfer is a potentially exempt transfer.
A gift with reservation of benefit does not become a potentially exempt transfer until
the donor has divested himself of all benefit in the gifted property. The gift of a house
in which the donor continues to reside rent free would in most cases be a gift with res-
ervation. If it is not a potentially exempt transfer, a gift is a chargeable transfer on
death.
The main exemptions from inheritance tax are (sections 18 to 29A of IHTA 1984):
– transfers of property between spouses and civil partners. If the transferee is not
domiciled in the United Kingdom, the exemption is limited to GBP 325,000. This
exemption is extended to the extent that the property transferred is or has been
the transferor’s main residence (see section 5.4.). A non-domiciled spouse or civil
partner may elect to be treated as UK-domiciled for inheritance tax purposes. The
election may also be made by a UK-domiciled person regarding a past period in
which he was not UK-domiciled. Also, an individual who was previously married or
in a civil partnership may make a retrospective election following divorce or dis-
solution;
– regular (e.g. year-by-year) gifts which represent normal expenditure out of
income;
– gifts up to GBP 3,000 in a tax year (any unused amount of the exemption may be
carried forward for 1 year); and
– donations to charity and political parties.
Furthermore, the rate of inheritance tax is reduced by 100% on transfers of (i) an inter-
est in an unincorporated business, (ii) a controlling interest in a trading company, and
(iii) shares in an unquoted trading company. For certain other transfers of business
property, the rate is reduced by 50%. Rate reductions also exist for the transfer of
certain agricultural property.
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5.3. Personal allowances

For applicable allowances and exemptions, see section 5.2.
5.4. Rates
A nil rate band applies up to GBP 325,000 (section 7 and Schedule 1 of IHTA 1984).
Above this amount, the rate is 40% in respect of inheritance tax payable on death, and
20% for chargeable lifetime transfers.
Finance (No. 2) Act 2015 introduced an additional nil rate band, which took effect for
relevant transfers on death after 5 April 2017. The additional nil rate band applies
where a residence is transferred on death to a direct descendant, as well as in circum-
stances where, after 8 July 2015, a person downsizes or ceases to own a home, and
assets of an equivalent value are transferred to his direct descendants. For 2019/20,
the amount of the additional nil rate band is GBP 150,000, and for 2020/21, it is GBP
175,000. For 2018/19, it was GBP 125,000. The additional nil rate band is subject to
tapered withdrawal for estates with a net value exceeding GBP 2 million.
A lower rate of 36% (in place of 40%) applies where 10% or more of the deceased’s net
estate is left to charity.
Inheritance tax is charged on a 7-year basis so that chargeable transfers (lifetime or on
death) are cumulated with transfers within the previous 7 years for computing the tax
payable. If the transferor has survived more than 3 years after making a particular gift,
a sliding-scale tax reduction (known as “tapering relief”) applies in respect of the
inheritance tax liability on that gift.
Certain types of trusts are taxed every 10 years on their net worth at an effective rate
of 6% (i.e. 30% of net worth at the lifetime rate of 20%). An exit tax also applies when
property is appointed out of such trusts.
5.5. Double taxation relief
Unilaterally, double taxation is relieved by an ordinary credit for foreign taxes of a
character similar to UK inheritance tax chargeable by reference to the same event and
attributable to the same property.
The United Kingdom has inheritance tax treaties with France, India, Ireland, Italy, the
Netherlands, Pakistan, South Africa, Sweden, Switzerland and the United States.
6. International Aspects
6.1. Resident individuals
For a discussion of residence, see section 1.1.
6.1.1. Foreign income and capital gains
A resident individual is, in principle, subject to tax on his worldwide income and
capital gains. Relief is, however, available in respect of offshore employment income
in the following circumstances. An individual who is resident but not domiciled in the
United Kingdom and is not deemed to be so domiciled (see section 6.2.1.1. is charge-
able to income tax on a specially advantageous basis in respect of offshore employ-
ment income under an employment with an employer resident outside the United
Kingdom, the duties of which are performed wholly outside the United Kingdom (sec-
tions 22 and 23 of ITEPA 2003). The individual is only subject to tax on amounts remit-
ted to the United Kingdom. If he remits nothing, there is no charge to tax for that tax
year. For the operation of the remittance basis rules, see section 6.2.1.1.
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Foreign-source dividends, interest, royalties and rental income are, in general, fully
taxable, subject to the remittance basis of taxation for foreign domiciliaries (see
section 6.2.1.). However, stock dividends from a non-resident company are not tax-
able.
Before 2016/17, an imputation tax credit applied to domestic dividends. It was also
extended to certain dividends received from a foreign source. However, FA 2016 abol-
ished the tax credit, with effect from 2016/17. For details, see section 1.5. The pre-
2016/17 position on foreign-source dividends may be summarised as follows: the impu-
tation credit applied to dividends received by a UK resident or an “eligible non-resi-
dent”. An eligible non-resident was one who, while not a resident of the United
Kingdom, nevertheless met certain requirements set out in legislation. These included
(i) residence in the Isle of Man, (ii) previous residence in the United Kingdom but
having to live abroad for the sake of his health or that of a family member living with
him or (iii) current or past employment in the service of the Crown.
A UK resident individual is taxable on foreign-source business and professional income,
subject to the remittance basis for foreign domiciliaries (see section 6.2.1.).
A UK resident individual is subject to capital gains tax on the disposal of assets any-
where in the world, subject to the remittance basis of taxation for foreign domicili-
aries (section 2 of TCGA) (see section 6.2.1.).
6.1.2. Foreign capital
There is no net wealth tax, real estate tax, or other tax on foreign capital.
6.1.3. Double taxation relief
Where an individual’s income suffers overseas tax in a country with which the United
Kingdom does not have a tax treaty, UK domestic legislation provides for unilateral
relief from double taxation by means of an ordinary foreign tax credit. The credit is
computed on an item-by-item, source-by-source basis. The domestic law provisions
granting unilateral relief from double taxation are contained in the Taxation (Interna-
tional and Other Provisions) Act 2010 (TIOPA 2010).
Under the majority of tax treaties that the United Kingdom has entered into with other
countries, relief from double taxation is accomplished by means of the credit method
(section 9 of TIOPA 2010). The exemption method is also provided for in particular
treaties. Where relief may be claimed under a tax treaty, it is not available under the
unilateral relief provisions.
The United Kingdom had implemented the former EU Savings Directive (2003/48), and
had therefore effected legislation on the automatic exchange of information relating
to savings income. However, with the repeal of the Savings Directive as per 1 January
2016, automatic exchange of information that took place under that Directive now
does so under (amending) Directive 2014/107 (automatic exchange of financial
account information between Member States) from that date.
6.2. Expatriate individuals
6.2.1. Inward expatriates
There is no special regime for inward expatriates, although a few special deductions
and exemptions are available (see section 6.2.1.2.). An individual who is domiciled
abroad, while being resident in the United Kingdom is, however, taxed on the remit-
tance basis in respect of foreign income and capital gains (see section 6.2.1.1.).
89
6.2.1.1. Foreign domiciliaries

Under common law, every individual has a domicile of origin, which is usually the
domicile of his father at the time of the individual’s birth. An individual can only have
one domicile. The individual may subsequently acquire a domicile of choice in a dif-
ferent country, but for this the individual has to prove not only physical presence in
that country but also a firm intention to make it his permanent home. Accordingly, a
national of another country who enters the United Kingdom will usually, for the pur-
poses of UK law, retain his foreign domicile of origin, throughout even a prolonged
period of residence in the United Kingdom, provided that he retains the intention to
leave the United Kingdom at the end of that period. It should be noted that an indi-
vidual’s nationality does not determine his domicile status, though it may influence it.
An individual who is domiciled abroad, while being resident in the United Kingdom, is
liable to tax on the remittance basis (if he so chooses and pays the appropriate remit-
tance-basis charge) in respect of foreign income and capital gains (sections 831 to
832B of ITTOIA 2005, Part 14 Chapter A1 of ITA 2007 and Schedule 1 of TCGA 1992). This
means that, in respect of such income and gains, he is subject to tax only in respect of
remittances to the United Kingdom.
With effect from 6 April 2017, a substantial reform of the remittance basis regime has
taken place (section 835BA of ITA 2007 and Schedule 8 to Finance (No. 2) Act 2017).
The main changes are as follows:
– the introduction of a “deemed domicile” rule, which applies to individuals who
have been resident in the United Kingdom for 15 out of the past 20 years, unless
there is no tax year after 5 April 2017 in which the individual is resident. There is
protection for non-domiciled individuals who have already established a non-resi-
dent trust before 6 April 2017 and are subsequently deemed to be UK domiciled.
Income and gains retained in such a trust are not thereby subject to UK tax, pro-
vided that no new property or income is provided to the trust on other than arm’s
length terms after 5 April 2017. There is also protection for offshore assets owned
by an individual who becomes a deemed UK domiciliary. On any future disposal of
such assets, the cost base is their market value as at 6 April 2017, subject to certain
conditions. Transitional rules apply to offshore funds; and
– the introduction of special rules applicable to a returning UK domiciliary, i.e. an
individual who was a UK domiciliary at birth, left the United Kingdom and acquired
a foreign domicile, and subsequently returns to the United Kingdom. In general
terms, upon returning to the United Kingdom, such an individual is treated as
having reverted to his UK-domiciled status. Furthermore, when such an individual
once again leaves the United Kingdom, he will generally continue to be treated as
UK-domiciled unless certain prescribed conditions are met.
A remittance basis charge (RBC) is levied on non-domiciled individuals who wish to
access the remittance basis (“remittance basis users”) (section 809B of ITA 2007) and
are not deemed to be UK-domiciled as a result of the changes described above. For
remittance-basis users who are at least 18 years old and resident in the United
Kingdom for 7 out of the 9 tax years immediately preceding the relevant year, the RBC
is GBP 30,000. With effect from 2012/13, a higher annual charge applies where the
individual has been resident in the United Kingdom for at least 12 out of the previous
14 tax years and is not deemed to be UK-domiciled as a result of the changes described
above. The higher annual charge is GBP 60,000. With effect for the years 2015/16 and
2016/17 only, there was an even higher charge of GBP 90,000 for individuals who had
been resident in the United Kingdom for more than 17 of the past 20 years. Following
90
the deemed-domicile rule in force since 6 April 2017, there are now no individuals in
this category. There is a de minimis exception where the individual’s foreign income
and gains in the relevant tax year are less than GBP 2,000.
An individual who claims the remittance basis is not entitled to any personal allow-
ance, married couples’ tax reduction or capital gains tax annual exemption for the rel-
evant year.
Foreign dividend income and foreign savings income taxed on the remittance basis is
subject to tax at the basic rate, higher rate and additional rate (see section 1.9.1.). In
the case of foreign dividend income taxed on the arising basis, the separate dividend
income rates (see section 1.9.1.) apply.
There is an exemption from the remittance basis rules in respect of foreign income and
gains remitted to the United Kingdom for the purposes of making a commercial invest-
ment in a qualifying business.
Foreign capital gains are taxed when remitted. Gains realized before the taking-up of
UK residence and remitted thereafter are not taxed, however (section 1G of TCGA
1992). Foreign gains made during UK residence are always assessed on remittance
during a period of UK residence.
Some of the United Kingdom’s tax treaties contain a provision that, in respect of
income taxed on the remittance basis in the United Kingdom, postpones relief from
taxation in the source state until the income is remitted to the United Kingdom.
6.2.1.2. Special provisions for expatriates
An expatriate receiving a salary from a non-resident employer may claim a deduction
from the salary for such items as pension scheme contributions, interest, pre-15 March
1988 court order alimony, pre-14 March 1984 life insurance contract premiums, etc., if
a corresponding payment in the United Kingdom would have been deductible. This
applies, to the extent that the payment (other than pension scheme contributions)
cannot be made out of other foreign income. The expatriate may also receive non-
taxable travel expenses from a UK or non-resident employer for himself and his family
during the first 5 years for journeys between home and his UK place of employment.
Relocation expenses paid by an employer up to GBP 8,000 are not taxable. The gov-
erning provisions can generally be found in Part 2, Chapter 5 of ITEPA 2003.
6.2.2. Outward expatriates
An individual who is found to be UK resident under the Statutory Residence Test (see
section 1.1.) will be treated for tax purposes as resident for the full tax year. However,
there are circumstances in which the tax year is treated as split (the so-called split
year treatment), with the result that the individual would be treated as UK resident
for one part of the year, and non-UK resident for the remaining part.
For the taxation of capital gains derived by temporary non-residents, see section 1.6.
Unrealized capital gains are not taxed upon emigration. The act of leaving the United
Kingdom and ceasing to be resident does not constitute a deemed disposal of assets for
UK capital gains tax purposes resulting in a gain; however, in certain circumstances,
for example, where tax has been deferred on held-over capital gains, a charge may
arise at that point.
6.3. Non-resident individuals
For a discussion of residence, see section 1.1.
91
6.3.1. Taxes on income and capital gains

Non-residents are liable to income tax on all UK-source income, subject to reductions
or exemptions given in a double tax treaty (see sections 6.3.1.1. to 6.3.1.3.).
Regarding capital gains tax (CGT), the general rule is that non-residents are not liable
to CGT on the disposal of UK-situated property. Two main exceptions relate to: (i) the
disposal of assets of a trade carried on in the United Kingdom through a branch or
agency; and (ii) the direct or indirect disposal of an interest in UK land. For further
details, see section 6.3.1.4.
6.3.1.1. Employment income
Non-residents are subject to UK income tax on income from employment performed in
the United Kingdom (section 27 of ITEPA 2003). The method of taxation is the same as
for residents with the employer withholding income tax at source under the PAYE
system (see section 1.9.2.). The final tax liability is determined when the employee
files an income tax return.
Directors’ remuneration is treated in the same manner as employment income. A non-
resident may be subject to the PAYE system on a pension paid to him by a resident of
the UK if the pension exceeds the prescribed minimum rate and is not wholly in respect
of an employment which was carried on abroad.
Income derived by non-residents from employment in the UK is subject to the same
rates of tax (including where relevant, higher rate and additional rate income tax) as
residents, subject to any tax treaty provision.
Non-resident individuals are generally not entitled to the allowances and credits set
out in section 1.7. However, certain categories of non-resident individuals may claim
the allowances and credits set out in section 1.7.2. (the age allowance threshold
applies only to UK income) and section 1.7.3. The categories are, in particular:
– British subjects and nationals of EEA countries (EU Member States and Iceland,
Liechtenstein and Norway);
– residents of the Isle of Man or the Channel Islands;
– residents in treaty countries where the treaty contains a personal allowance pro-
vision;
– nationals, without necessarily being residents, of treaty countries where the treaty
contains an appropriately worded non-discrimination article and does not contain a
personal scope article restricting the applicability of the treaty to residents; and
– nationals and residents of a number of other countries by virtue of a non-discrim-
ination article, as listed in HMRC’s claim notes.
Before 6 April 2010, Commonwealth citizens were entitled to personal allowances in
their own right. However, with effect from that date, this entitlement was withdrawn.
The withdrawal applies only where the entitlement to claim arises solely as a result of
Commonwealth citizenship. An affected individual may nevertheless claim under
another head, e.g. if there is a relevant treaty containing a non-discrimination article.
Allowances are set off primarily against income which is not taxed at source, e.g. bank
interest, rental income and trading income. Pension premiums (see section 1.3.3.)
paid by a non-resident in the United Kingdom are deductible from UK-source earned
income which is taxed in the United Kingdom. The deductions set out in sections
92
1.7.1.4. and 1.7.1.5. are available against UK income for all non-residents. The
payment of non-UK-source interest on a non-UK loan to acquire rental property is
deductible. For the deduction available to seafarers, see section 1.3.1.
6.3.1.2. Business and professional income
Non-residents are subject to tax on income derived from business and professional
activities performed in the United Kingdom, subject to any tax treaty provision. For a
discussion of the position with respect to allowances and deductions, see section
6.3.1.1.
6.3.1.3. Investment income
Income tax is withheld at source on investment income, such as interest and royalties
(section 369 of ITTOIA 2005 and sections 906 to 908 of ITA 2007, respectively). The
withholding tax is final. In the case of rental income, the recipient may arrange with
HMRC to pay his tax directly as an alternative to withholding. Non-residents are
exempt from withholding tax on interest paid on national savings accounts and bank
and building society accounts.
There is no withholding tax on dividends under domestic law. Under many of the United
Kingdom’s tax treaties, the United Kingdom is entitled (but not obliged) to impose a
withholding tax of 15% on the payment of dividends to non-resident individuals.
For withholding tax rates under tax treaties, see Corporate Taxation section 6.3.5.
6.3.1.4. Capital gains
The main rule is that there is no charge to capital gains derived by non-residents upon
the disposal of assets in the United Kingdom. The following are the main exceptions to
this rule:
– where the taxpayer is carrying on a trade in the United Kingdom through a branch
or agency and the assets are used, held or acquired for the purposes of the trade
(section 1B of TCGA 1992). The same rule applies for assets held for the purposes of
a profession or vocation carried on in the United Kingdom. Generally, in these
cases, a disposal is deemed to take place on the removal of an asset from the
United Kingdom, upon cessation of use of the asset in the business, or cessation to
trade through the branch or agency (section 25 of TCGA 1992);
– upon the direct or indirect disposal of an “interest in UK land”. An indirect disposal
of an interest in UK land is chargeable to CGT if it is a disposal of an asset (wherever
situated) that derives at least 75% of its value from UK land, and the individual
making the disposal has a “substantial indirect interest” in that land. An asset is
regarded as deriving at least 75% of its value from UK land if it consists of a right or
interest in a company (such as a share), and at least 75% of the market value of the
company’s assets (except for those assets that are not interests in UK land and are
matched by related-party liabilities), at the time of the disposal, derives directly
or indirectly from interests in UK land. A person has a substantial indirect interest
in UK land if at any time in the period of 2 years immediately preceding the dis-
posal, he has an investment of at least 25% in the company. Exceptions are made
for land held for trading purposes and certain collective investment funds. These
rules apply for disposals after 5 April 2019 and, broadly, apply only to that part of
the chargeable gain that relates to the period after that date. This is determined
either by ascertaining the market value of the property as at that date (so-called
rebasing) or by applying a straight-line time apportionment from the later of
31 March 1982 and the acquisition date. Generally speaking, it is the taxpayer’s
choice. For the rate of tax, see section 1.9.1.5. Non-residents’ losses from direct or
indirect disposals of an interest in UK land are generally ring-fenced against gains
93
from such disposals. Unused losses can be carried forward. They cannot be carried
back, except in the year of death of the taxpayer; and
– before 6 April 2019 but after 5 April 2015, non-residents’ gains from disposals of
interests in UK land were chargeable only if the interest was held in UK residential
property. Such disposals are known as “non-resident CGT disposals” and the gains
arising from them as “NRCGT gains”. This rule applies for relevant disposals after 5
April 2015 and before 6 April 2019. The chargeable part of the gain was that part
relating to the period after 5 April 2015. This was determined either by ascertain-
ing the market value of the property as at that date (so-called rebasing), or by
applying a straight-line time apportionment from the later of 31 March 1982 and
the acquisition date. Generally speaking, it was the taxpayer’s choice. The tax rate
was the rate applicable to resident individuals, personal representatives and trust-
ees, as appropriate (see section 1.9.1.). Private residence relief was available.
NRCGT losses were generally ring-fenced against NRCGT gains. Unused losses could
be carried forward. They could not be carried back, except in the year of death of
the taxpayer. If the taxpayer later became UK resident, the ring fence was
removed, and the NRCGT losses became available for offset against non-NRCGT
gains. If a UK resident becomes non-resident having unused losses from UK residen-
tial property, he may carry forward those losses for use against any subsequent
gains from UK residential property.
The exemption from capital gains tax for non-residents does not extend to speculative
property gains which are taxed as income or to the gains of temporary non-residents
(see section 1.6.).
From 6 April 2019, non-residents are also liable to CGT on direct or indirect disposals
of interests in UK land of a non-residential nature. See also section 1.6.
6.3.2. Taxes on capital
There is no net wealth tax.
Non-residents are subject to a local tax (“council tax”) on residential real property sit-
uated in the United Kingdom or to “national non-domestic rates” if the property con-
sists of business premises (see section 4.2.).
6.3.3. Inheritance and gift taxes
See section 5.
6.3.4. Administration
If a non-resident individual is required to file a UK tax return (see section 6.3.), the
rules discussed in section 1.10. apply.
94
KEY FEATURES
Last reviewed:4 February 2020
A. General information
Sources of tax law Inheritance Tax Act 1984
Income and Corporations Taxes Act 1988
Taxation of Chargeable Gains Act 1992
VAT Act 1994
Income Tax (Earnings and Pensions) Act 2003
Income Tax (Trading and Other Income) Act 2005
Income Tax Act 2007
Corporation Tax Act 2009
Corporation Tax Act 2010
Taxation (International and Other Provisions) 2010
Annual Finance Acts.
Main types of business entities Public company
Private company
Partnership/limited partnership/limited liability
partnership
Accounting principles UK GAAP; IAS/IFRS
Currency Pound sterling (GBP)
Foreign exchange control No
Official websites Legislation
http://www.legislation.gov.uk
Guidance
http://www.gov.uk/browse/tax
HMRC
http://www.gov.uk/government/organisations/hm-
revenue-customs
HMRC's manuals
http://www.hmrc.gov.uk/manuals
B. Direct taxation: Companies
1. Resident companies
Residence A company is UK resident if it is incorporated in the UK or
if the central management and control takes place in the
UK
Tax base Worldwide
Corporate tax rates 19%
Ring Fence Corporation Tax applies to companies making
profits from oil extraction or oil rights in the UK or UK
continental shelf at 30% (Main Rate) or 19% (Small Profits
rate) with Marginal Relief for profits between GBP
300,000 and GBP 1.5 million
8% surcharge on profits of banking companies
Alternative minimum tax No
95
DOING BUSINESS IN THE UNITED KINGDOM 2020 KEY FEATURES
Capital gains Part of business income

Participation exemption available for disposal of
substantial shareholdings
Intra-group asset transfers treated as being made on a no
loss/gain basis
Rollover relief available for qualifying business assets
Loss carry-forward Yes, indefinitely against future income of “the same
trade” (except in case of change of ownership as well as
major change in trade within 5 years) and can be set off
against total profits, subject to an annual “deduction
allowance” (calculated based on total profits)
Loss carry-back Yes, for trading losses only (for 1 year)
Terminal losses may be carried back for 3 years and set
off against profits of any description
Unilateral double taxation relief Yes, ordinary foreign tax credit or deduction method
(upon election)
2. Non-resident companies
Corporate tax rates 19%
Capital gains on sale of shares in Exempt
resident companies
Capital gains on sale of Exempt, except for capital gains:
immovable property (i) attributable to a UK PE and (ii)
from disposal of “UK residential property interest”
Withholding tax rates
Branch profits No
Dividends 0%
Interest 20%
0% for bank deposits and Eurobonds
0% for associated EU companies (EU Interest and
Royalties Directive)
Royalties 20%
0% for associated EU companies (EU Interest and
Royalties Directive)
Fees (technical) 0%
Fees (management) 0%
3. Specific issues
Participation relief Inbound dividends: exempt
Outbound dividends: exempt
Group treatment Yes
Incentives R&D
Tonnage regime
REITs
Patent box regime (“modified nexus approach”
applicable to entrants after 1 July 2016)
Anti-avoidance
Transfer pricing legislation Yes
Thin capitalization legislation Interest Deduction Limitation (Fixed Ratio: 30% of
EBITDA or Group Ratio: net group interest expense
divided by group EBITDA)
96
KEY FEATURES DOING BUSINESS IN THE UNITED KINGDOM 2020
Controlled foreign company Yes

legislation
General anti-avoidance rule Yes
(GAAR)
Other anti-avoidance Yes, e.g. Diverted Profits Tax, Disclosure of Tax
legislation Avoidance Schemes ("DOTAS")
C. Direct taxation: Individuals
1. Resident individuals
Residence Statutory Residence Test:
- automatic UK tests;
- automatic overseas tests; or
- sufficient ties test.
An individual is treated as UK resident if either the
automatic residence test or the sufficient ties test is met
Taxable income Domiciled resident: worldwide
Non-domiciled resident: UK-source income and
remittance basis for foreign-source income
Income tax rates Progressive:
Top rate 45% (over GBP 150,000)
Dividend income top rate 38.1% (over GBP 150,000)
Alternative minimum tax No
Capital gains 10% for taxable income up to GBP 33,500 (or 18% for
residential property)
20% for taxable income above GBP 33,500 (or 28% for
resident property)
10% for gains qualifying for entrepreneurs’ relief
(subject to a lifetime cap of GBP 10 Million)
Gains from assets held for own business are part of “self-
employment income” (not capital gains)
Unilateral double taxation relief Yes, ordinary foreign tax credit
Social security contributions Yes, at varying rates. Not deductible for income tax
purposes
2. Non-resident individuals
Income tax rates Progressive;
Top rate 45% (over GBP 150,000)
Capital gains on sale of shares in Exempt, except if held for a trade
resident companies
Capital gains on sale of Exempt, except if held for trade; or from
immovable property disposal of “UK residential property interest”
Withholding tax rates
Employment income Regular wage withholding (PAYE) applies
Dividends 0%
Interest 20%
Royalties 20%
Fees (technical) 0%
Fees (directors) Taxed as employment income
97
DOING BUSINESS IN THE UNITED KINGDOM 2020 KEY FEATURES
D. Indirect taxation: Value added tax (VAT)/Goods and services tax (GST)
Taxable events Supply of goods and services, imports of goods, intra-
Community acquisitions of goods or new means of
transport
VAT/GST (standard) 20%
VAT/GST (reduced) 0%, 5%
VAT/GST (increased) No
Registration/deregistration GBP 85,000 (GBP 83,000 is the deregistration threshold)
threshold
VAT group Yes
E. Other taxes
Inheritance and gift taxes Yes
Net wealth tax (individual) No
Net wealth tax (corporate) No
Real estate taxes Yes
Capital duty No
Transfer tax Yes
Stamp duty Yes
Excise duties Yes
Other main taxes Insurance premium tax
landfill tax
Aggregates levy
98
CONTACT This publication has been carefully prepared, but should be seen as general guidance
only and cannot address the particular needs of any individual or entity. The
information contained within it is based upon information available up to the dates
BDO LLP mentioned at the heading of each chapter. While every reasonable effort has been
55 Baker Street taken by the IBFD and BDO to ensure the accuracy of the matter contained in this
W1U 7EU London publication, you should not act upon it, or refrain from acting, without obtaining
UNITED KINGDOM specific professional advice: the information contained herein should not be regarded
Tel. +44 20 7486 5888 as a substitute for such. Please contact BDO to discuss these matters in the context
www.bdo.co.uk of your particular circumstances. The IBFD and BDO accept no responsibility for any
loss incurred as a result of acting on information in this publication.
International Tax Coordinator:
Tim Ferris BDO is an international network of independent public accounting, tax and advisory
E-mail: [email protected] firms, the BDO Member Firms, which perform professional services under the name
of BDO. Each BDO Member Firm is a member of BDO International Limited, a UK
company limited by guarantee that is the governing entity of the international
BDO network. Service provision within the BDO network is coordinated by Brussels
Worldwide Services BV, a limited liability company incorporated in Belgium.
Each of BDO International Limited, Brussels Worldwide Services BV and the member
firms of the BDO network is a separate legal entity and has no liability for another
such entity’s acts or omissions. Nothing in the arrangements or rules of the BDO
network shall constitute or imply an agency relationship or a partnership between
BDO International Limited, Brussels Worldwide Services BV and/or the member firms
of the BDO network.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
www.bdo.global

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DOING BUSINESS IN UNITED KINGDOM

Africa: Ridha Hamzaoui, Sabrine Marsit, Emily Muyaa, Yvette Nakibuule

Tel.: 31-20-554 0100

5. TAXES ON CAPITAL ............................................................................. 31

9.6. OTHER TAXES ............................................................................... 59

4. TAXES ON CAPITAL ............................................................................. 85

Abbreviation English definition

1.1.2. Surplus advance corporation tax

1.3.4. Depreciation and amortization

Upon disposal, a balancing charge or a balancing allowance may arise.

There are specific anti-avoidance provisions for attributing to resident shareholders

1.6.2. Withholding taxes on domestic payments

Effective for distributions received on or after 1 July 2009, distributions received by

companies, companies with limited UK sales or expenses, and where arrangements

5.2. Real estate tax

The ATED bands are as follows:

Property value (GBP) Charge 2018/19 Charge 2019/20

Effective date Chargeable equity and long-term Short-term chargeable

5.4. Bank surcharge

6.1.3. Foreign capital

The treatment of non-resident companies trading in the United Kingdom generally

6.3. Withholding taxes on payments to non-resident companies

Dividends Interest1,2 Royalties

Dividends Interest1,2 Royalties

Dividends Interest1,2 Royalties

Dividends Interest1,2 Royalties

In order to ensure conformity with the OECD recommendations on interest deductibil-

9.3.2.1. SDLT on residential property

Property value (GBP) Rate (on relevant Additional

Net present value (NPV) of Rate (on entire NPV) (%)

9.3.3. Land and buildings transaction tax

Value of consideration Rate (on relevant portion of Additional-property rate (on

For chargeable transactions in non-residential or mixed property with an effective

Relevant part of Rate (on relevant part of consideration) (%)

The rates in force previously are shown in the table below.

Relevant part of Rate (on relevant part of consideration) (%)

Leases: there is generally no charge to LBTT in respect of residential leases. However,

Value of consideration Rate (on relevant portion of Additional-property rate (on

Value of consideration Rate (on relevant portion of value) (%)

NPV of rents (GBP) Rate (%)

Abbreviation English definition

1.1. Taxable persons

1.2.2. Exempt income

shareholder shares acquired pursuant to an employee shareholder agreement entered

The profits of a trade, profession or vocation must be calculated in accordance with

1.7. Personal deductions, allowances and credits

1.7.1.5.3. Social investment relief

Income tax band (GBP): Income tax band (GBP):

2019/201 2020/21 Budget1

1.9.1.2. The starting rate for savings income

5.3. Personal allowances

6.2.1.1. Foreign domiciliaries

6.3.1. Taxes on income and capital gains

Capital gains Part of business income

Controlled foreign company Yes

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