Challenges facing wealthy students studying in the UK
The UK tax system presents a minefield to wealthy, international students who may not realise that they have tax registration and reporting obligations in the UK until it is too late. This update sets out some of the key issues to help students stay compliant.
As British students return to university this September, they will be joined by a number of foreign students who have been attracted to study at UK universities. According to the most recent figures available from the Higher Education Statistics Agency, just under 460,000 foreign students enrolled at UK institutions in the 2017/18 academic year, which represented almost 20% of enrolments for that year.
Many of those students, like most of their British counterparts, will be just about making ends meet and may be juggling several part time jobs to supplement their finances. However, the financial position of others will be quite different. Their studies may, for example, be funded by distributions from an offshore family trust or they may have substantial investments in their home country.
If you are one of those students, there are a number of matters you need to consider to make sure that your tax affairs are in order in the UK.
Are you tax resident in the UK?
As an individual, your UK tax residence status will be decided under the UK’s Statutory Residence Test (SRT).
You will automatically be treated as UK resident if you spend at least 183 days in the UK during the tax year, which runs from 6 April in one year to 5 April the following year.
If you spend less than 183 days in the UK, there are other tests which look at where your home is, if and where you work, what ties (or connections) you have to the UK and how many days you spent here during the year.
If you come to the UK partway through a tax year or leave before the end of a tax year, it may be possible to claim split year treatment so that you are only treated as resident for part of the year.
The rules are very detailed and it is easy to be caught out, so specialist tax advice should be taken to make sure your status has been correctly assessed.
Are you tax resident in your home country?
This is particularly likely to be the case if your stay in the UK is temporary and you retain connections with your home country.
You should take local advice on your tax status in your home country and on any foreign tax implications of ceasing to be tax resident there. For example, your home jurisdiction may charge an exit tax when residence ceases. If you have come to the UK from another EU country, you may need advice on whether Brexit could affect the exit taxes which may be charged.
If you are a ‘dual resident’, meaning that you are tax resident in two different countries at the same time, the ‘tie breaker’ clause in the tax treaty between the UK and your home country will need to be reviewed to decide which country has primary taxing rights under the treaty.
Your residence position in both the UK and in your home country may change over the course of your studies and should be kept under review.
How are UK residents taxed?
If you are UK resident under the SRT, the default position is that you will be taxable in the UK on your worldwide income and capital gains as they arise.
However, if you are domiciled outside the UK (i.e. your country of belonging is outside the UK), you can make a claim to be taxed on a remittance basis. This means that you will only be taxable in the UK on your UK source income and gains and on foreign income and gains which you bring to the UK. Foreign income and gains which you keep outside the UK will not be taxable in the UK. In most situations, you will also lose your UK tax free allowances for income and capital gains.
The UK’s domicile rules and remittance basis legislation are highly complex, so specialist tax advice is needed if you wish to claim the remittance basis.
Tax reliefs for foreign students
Many of the UK’s tax treaties contain a provision which prevents overseas income and gains from being taxed in the UK if they are brought here to fund your maintenance, education or training.
The exemption generally covers funds which are used for normal living expenses, such as food and accommodation, as well as tuition fees and study materials. Where costs, excluding course fees, exceed £15,000, HMRC may seek additional supporting documentation.
The exemption does not apply automatically and has to be claimed.
What should I do next?
Take advice from a UK tax specialist on your UK tax residence status. They will be able to assist with the next steps, which may include:
- Registering with HMRC for self-assessment, which should be done by 5 October following the end of the tax year for which you are first required to submit a UK tax return.
- Preparing and submitting a UK tax return by 31 January following the end of each tax year. Calculating and paying your tax liabilities by the due dates.
- Making treaty claims to establish which country has primary taxing rights. If you are dual resident and no treaty claim is made, you will potentially be taxable in both countries on your worldwide income and capital gains.
- Making treaty claims to protect against UK tax on foreign income and capital gains that are brought to the UK to fund your studies.
- Liaising with your tax adviser in your home country to ensure the best tax outcome for you in both countries.
Baldwin’s private client tax team have experience in advising non-UK students on their UK tax affairs. For more information, please speak to your usual Baldwins contact or contact a member of our tax team.