Key Tax Tips for NRIs Living in the UK: Financial Advisors’ Advice
It is quite taxing to navigate through the tax system as a non-resident Indian living in the UK. It is important to know and understand the tax liabilities of both the UK and India and particularly appreciate the double taxation avoidance agreement that exists between the two countries. This blog is designed to give you tax tips as an NRI in the UK to manage your finances better and as per the statute of the law.
1. Residential Status
The very first step toward understanding your tax obligations is the determination of residential status. The residential status of a person in India is determined by the number of days spent in the country. If one spends less than 182 days in India in a financial year, he is considered an NRI. This establishes residency in the UK through a mix of criteria, days spent in the UK, and the nature of your ties to that country. UK Statutory Residence Test For tax year 2023/24, you will be treated as a UK resident if you have spent more than 183 days in the UK. You may wish to see a tax advisor if you are not sure about your residency.
2. Double Taxation Avoidance Agreement (DTAA)
DTAA between India and the UK is highly beneficial for NRIs staying in the UK. DTAA ensures that it does not tax you on the same income in two countries. For example, you are earning rental income from a property in India; you can take that benefit in terms of tax relief in the UK too, as long as you are paying tax on the same in India.
Working of DTAA: Relief available under the DTAA between India and the UK: Exemption method: Income is taxed only in one country. Tax credit method: Tax is paid in both countries, but relief is provided by crediting the tax already paid in one country.
3. Tax on Global Income
The UK taxes all your incomes globally, including those from Indian investment or property. But a DTAA helps. NRIs are to declare income from rentals, dividends, and capital gains made in India under their UK tax returns.
UK Tax Rates applicable in 2024/25
- Basic Rate: 20% for income up to £50,270
- Higher Rate: 40% for income between £50,271 and £150,000
- Extra Tax: 45% for income over £150,000
4. India: Capital Gains Tax in India on Indian Investments
You may have to pay capital gain tax in India while selling a property or stocks in India. However, you are also liable to report the same gain in the UK through the Double Taxation Avoidance Agreement, or DTAA. You can avoid double taxation and claim tax relief in the UK for the capital gains tax relief on the gains made in India, subject to certain conditions.
Indian Capital Gains Tax Rates (2024) Long-term capital gains on equity investments: 10% over ₹1 lakh Short-term capital gains: 15%.
5. Keep Your Indian Bank Accounts
As an NRI, you are expected to convert your resident savings account into an NRO (Non-Resident Ordinary) account. The account will allow you to administer your income in India, say rent, dividends, or pension, and then remit the funds to the UK after you have paid the relevant taxes.
You may also open an NRE account that allows for tax-free remittance of foreign earnings to India. Interest on NRE accounts is tax-free in India.
6. Tax Considerations: Inheritance
The UK has an inheritance tax (IHT) that will apply to your worldwide estate if you are deemed to be domiciled in the UK. The IHT threshold for 2024/25 is £325,000. Anything above that amount will be taxed at 40%. While India does not have an inheritance tax, prudent planning of one’s estate will avoid a major tax burden being placed on NRIs’ heirs back in India.
Seek Advice from a Professional Tax Consultant
Cross-border taxation is too complex and hence calls for professional advice from a financial advisor specializing in NRI tax matters. A professional will guide you on how to optimize the DTAA, and tax planning, and keep you in line with the tax laws of both the UK and India.
Conclusion
Tax for NRIs who live in the UK is pretty taxing; however, when you plan your finances and also know the rules of tax prevailing between the two countries, then you will get to an optimum financial position. Double Taxation Avoidance Agreement is indeed a powerful tool that may help slash your tax liabilities. But you should always ask for a experienced tax advisor in United Kingdom to check whether you’re following the correct strategy to garner the benefits.
FAQs’
- What is the Double Taxation Avoidance Agreement (DTAA)?
Ans – DTAA is an agreement between two countries to avoid taxing the same income twice. - Do NRIs in the UK need to pay tax on global income?
Ans – Yes, as UK residents, NRIs must declare and pay tax on their global income, but DTAA helps avoid double taxation. - What are the benefits of an NRE account?
Ans – An NRE account allows tax-free repatriation of foreign income to India, and the interest earned is tax-free in India. - Is the interest on an NRO account taxable?
Ans – Yes, the interest earned on an NRO account is taxable in India. - What is the inheritance tax threshold in the UK?
Ans – The inheritance tax threshold for the 2024/25 tax year is £325,000, with a 40% tax rate above this amount. - How does the UK Statutory Residence Test work?
Ans – The UK Statutory Residence Test determines your tax residency based on the number of days spent in the UK and your ties to the country. - Can I claim tax relief on Indian capital gains in the UK?
Ans – Yes, you can claim tax relief on capital gains made in India under the DTAA. - What is the basic rate of income tax in the UK?
Ans – The basic rate of income tax in the UK for 2024/25 is 20% for income up to £50,270. - How can I avoid double taxation on my Indian income in the UK?
Ans – By utilizing the DTAA, you can claim tax relief on income that has already been taxed in India. - Should I consult a financial advisor for NRI tax matters?
Ans – Yes, consulting a financial advisor specializing in NRI taxation can help you manage cross-border tax obligations efficiently.
Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.
