Tax Guide for US Expats Living and Working in the Isle of Man
Who Is Liable For Income Taxes in the Isle of Man
Residents are subject to tax on worldwide income. Nonresidents are subject to tax on income from Isle of Man sources only.
Individuals are considered resident in Isle of Man if any of the following conditions applies:
- They are present for six months or more during the tax year.
- They are present for an average of 90 or more days per tax year over a period of four or more consecutive years.
- The individual’s specific circumstances indicate “a view or intent to establish residence.” The Assessor of Income Tax considers several factors in determining the applicability of this condition.
Certificates of residence can be provided if the Assessor of Income Tax is satisfied that the conditions of residence are fulfilled.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. An employee is taxed on remuneration and benefits received during a tax year (ending on 5 April). Taxable benefits include company cars and accommodation.
Education allowances provided by the employer to its employees’ children 18 years of age and under are taxable for income tax and social security purposes.
Self-employment and business income. Self-employment income includes income from a trade, profession or vocation.
A self-employed individual is assessed on business profits. In general, the assessment for a particular year is based on business profits earned during an accounting period ending in the current tax year. For tax purposes, profits are usually determined in accordance with normal accounting principles, subject to certain adjustments (see Business deductions).
Investment income. For tax purposes, investment income, including dividends, interest, royalties and rental income, is included in an individual’s total income. If necessary, double taxation relief is granted on income subject to withholding tax in another country.
Relocation of key employees. If an individual is contractually obligated to take up residence in the Isle of Man to facilitate the process of starting up of a new business or the diversification or expansion of an existing one and if the necessary approval is obtained, the individual and his or her jointly assessed spouse can be subject to income tax on Manx-source income only for the first three years of residence. For the company, financial assistance may be granted for any reasonable relocation package that needs to be incurred with respect to the new business.
Taxation of employer-provided stock options. The Isle of Man has no specific legislation addressing the taxation of employer-provided stock options. However, concessional tax exemption is granted to directors and employees of bodies corporate for the following:
- Acquisitions after 5 April 1989 of rights to acquire shares under approved savings-related share option schemes
- Appropriations after 5 April 1989 of shares under approved profit sharing schemes
The schemes must conform to U.K. legislation on the subject area and must be approved by the Assessor of Income Tax. Any capital gain that arises at the exercise of the option is not taxable.
Capital gains. No capital gains tax is imposed in the Isle of Man.
Deductions
Deductible expenses. Expenses are deductible if they are incurred wholly, exclusively and necessarily in the performance of employment duties. No allowance is available for travel between home and work or for office attire. Allowable expenses include membership fees of approved professional bodies and contributions by an employee to a personal pension scheme.
The maximum deduction in a tax year for contributions to a personal pension scheme is 300,000, or 100% of relevant earnings, whichever is less. The Isle of Man does not provide for a lifetime allowance with respect to benefits from personal pension schemes.
In addition, the following expenses are deductible from total income:
- Mortgage or other loan interest payable to an Isle of Man lender. A £7,500 (£15,000 for couples electing to be taxed jointly) annual limit applies. If the £15,000 limit applies, the deduction is allowed regardless of which partner is responsible for making the interest payments.
- Private medical insurance premiums for residents 60 years of age and older (up to £1,800 per year).
- Payments made under Educational Deeds of Covenant of up to £5,500 a year are deductible from taxable income. An Educational Deed of Covenant is an irrevocable covenant for the benefit of a person between 18 and 25 years of age who is undertaking a course of higher education. The covenant must be entered into before 6 April 2011 by a parent or grandparent of the donee, and the donee must be within the qualifying age band when the covenant is made and when the payment is made.
- Nursing expenses incurred in caring for a dependent relative (up to £9,300 for the year ending 5 April 2012).
Business deductions. Expenses incurred wholly, exclusively and necessarily in producing self-employment or business income are deductible. The following expenses are not allowed for tax purposes:
- Depreciation
- Costs of a capital nature
Although costs of a capital nature are not deductible, capital allowances (tax depreciation) are deductible in computing taxable profits. Capital allowances include a 100% first-year allowance for plant and machinery and a 25% annual allowance on a reducing-balance basis for cars. The car allowance is limited to an annual maximum of £3,000.
A 100% first-year allowance is available for qualifying expenditure incurred to acquire, extend or alter qualifying industrial buildings, agricultural buildings and tourist premises. Government grants received for capital expenses are not taken into account in calculating the capital allowance that may be claimed.
Rates. For the tax year ending 5 April 2012, the income tax rates for resident individuals are the lower rate of 10%, which applies to the first £10,500 of taxable income, and the higher rate of 18%, which applies to taxable exceeding £10,500. The 10% rate applies to the first £10,500 of income for each individual above their personal allowance (see Personal deductions and allowances). Married couples wishing to be taxed jointly must make an election. If an election is made, the 10% rate applies to the first £21,000 of joint income in excess of the married allowance (£18,600 for the tax year ending 5 April 2012).
A cap on an individual’s annual tax liability is available on application. The maximum amount of income tax payable by an Isle of Man resident taxed under the cap is £115,000 (£230,000 for married couples electing to be taxed jointly) for the year ending 5 April 2012, regardless of the amount of his or her worldwide taxable income.
Nonresidents are taxed at a rate of 20% on all income arising in the Isle of Man. Effective from 6 April 2010, nonresidents are not entitled to a personal allowance. The tax liability of nonresidents with respect to certain types of income is limited to the income tax deducted at source, if applicable.
The Attribution Regime for Individuals (ARI) applies to Isle of Man companies that pay tax at the standard rate of 0% and that have Manx-resident shareholders. The ARI is effective for accounting periods beginning on or after 6 April 2008. Under the ARI, trading companies are required to distribute at least 55% of their distributable profits within 12 months after the end of the company’s accounting period. If this occurs, the Manx resident shareholders are subject to income tax on the actual dividend received. If this does not occur, 100% of the company’s distributable profits are attributed to the Manx resident shareholders based on the ratio of their shareholdings. The shareholders are subject to income tax on their attributed profits, even though they may not have actually received the income. Subsequent dividends paid from profits subject to the ARI are exempt from tax in the hands of the Manx-resident recipients. For investment companies, attribution occurs in all cases, regardless of the amount of the distribution. Attributed profits are treated as received 12 months after the end of the accounting period of the company.
Relief for losses. Business losses may be carried forward and off-set against future profits from the same trade or, by concession, carried back to the immediately preceding year and offset against profits from the same trade. Business losses incurred in the first four years of assessment may be carried back against other income. On the permanent discontinuance of a trade, a terminal loss may be carried back and offset against profits from the same trade in the three preceding years of assessment. Certain restrictions apply.
B. Other taxes
No inheritance or estate tax, wealth tax, stamp duty or stamp duty land tax is imposed in the Isle of Man. Land registry fees are payable on the transfer of Isle of Man property. The general rate is £4.50 for each £1,000 of value. However, some exceptions exist.
C. Social security
In general, National Insurance contributions are payable on the earnings of individuals who work in the Isle of Man.
The Isle of Man has a reciprocal agreement with the United Kingdom that permits National Insurance contributions to be paid in either place to count toward total payments required.
For the year ending 5 April 2012, an employee’s National Insurance contribution is 11% of weekly earnings between £115 and £750 (9.4% for employees who contract out of the state second pension [S2P], which is permitted if the employee is a member of an approved occupational pension scheme). The annual ceiling on the amount of wages subject to an employee’s National Insurance contributions at a rate of 11% is £39,000. Earnings above this amount are subject to National Insurance contributions at a rate of 1% for the year ending 5 April 2012. An employer must pay contributions of 12.8% of an employee’s weekly earnings exceeding £115 (£5,980 per year) for the year ending 5 April 2012, with no ceiling.
A self-employed individual must pay a weekly flat-rate contribution of £2.50 per week if annual profits are expected to exceed £5,315 for the year ending 5 April 2012. In addition, an annual contribution equal to 8% of profits between £5,980 and £39,000 is also payable for the year ending 5 April 2012. This contribution is collected together with the individual’s income tax. Effective from 6 April 2010, an additional Class 4 contribution equal to 1% of the profits or gains of self-employed individuals above the annual upper profits limit is required.
To learn more about the history, culture, economy and other information about the Isle of Man
We have been preparing US income tax returns for US Citizens and permanent residents living in the Isle of Man for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the Isle of Man and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in the Isle of Man.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email