Moving to the UK – pre-arrival planning

• When you become resident
• Pre-arrival remittances
• Treaty residence

Long term residence

• Inheritance tax
• Deemed domicile
• Offshore Trusts

Leaving the UK

• Account segregation
• Offshore borrowing
• Offshore gifts
• Ownership of UK property

THE CURRENT POSITION 

Residence

The UK is one of the very few countries that does not have a statutory definition of 'residence' for tax purposes.  For many years, taxpayers have had to rely on both HMRC's published interpretation which is found in their booklet HMRC6 and its predecessor IR20, and relevant case law. 

Residence is determined by physical presence, wider attachment to the UK and intentions. Other factors which may be taken into consideration include family ties and business interests, assets, and accommodation in the UK.  An individual will be regarded as resident if physically present in the UK for 183 days in a tax year running from 6 April to 5 April in the following year.  However, for those who make regular visits to the UK but do not reach the 183 day threshold, the position is much less clear.  A day is counted for residency purposes if the individual is present at midnight.

UK residence is considered to be 'sticky'.  It is easier to become resident than it is to cease to be resident.  For individuals looking to leave the UK, HMRC will expect to see a change of lifestyle and a clear reduction in business, economic and personal ties to the UK, as well as a significant reduction in days spent in the UK. 

Dixon Wilson has considerable experience advising clients on their residency status, as well as developing strategies to ensure individuals legitimately secure the best advantages for their personal circumstances.

Domicile is also not defined in UK tax legislation.  It is a common law concept, which is not synonymous with residence or nationality.  The rules governing domicile are complex but a high level summary is set out below.

Under UK law all individuals have a domicile of origin.  This is inherited from their father when the individual is born.  During an individual's minority until age 16 their domicile follows that of their father, or the person on whom they are legally dependent. 

On reaching age 16 an individual can acquire a new domicile of choice which will reflect both the individual's circumstances and intentions.  This will require permanent residence in the chosen country as well as an intention to remain there indefinitely.  This intention should be evidenced by the facts.

If a domicile of choice is lost then the individual's domicile of origin will revert until a new domicile of choice has been obtained.

Tax Treatment of Non-doms - The Remittance Basis of Taxation

While UK resident and domiciled individuals are subject to tax on their worldwide income and capital gains, those who are resident but not domiciled in the UK have the opportunity to be taxed on the remittance basis. 

The remittance basis limits liability to UK tax to income and gains from assets located and duties performed in the UK, and foreign income and gains which are remitted to the UK.

Individuals who have been resident for fewer than seven of the last nine tax years can elect to be taxed on the remittance basis at no additional tax cost.  Those who have been resident for more than seven of the last nine tax years must, in most circumstances, pay the annual remittance basis charge, currently £30,000, if they are to be taxed on the remittance basis.  Individuals can elect whether to take advantage of the remittance basis each year.  There are exemptions for minors and those with low levels of unremitted foreign income or gains.

At Dixon Wilson we routinely advise our non-domiciled clients on the most appropriate way to structure their offshore assets so as to ensure the remittance basis charge is only paid when it is beneficial to do so. 

What is a Remittance?

Remittances are widely defined by legislation and include the movement of money to the UK as well as the purchase of goods and services in the UK which are paid for abroad.  A remittance also occurs when the proceeds of offshore loans are brought to the UK and the loan is repaid offshore; this also includes the use of foreign credit cards in the UK. 
 
A remittance can also occur in certain situations when funds are not brought to the UK.  Such ‘constructive remittances’ occur when the benefit from a service paid for abroad from foreign income or gains is received in the UK.  This can include flights which depart from outside the UK but arrive or stop over in the UK. 

The remittance of ‘clean capital’ does not create a UK tax liability and there are opportunities for non-domiciled individuals to utilise offshore capital to fund UK expenditure.  ‘Clean capital’ includes assets held by an individual prior to becoming UK tax resident as well as any subsequent receipts which are neither income nor capital gains, for example inheritances or gifts.  Careful planning is required to preserve available ‘clean capital’ and to prevent it from becoming tainted with foreign income or gains.

Record keeping

Given the complex rules surrounding the treatment of foreign income and gains it is important for records to be maintained which are sufficient to allow the tax position to be correctly determined.  For example the remittance of foreign funds can give rise to a UK tax liability which is calculated with reference to foreign income and gains which were realised many years previously.  Details of all offshore transactions post residency should be maintained and this includes all bank statements, credit card statements and investment portfolio records.  

SPECIFIC CIRCUMSTANCES

MOVING TO THE UK – PRE-ARRIVAL PLANNING

It is important for anyone who is planning to move to the UK to give consideration to various pre-arrival steps which, if implemented correctly, can provide UK tax advantages for the individual.  These strategies are often time sensitive and must be implemented before the individual becomes UK resident. 

When you become resident

The date an individual becomes resident in the UK will have a major effect on the exposure to UK taxes and depends on various factors, such as the reasons for coming to the UK and the individual’s intentions in the future. 

If an individual arrives in the UK with the intention of remaining here for at least two years, then they will be resident from the date of arrival.  HMRC allow, by concession, for the tax year of arrival to be split into the periods before and after arrival in the UK, such that only the period after arrival in the UK is relevant for UK tax purposes.

If an individual arrives in the UK without a firm intention to remain for at least two years, or without a settled purpose, for example employment, then the individual will be resident from the earlier of the following:

• 6 April in the tax year in which the individual first spends 183 days in the UK,

• 6 April in the tax year in which the individual realises he or she will spend more than 90 days per year in the UK on average over a four year period,
  

• 6 April in the fifth year if the individual spends more than 90 days per year on average over the previous four years.

Pre-arrival remittances

Once an individual knows that he/she will become tax resident then it is possible to take steps to ensure affairs are structured to maximise the benefits of their non-dom status.  Assets which are remitted to the UK before residence commences will not be subject to UK tax.  It is sensible for the individual to consider their immediate spending requirements in the UK, including capital purchases, and to remit, prior to arrival, sufficient funds to meet those demands.

Longer term spending requirements should be funded from offshore ‘clean capital’ sources.  Such sources can be maintained by the operation of segregated accounts.  Please see the Account Segregation section for more details.

Treaty residence

The UK has an extensive network of double tax treaties.  The treaties are designed to provide relief to an individual who is tax resident in more than one country and would, without such relief, be subject to tax in more than one country on the same income or gains.  Broadly speaking, the treaties provide for particular types of income or gains to be taxed in only one country depending on the particular circumstances of the individual or for relief for tax paid in one country to be available against tax due in the other.  As all tax treaties are different it is difficult to generalise about the specific provisions.  However, individuals can benefit from taking advice as to which reliefs will apply to them when they become UK resident.  It is often the case that, initially, an individual who is tax resident in the UK will not be UK resident for the purposes of the double tax treaty, which significantly reduces the scope of their exposure to UK tax.

LONG TERM RESIDENCE

Once an individual is resident in the UK that person will be subject to UK income tax, capital gains tax and, in due course, inheritance tax.  Details of the income tax and capital gains tax treatment of non-domiciled residents can be found here.

Inheritance Tax

Broadly speaking individuals who are resident and domiciled in the UK are liable to UK inheritance tax (IHT) on their worldwide assets following a ‘chargeable event’.  In contrast, those who are resident but not domiciled in the UK are liable to IHT only on their UK situs assets.  A ‘chargeable event’ includes transfers of value either on death or during an individual's lifetime.  Lifetime transfers by UK domciliaries or lifetime transfers of UK assets by non-doms are either immediately chargeable to inheritance tax (including gifts into almost all trusts), or potentially exempt, (including most other gifts).  Potentially exempt transfers and gifts normally only become chargeable if the donor does not survive for seven years after the date of the gift.  There are various exemptions and abatements that can apply to these charges, the most common being the spouse exemption for UK domiciled spouses.

Offshore Trusts

Offshore trusts can be an effective way to manage a non-dom’s exposure to UK IHT.  Offshore trusts which are settled by individuals who are not domiciled in the UK (“the settlor”) are known as 'excluded property' trusts.  For IHT purposes the assets of an excluded property trust are outside the settlor's estate, and remain so even if the settlor subsequently acquires an actual or deemed UK domicile. 

Trustees of offshore trusts are not liable to UK income tax on non-UK source income and capital gains tax on all assets regardless of situs.  However, beneficiaries of offshore trusts who are tax resident in the UK can be liable to either income tax or capital gains tax on distributions they receive from the trustees.  The rules for calculating the beneficiary’s UK tax liability are complex and often require information that the beneficiary may not normally be privy to.  Dixon Wilson can assist offshore trustees with undertaking the ongoing calculations required to determine both a beneficiary’s actual tax liability, but also the tax cost of future distributions.

It is extremely important that both the trustees and beneficiaries of offshore trusts maintain sufficient records to determine the beneficiary’s liability to UK tax.  A beneficiary’s UK tax liability on a particular distribution can be calculated with reference to both historic and future events and it is therefore important for the records to be maintained properly.  

An individual who is looking to leave the UK will need to consider his or her exposure to UK tax after residence has ceased, particularly if UK real assets such as land are retained.

Whether an individual ceases to be a tax resident once they have left the UK will depend on a number of factors including:

The issue of whether an individual has ceased to be UK resident is complex and is always dependant on the precise circumstances of the departure.  Dixon Wilson can provide advice on what actions are required for an individual to cease to be UK resident.

Provided that HMRC accept that the individual has ceased to be resident, the operative date for tax purposes will be the day after their departure, if they are intending to leave the UK for a period of more than three years or to undertake a full time contract of employment abroad for at least one year. 

An individual will remain liable to UK income tax on their UK investment income until the end of the tax year of departure.  By concession, HMRC allow for the tax year of departure to be split into a period of residence and non residence such that foreign income which arises after departure is not subject to UK tax. 

TAX PLANNING STRATEGIES

Account Segregation

Basic tax planning involves individuals operating multiple offshore accounts to keep income, gains and capital segregated.  The accounts will include:

• a capital account.  This will include pre-residency assets, any gifts or inheritances and the proceeds of any offshore assets which are sold at a loss.
  

• a capital gains account.  This will contain the proceeds of offshore assets which are sold at a gain. 

• an income account.  This will include all income (interest, dividends and offshore income gains) arising on the first two accounts as well as any other income arising from offshore assets. 

For maximum tax efficiency the accounts should ideally be denominated in Sterling. For UK capital gains tax purposes non-Sterling accounts are (with certain exceptions) chargeable assets and foreign exchange gains in non-Sterling accounts will result in capital gains or losses. 

Adopting this approach can ensure that any remittances are first made from pre-residence capital.  The capital gains and income accounts should be used to fund offshore expenditure.

For more sophisticated interests the structure of offshore accounts can become much more complicated.

For those remittance basis users whose annual foreign income and gains are below £2,000, there is the ability to remit funds free of tax from their offshore capital gains account by utilising their annual exemption. 

Dixon Wilson are experienced at negotiating the opening and running of such accounts with offshore banks.

Offshore Borrowing

Funds borrowed offshore can be remitted to the UK without creating an immediate tax liability.  The payment of interest or the repayment of the loan capital offshore will create a remittance and a corresponding tax liability if the individual is UK resident when the payment is made.  Tax planning opportunities exist for individuals to remit borrowed funds which are either interest free or where the interest will be rolled up and which will not be repaid until after the individual has ceased to be UK resident.  Further care needs to be taken where loans are secured on offshore assets.

Offshore Gifts

Gifts by an individual who is resident but not domiciled in the UK to anyone other than their spouse or minor children can be made out of foreign untaxed income.  As long as the gift is completed offshore and the donor does not retain a benefit then the gift can be remitted to the UK by the recipient without creating a taxable remittance. 

Ownership of UK Property

For many non-domiciled individuals their most significant UK asset is likely to be their home in the UK.  If owned personally this will be exposed to inheritance tax whilst the individual is UK resident.  It was once commonplace for non-domiciled individuals to own their UK home through an offshore company which would have, in turn, been owned by an offshore discretionary trust.  The position is now much more complicated and the most appropriate ownership structure needs to be considered on a case by case basis.

In some instances a trust will remain the right vehicle to own UK property but for many it will not.  For many long term residents it is advisable for property to be purchased outright in the individual's name.  The inheritance tax exposure can be mitigated by borrowings secured on the property which will be deducted from the property's market value upon an inheritance tax chargeable event or by life assurance.  If the borrowings are taken offshore and the proceeds are not remitted to the UK then the inheritance tax exposure can be fully mitigated.