Moving to the UK A briefing note on the UK tax implications for high net worth individuals
This briefing note provides an overview of the UK tax issues that high net worth individuals should consider in the light of their wish to spend more time in the UK or move certain family members to the UK. Who we are Taylor Wessing s Private Wealth practice has been recognized as a market leader for several years. We offer a fully integrated international service for individuals and their families as well as their businesses who require expert and coordinated advice on their personal wealth holding structures, tax and estate planning, commercial investments, family and corporate governance and reputation management issues. We focus on our client s objectives and concerns and then propose and implement the appropriate legal solution delivered with personal service with institutional quality. UK residency and taxation The UK continues to be an attractive jurisdiction for individuals and families who are looking to move away from their home jurisdictions. The UK residency and domicile status of an individual determines his exposure to UK direct taxes (namely income tax, capital gains tax and inheritance tax). The Statutory Residency Test (SRT) The SRT came into force on 6 April 2013 and sets out the test to determine the UK residency of an individual after 5 April 2013. Under the new rules an individual can be sure of being non-uk tax resident if he meets the automatic overseas test ; failing which, he will be UK tax resident if he is (a) automatically UK resident, or (b) if has sufficient ties or connections with the UK. as a leaver or an arriver ). A day is generally counted if the individual is in the UK at midnight (although there are exceptions to this rule such as where the individual is in transit through the UK or where his presence in the UK is due to exceptional circumstances beyond that individual s control). Automatic Overseas Test An individual will be conclusively non-uk resident for a tax year if (a) he is an arriver and he spends fewer than 46 days in the UK in the relevant tax year; (b) he is a leaver and he spends fewer than 16 days in the UK in the relevant tax year; or (c) he has a full-time contract of employment overseas and he spends fewer than 31 days working in the UK and fewer than 91 days generally (working and otherwise) in the UK in the relevant tax year. Automatic UK Residence Test An individual will be conclusively UK resident for a tax year if (a) he spends 183 days or more in the UK in the relevant tax year; or (b) he satisfies the UK home test (which in very broad terms will be satisfied if he has a home in the UK for more than 90 days in the relevant tax year and he is present in that home for at least 30 days in the relevant tax year and whilst he has that home, he either has no overseas home or he spends less than 30 days in his overseas home in the relevant tax year). Sufficient Ties Test If an individual is not conclusively UK resident under the Automatic UK Residence Test, he may be UK resident in a tax year under the Sufficient Ties Test. For the purposes of that test, the following ties with the UK will be taken into account: UK-resident family; accommodation in the UK; The rules apply differently according to whether or not the individual has been UK resident in the last three tax years (i.e. whether he is classified
substantive work in the UK (whether employment or self-employment); UK presence in the previous tax years (i.e. spending more than 90 days in the UK in either of the previous two tax years); and more time in the UK than any other single country (this tie is only applicable for leavers ). The legislation includes some detailed provisions on each of these ties which would need to be considered in more detail in the light of the individual s circumstances. The number of days in the UK to make an individual UK resident in the relevant tax year will depend on the number of ties that individual has with the UK and whether he is an arriver or a leaver. The following tables illustrate the link between the ties and days spent in the UK, for both arrivers and leavers. Arrivers Days spent in the UK Fewer than 46 days Impact of ties on residence status Non-UK resident 46-90 days Resident if four ties (otherwise non-uk resident) 91 120 days Resident if three or more ties 121 182 days Resident if two or more ties 183 days or more UK-resident regardless of ties Leavers Days spent in the UK Fewer than 16 days Impact of ties on residence status Non-UK resident 16-45 days Resident if four ties (otherwise non-uk resident) 46 90 days Resident if three or more ties 91 120 days Resident if two or more ties 121 182 Resident if one or more ties 183 days or more UK-resident regardless of ties Split year Normally if an individual is resident in the UK for any part of the UK tax year then he will be taxed as a UK resident for the whole of the tax year. The SRT now provides specific provisions to deal with this situation and if an individual is going to be caught by this, then he should seek formal advice. The UK tax year runs from 6 April to 5 April.
Exposure to UK tax and the remittance basis An individual will have access to a favourable UK tax regime, known as the remittance basis of taxation, even if he does become resident in the UK, provided that he is (and remains) domiciled outside the UK. Domicile Domicile is an important concept under English law for determining the liability of an individual to UK income tax (IT), capital gains tax (CGT) and inheritance tax (IHT), although it is not defined in UK tax legislation. It is only possible to have one domicile at a time, and for English law purposes, every individual is domiciled somewhere. Domicile is not the same as residence and the place where an individual is domiciled is not necessarily the place he has his habitual residence or citizenship. A person is born with a domicile of origin, which is usually the domicile of his father at birth. A domicile of origin can be displaced by acquiring a domicile of dependency (for example, if the individual s father acquires a new domicile whilst that individual is under 16) or a domicile of choice. A domicile of choice can be acquired if an individual resides in another country with the intention to reside there permanently or indefinitely. If a domicile of choice is lost then the individual s domicile of origin will revive, unless a new domicile of choice is obtained. An individual can remain non-uk domiciled provided he does not form an intention to remain permanently or indefinitely in the UK. However, whilst an individual can retain a non- UK domiciled status for IT and CGT purposes, for IHT purposes a person is deemed domiciled in the UK once he has been resident for 17 out of the previous 20 tax years. IHT is charged on the value of property that an individual owns at the date of his death (including gifts made less than seven years before death). IHT is payable at a rate of 0% up to the amount of the general IHT exemption (known as the nil-rate band and currently 325,000) and at a current rate of 40% on the balance in the absence of any available IHT reliefs such as the spouse exemption. If an individual is neither domiciled nor deemed domiciled in the UK, IHT is only charged with respect to assets situated in the UK on death in the absence of any available IHT reliefs. If however an individual is domiciled or deemed domiciled in the UK then IHT will be charged on their worldwide assets on death subject to any available IHT reliefs. The remittance basis of UK taxation In relation to IT and CGT, an individual who is UK resident but non-uk domiciled can either be taxed on the arising basis or the remittance basis. The arising basis means that an individual will be taxed in the UK on his worldwide income and gains in the tax year in which the income or gain arises regardless of whether the funds are brought to the UK. If an individual claims the remittance basis of taxation he should not have to pay IT or CGT on non-uk income and non-uk capital gains so long as they are not remitted to the UK. He will still be subject to IT and CGT on income from a UK source (for example, interest on a UK bank account) and capital gains realised on the sale of UK assets (for example, the sale of shares in a UK company). A non-uk domiciled individual who has been resident in the UK for seven out of the previous nine tax years will need to pay an annual charge known as the remittance basis charge of 30,000 in order to be able to elect to be taxed on the remittance basis for any relevant tax year. Where an individual has been resident for 12 out of the previous 14 tax years this remittance basis charge increases to 50,000 per year. An individual can make a decision each year as to whether it would be beneficial to pay the annual charge to be taxed on the remittance basis. If the individual does not elect to be taxed on the remittance basis (and pay the remittance basis charge if applicable) then he will be subject to UK tax on the arising basis for the relevant year. The definition of what constitutes a remittance
to the UK is very broad and the rules are extremely detailed and therefore any individual considering a move to the UK should take appropriate advice in the tax year before he becomes UK tax resident. Pre-arrival planning Given the favorable remittance basis of UK taxation available to non-uk domiciled individuals who are UK tax resident, it is essential that high net worth individuals who wish to move to the UK or send family members to live in the UK, take adequate advice before they come to the UK so that they understand the consequences of becoming UK tax resident and the remittance basis of taxation and consider suitable pre-arrival planning and implement it in the tax year before they become UK tax resident to ensure that their exposure to UK tax once they are UK tax resident is minimised as much as possible. For example if an individual wishes to move to the UK in August 2015 then he should seek advice and implement all of his pre-arrival planning before 6 April 2015. Two relatively straightforward strategies that our clients usually implement are: Ring fencing income or gains which have arisen before a non-uk domiciled individual became UK resident. In general terms, all such income and gains can be brought into the UK without incurring a charge to UK tax, provided that the funds are kept separate from post UK residency income or gains. Any pre-arrival funds that the individual is planning to bring into the UK once UK tax resident should be segregated and proper UK and offshore banking arrangements need to be put in place to aid this. For example, any offshore accounts should be structured so that interest earned once UK tax resident on segregated pre-uk residency funds is directly mandated to a separate income account outside the UK. Rebasing assets standing at a gain if an asset is sold after a non-domiciled individual becomes UK resident, then he is liable to be taxed on the whole of the gain including appreciation which occurred prior to becoming UK resident on the remittance basis. If instead the asset is sold before the start of the tax year in which the nondomiciled individual becomes UK resident then the sale proceeds may be used in the UK once he is UK tax resident (provided that they are not mixed with post-uk residency income or gains) free of tax. Other matters on which pre-arrival planning advice should be sought include: UK tax compliance obligations the structuring of the UK residential property acquisitions the merits of transferring assets to one or more offshore trusts for succession planning, asset protection and UK tax advantages reviewing the arrangements of any offshore companies where the individual is on the board of directors or a shareholder to ensure that these companies will not become inadvertently UK tax resident once he is UK tax resident reviewing any existing offshore holding structures from which the individual may benefit once he is UK tax resident Our service at Taylor Wessing is forward thinking and tailor made to our clients and our advice depends on the residence and domicile status of our clients. Please do not hesitate to contact one of our private client specialists within the Private Wealth Group for any further information about our services and how we may be able to assist you. Key contacts Sanjvee Shah Partner, London +44 (0)20 7300 4059 s.shah@taylorwessing.com Nick Warr Partner, London +44 (0)20 7300 4232 n.warr@taylorwessing.com
Europe > Middle East > Asia www.taylorwessing.com Taylor Wessing LLP 2014 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices operate as one firm but are established as distinct legal entities. For further information about our offices and the regulatory regimes that apply to them, please refer to: www.taylorwessing.com/regulatory.html NB_000767(Russia)_05.14