These guidelines are primarily intended for non-UK domiciled individuals who are intending to take up UK tax residence. Many such individuals become resident in the UK in order to take advantage of the beneficial tax regime for non-domiciliaries. Broadly, this regime allows resident but non-domiciled individuals to elect to be taxed on UK-source income and gains only, limiting UK tax exposure on overseas sources to amounts brought in or “remitted” to the UK.
Becoming UK Tax Resident
The Statutory Residence Test determines whether or not an individual is UK resident for tax purposes. Although the aim of the legislation is to provide certainty to taxpayers, the rules can become very complicated in some cases.
Subject to not meeting any of the automatic overseas tests contained within the Statutory Residency Test, an individual is automatically resident in the UK for a tax year if they meet any one of these tests:
- The individual spends 183 days or more in the UK in the tax year; or
- The individual has a home in the UK for more than 90 days (which can straddle two tax years), and
- He is present in that UK home on at least 30 separate days during the tax year, and
- While he has that UK home there is at least one period of 91 consecutive days, when he has no home overseas (or has one or more homes overseas but each of those homes is a home at which the individual is present on fewer than 30 separate days during the tax year); or
- The individual works full-time in the UK for 365 days (which can straddle two tax years) with no significant break of 31 days or more other than for leave and sickness, and:
- All or part of that work period falls within the tax year, and
- More than 75% of the total number of days in the tax year when he does more than 3 hours work are days when he does that in the UK.
If an individual is UK resident under these rules then he will generally be considered resident from the start of the tax year, unless he falls into one of the limited categories where “split-year” treatment applies.
For further details regarding the Statutory Residence Test and split-year treatment please see our separate briefings on these topics or contact us for further details.
Breaking Overseas Tax Residence / Becoming UK Treaty Resident
It is normally desirable for a non-domiciliary to lose their overseas tax residence on coming to the UK. It is typically more difficult to lose a tax residence than to gain one, particularly where close ties remain with the country of origin. Local tax advice should be sought in this regard.
Where both the UK and the country of origin consider the taxpayer to be resident under domestic law, the taxpayer will be considered “dual resident” and may be taxable in both states.
However, where there is a tax treaty in place between the UK and the country of origin, it will typically contain a “tiebreaker clause” which allocates fiscal residency to one state only according to a set of criteria.
It is therefore important that sufficient steps are taken to ensure that “treaty residence” is awarded to the UK should a challenge be mounted by the authorities in your country of origin.
The standard provisions in a treaty tiebreaker clause form a hierarchy of tests in deciding such residence:
- The individual will be considered resident where he has a permanent home available to him;
- If a permanent home is available in both states, he will be resident where his personal and economic relations are centred;
- If the position is still undecided, residence will be awarded to the state where he has a habitual abode;
- If there is a habitual abode in both states, he will be a resident of the state of which he is a national;
- Otherwise the residence position will be decided by mutual agreement between the tax authorities of both states.
It can be seen from the above that it will be important to consider such matters as accommodation, family and business arrangements.
Tax Planning Considerations
There are a number of important tax planning points to be considered before taking up UK residence, in order to ensure that your future UK tax position is optimised.
- Presuming you wish to be taxed on the favourable “remittance basis”, bank accounts should be carefully restructured in order to segregate sources of income and gains. Most importantly, a core capital account should be established. Taking these simple steps is crucial in order to reduce future taxable remittances.
- If purchasing UK property, take advice on the ownership structure for holding the property. This has become a particularly complex area following recent changes to legislation. Further changes are expected to be introduced from 6 April 2017 to bring within the scope of UK inheritance tax all UK residential property regardless of ownership structure.
- Consideration should be given to selling or gifting (e.g. within the family) any existing UK assets to uplift base cost to market value.
- Consideration should be given to settling offshore trusts and / or companies in order to shelter future income and gains from UK taxation. UK anti-avoidance provisions can make it very difficult to implement such structures when UK resident.
- Individuals who will become deemed domicile from 6 April 2017 (broadly, those who have been UK resident for at least 15 years) should also consider settling an offshore trust before that date to shelter foreign income and gains from taxation, and also to protect overseas assets from inheritance tax.
- Family business structures should be reviewed to ensure that there are no UK management and control issues and that income flows are tax-optimised.
- Employment and consultancy contracts with family businesses should be carefully structured. A dual contract system may be advantageous and there may be scope for tax-free provision of living accommodation.
It is therefore important that advice is taken well in advance of becoming UK resident in order to ensure maximum tax efficiency and to avoid common traps, particularly due to the fact that the UK law in this area is very new and potentially extremely complicated.
Verfides is experienced in advising UK resident non-domiciliaries on all aspects of their personal and business affairs. Services we have provided to our clients include residence and tax treaty advice, remittance planning, property structuring, business restructuring and the establishment of non-resident trust and corporate structures. We also provide tax compliance services.