Coming to the UK

This note provides a general outline of the UK tax system and sets out a number of tax planning options which a non- UK domiciled individual should consider if they are looking to move to the UK. This note should not be used instead of specific legal advice.

Domicile and Residence

The concepts of domicile and residence are fundamental to determining an individual’s tax position in the UK.

Domicile

UK law relating to domicile is complex and differs from the laws of most other countries. Domicile is distinct from the concepts of nationality or residence, but in essence, an individual is domiciled in the country that he considers to be his permanent home. When an individual comes to live in the UK, he will not normally become UK domiciled if he intends, at some point in the future, to leave the UK.

Residence

The UK has implemented a statutory residence test, effective from April 2013, which provides a test divided into three parts:

• the automatic overseas test;
• the automatic residence test; and
• the sufficient ties test.

The automatic overseas test will conclusively exclude individuals from UK residence. The criteria are as follows:

• the person has been a non-UK resident in each of the previous three tax years and he is present in the UK for fewer than 46 days in the tax year in question; or
• the person has been resident in the UK in one or more of the previous three tax years and he was present in the UK for fewer than 16 days in the tax year in question; or
• the person leaves the UK to carry out full-time work abroad, is present in the UK for fewer than 91 days in the tax year and works for less than 31 days in the UK in the tax year in question. (A working day requires more than three hours of work).

The automatic residence test - If the automatic overseas test does not apply an individual will be UK resident in a particular tax year if the automatic residence test will apply to him. The criteria are as follows:

• the person is present in the UK for 183 days or more in the tax year; or
• the person only has a home or homes in the UK; or
• the person carries out full-time work in the UK. ‘Full-time’ means more than 75% of working days are in the UK.

An individual who does not satisfy the criteria of the automatic overseas test, so as to be conclusively a non- UK resident, or the automatic UK residence criteria, so as to be conclusively a UK resident, will need to determine residence by reference to the sufficient ties test.

The sufficient ties test is a tie breaker test which determines the residence status on (a) how many of the specified ‘connecting factors’ apply to them and; (b) how many days are spent in the UK in the tax year in question. The greater the number of connecting factors that apply to the individual the fewer the number of days they are permitted to be present in the UK without becoming a UK resident.

Individuals are categorised as either ‘arrivers’ or “leavers” by reference to whether they have been a UK resident in any of the three tax years immediately preceding the tax year in question. Naturally, it is more difficult to be a non- UK resident as a ‘leaver’ than as an ‘arriver’. If a person is an ‘arriver’ (having been a non-UK resident in each of the three tax years preceding the tax year in question) the connecting factors are:

• having a UK resident family;
• having a place to live in the UK;
• having substantive UK employment; and
• spending 90 days or more in the UK in either of the two previous tax years.

For ‘arrivers’ the connecting factors tie in with the number of days spent in the UK as set out in the table below:

If a person is a ‘leaver’ (having been a resident in one or more of the previous three tax years) the relevant connecting factors are:

• having a UK resident family;
• having a place to live in the UK;
• having substantive UK employment;
• spending 90 days or more in the UK in each of the previous two tax years;
• spending more time in the UK than in any other single country.

For ‘leavers’ the connecting factors are combined with days spent in the UK to determine residence status as follows:

Remittance Basis of Taxation

UK source income and gains are always taxed on the arising basis. However, non-UK domiciled UK resident individuals have the option to benefit from the “remittance basis” of taxation in respect of their foreign income and gains.

The rules governing the remittance basis are extremely complex and include anti-avoidance rules which deem income and gains arising anywhere in an offshore structure (e.g. trusts, companies etc.) to be income or gains of either the individual who was ultimately responsible for creating the structure, or to any individual who receives any benefit from the structure.

In essence, if income or gains arising outside the UK are used in any way in the UK by or for the benefit of a remittance basis taxpayer, their spouse, or minor children, or are brought to the UK by any structure for their benefit, a liability to tax may arise.

On becoming resident in the UK for the first time an individual will be able to claim the remittance basis of taxation automatically. A £30,000 charge will apply if the individual has been resident in the UK for at least 7 out of the last 9 tax years and a £60,000 charge will apply if the individual has been resident in the UK for at least 12 of the last 14 tax years. This is known as the remittance basis charge. Once a non-domiciled individual has resided in the UK for at least 15 of the 20 tax years, they will no longer be able to claim the remittance basis and will pay tax on foreign income on the arising basis.

Careful planning is needed to avoid unintentional remittances and the liability to the remittance charge.

Income Tax

The UK top rate of income tax is 45% for individuals receiving taxable income of £125,141 or more. The higher rate of tax is 40%, on earnings between £50,271 and £125,140 and the basic rate of tax at 20% applies to income of £12,571 and £50,270.

Individuals have an annual personal allowance of up to £12,570, which means that all income below this amount is not taxed. However, the personal allowance tapers away above income of £100,000 nor does it apply to individuals claiming the remittance basis of taxation.

Married persons (or those in a civil partnership) are taxed independently on their individual incomes.

Remittance basis users will be taxable only on such income as either arises in, or is brought to, the UK in any tax year. Remittance basis users lose their personal allowance.

Individuals resident and domiciled in the UK, or those who do not use the remittance basis, pay tax on worldwide income on the arising basis.

Capital Gains Tax

The following Capital Gains Tax (‘CGT’) rates apply to gains:

• 18% and 28% tax rates for individuals for residential property and carried interest.
• 10% and 20% tax rates for individuals on all other gains.

Again, married persons (or those in a civil partnership) are taxed independently on their individual gains.

Remittance basis users will be liable to capital gains tax on gains made from the disposal of assets situated in the UK or from gains made outside the UK and remitted to the UK.

Gains on foreign currency bank accounts are exempt from UK CGT. However, gains made on foreign assets such as shares or properties could be taxable.

Gains on the disposal of certain types of assets such as a main residence, UK government securities, cars, life assurance policies, savings certificates and premium bonds may be relieved from capital gains tax.

Inheritance Tax

Inheritance tax (‘IHT’) is chargeable on gratuitous transfers of wealth both during life and on death.

Liability to IHT depends on an individual’s domicile. If the individual is domiciled in the UK he is taxable on a worldwide basis. A person who is not domiciled in the UK is taxable only on the assets situated in the UK.

As with income level capital gains any person who has been resident in the UK for more than 15 years out of a period of 20 years will be treated as being domiciled in the UK for IHT. This is called ‘deemed domicile’.

Certain lifetime gifts are exempt from IHT provided the donor survives seven years and does not retain any benefit. Strict rules apply in cases where the donor retains or reserves a benefit out of the gift (e.g. gives away his house but continues to live in it).

Transfers of property between spouses of the same domicile are exempt from IHT, as are transfers by a spouse with a non-UK domicile to a UK domiciled spouse.

IHT is charged at a rate of 40% on the net chargeable estate.

Exemptions from IHT are also available for:

• annual gifts not exceeding £3,000 per annum in total (this can be carried forward for 1 year only);
• gifts on the occasion of marriage - each parent may give up to £5,000, each grandparent £2,500 and any other person £1,000 free of IHT;
• normal expenditure out of income; and
• gifts to qualifying charities.

Subject to certain conditions, the following reliefs are also available:

• business property relief at 50% or 100% of the value of the property;
• agricultural property relief at 50% or 100% of the value of the property.

High Value Residential Properties

The following rules have been implemented to discourage the ownership of UK properties through corporate entities:

• a higher rate of Stamp Duty Land Tax is charged when properties are purchased by corporate entities;
• an annual charge applies when properties are purchased by corporate entities and used by connected individuals;
• a charge to CGT on the disposal of property sold by corporate entities; and
• the protection from IHT has been removed.

Planning Prior to Arrival

Legal advice should be taken before coming to the UK to explore structuring opportunities available to reduce your taxable exposure to UK and worldwide tax.

Some of the opportunities available include:

• maximizing the value of your pre arrival assets, to reduce potential capital gains in the future;
• structuring your assets to reduce the potential liability to income tax and capital gains tax;
• structuring your assets to reduce exposure to IHT; and
• purchasing UK assets in tax efficient structures.

Our Offering to Private Clients

Hill Dickinson is one of the few private client services firms with the breadth of knowledge and insight to create integrated, comprehensive, multi-jurisdictional solutions wherever they are required.

Through our private client services offering we assist wealthy individuals, families and entrepreneurs to manage their personal affairs through tax, succession and estate planning advice across multiple jurisdictions. Our teams work across borders and practices to offer a seamless service as an individual or family office, onshore or offshore.

Our team comprises lawyers and accountants with considerable experience in advising international families and their trustees on a wide range of issues. Our focus is the long-term management of your worldwide wealth.

Specialisations include:

• cross-border taxation with special emphasis on the creation of bespoke international tax structures for individuals and corporates; and
• structuring property, yacht and aircraft acquisitions, onshore and offshore.

For further information and support, please get in touch.