Article by Verfides
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 first thing to mention is that the UK domestic tax rules regarding residence are in a state of flux, with a consultation currently underway proposing new statutory rules in place of the current mix of statute, case law and HMRC guidance. The new rules, when finalised, are likely to be introduced in April 2013.
In the meantime, the basic UK statutory position is that an individual will be UK tax resident if he or she spends 183 days or more in a tax year in the UK. He or she will strictly be considered resident from the first day of that tax year, although a concessionary split-year treatment may be available. An individual may also be considered resident if he or she makes habitual and substantial visits to the UK over a number of tax years – typically at least 91 days a year over 4 consecutive years.
Intention is a key concept in determining UK residence. If you come to the UK with the intention of staying indefinitely then you will be considered resident from your day of arrival (as possibly the start of the tax year if earlier). Similarly, if your intention is to visit the UK for at least 91 days per year over a number of years, you will be considered UK resident from the date that intention became clear.
It is generally preferable for a non-domiciliary to become "resident but not ordinarily resident" on coming to the UK, as this status affords a preferable tax treatment for the first three years. However, several recent court cases have been decided against the taxpayer in this area and the concept of ordinary residence for tax purposes is likely to be largely abolished in 2013.
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 that 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 or 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 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. Most importantly, a core capital account should be established. Taking these simple steps is crucial in order to reduce future taxable remittances.
- A suitable structure for holding UK property should be established for inheritance tax mitigation purposes where possible. 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 or gains and also in anticipation of future deemed inheritance tax domicile. UK anti-avoidance provisions can make it very difficult to implement such structures when UK resident.
- 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 law in this area is due to undergo fundamental changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.