It has recently been reported that former UK non-domiciliaries who have ceased to reside in the UK following the abolition of the remittance basis are also abandoning their private members clubs on the strength of advice that to do so will shore up their non-UK tax resident status.
The UK, and London in particular, boast some of the world's finest members clubs, from institutions with storied histories stretching back centuries to newer ventures offering the latest in international luxury. Access to such clubs provides members with invaluable opportunities to make connections with like-minded individuals, expand their business and social networks, pursue hobbies and, sometimes too, to enjoy a bit of respite from the intensity of urban living. The decision to give up one's club membership should not be taken lightly and certainly not on the basis of misguided advice as to the tax benefits of doing so.
Until 6 April this year, the UK's system of inheritance tax operated on the basis of the concept of 'domicile'. The difficulty for taxpayers with the concept domicile is that it is partly based on an individual's intention. An individual born in the UK who leaves permanently to live elsewhere may well acquire a domicile in that other place – but evidencing this can be hard. During the domicile era, it was sometimes advisable for such individuals to give up their UK club memberships (or to convert to being an 'overseas' member), as HMRC may consider such a membership as potential evidence of an ongoing connection to the UK. In reality though such factors had ceased to assume importance for most people since the introduction of the UK's statutory residence test ('SRT') in 2013.
Since 6 April, the UK's system of inheritance tax now operates on the basis of 'long-term UK residence'. An individual who has been UK tax resident for at least 10 out of the previous 20 UK tax years is a long-term UK resident and so generally within the scope of inheritance tax. As long as an individual is clear on their UK tax residence position (and has suitable records evidencing it), this new system should provide more certainty to taxpayers as to whether they are in or outside of inheritance tax as compared with the old domicile system. As this system is entirely based on counting numbers of years residence, whether an individual has a UK club membership or not is irrelevant and so abandoning it would be unnecessary for inheritance tax purposes (subject to what we say below about residence).
The only way in which a private club membership could now influence an individual's exposure to UK taxation is in how it may interact with the SRT, which determines whether an individual is UK tax resident or not for a given tax year.
The SRT is a complex set of tests but can be summarised (very) briefly as follows: for a given tax year, first we check whether the individual satisfies any of the tests to be automatically non-UK resident, then we check whether the individual is automatically UK resident and, if we still do not have an answer, we turn to the 'sufficient ties' test. The sufficient ties test establishes a day count threshold, based on the number of ties an individual has to the UK – if the individual exceeds their threshold number of days presence in the UK, they will be UK tax resident.
One of the automatic UK residence tests can be met if the individual has a home only in the UK over a particular period. The test is very complex but it is, in theory, possible for a club which offers accommodation to be a 'home' for these purposes and therefore for the test to be met. Individuals staying in private members clubs who do not have any overseas home should take advice.
An area where there may be more risk is the sufficient ties test. One of the ties which an individual may have to the UK is the 'accommodation' tie. An individual will have this tie if (among other things) they have a place to live in the UK available to them for a continuous period of 91 days or more during the tax year and the individual spends one or more nights there. If a private members club offers accommodation, it is possible for its availability to a member to create an accommodation tie for that member. For each additional tie to the UK, an individual generally can spend fewer days in the UK in the tax year while remaining non-UK tax resident.
For private members clubs which do not offer any accommodation, the risk simply doesn't exist. Members who have ceased UK tax residence and intend to remain non-resident do not need to be concerned about abandoning their membership of these clubs.
For private members clubs which do offer accommodation, clubs and their non-UK tax resident members should consider revising the terms of their agreement to limit the availability of accommodation at the club to the relevant thresholds. As long as the agreement is appropriately drafted and there is no de facto departure from it, it should generally be sufficient to prevent an accommodation tie arising.
Individuals who have ceased UK tax residence this year and hastily abandon their club memberships without there being any real tax reason to do so are likely to repent at their leisure. If you require advice on your UK tax residence position going forward, please get in touch.
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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.
