Tax residence - moving to or from the UK
If you are considering moving to or from the UK, it is important to assess your UK tax residence position. The statutory residence test (SRT) determines your tax residence for each tax year (6 April to 5 April). It may be possible to split a tax year of arrival to or departure from the UK, but this will depend on your circumstances. It will generally be best to plan well before hand so that you can undertake all advance planning in the tax year before a change in your residence status.
If you are a foreign domiciliary (non-dom) coming to the UK, you should take professional advice well before arriving in the UK so that you understand how you will be taxed and can ensure that your non-UK assets are optimally structured. This should mean that you are less likely to incur higher foreign taxes, or crystallise income and capital gains while non-UK resident. Immigrants should note that there is no rebasing of assets on arrival in the UK, and historic gains accruing before arrival can be subject to UK tax if realised after you have become resident.
If you are leaving the UK, pre-departure planning will depend on your personal circumstances, but there are various tax matters that you may wish to consider in advance. These may include timing of disposals, issues around property ownership and consideration of overseas contracts, to name a few. You should be aware of the rules applying to temporary non-UK residents, which may result in income or gains realised whilst abroad becoming taxable on any return. The deemed domicile rules may also mean that your estate remains liable to inheritance tax for up to 6 tax years after leaving the UK, and your domicile status would not be reset if you returned within that time.
Even if you are not planning an international move, if you spend time in other countries, you should check your day counts and review the SRT. You can then ensure that your UK tax residence status is as expected, and any actions that you take between now and the end of the tax year do not result in unexpected consequences, in the UK or abroad.
Non-doms – planning before you become deemed UK domiciled
Individuals who have been UK resident for 15 out of the last 20 tax years are treated as deemed UK domiciled for income tax, capital gains tax and inheritance tax purposes. Once deemed UK domiciled, you are no longer able to access the remittance basis and your worldwide estate is subject to UK inheritance tax.
If you are approaching the date on which you become deemed UK domiciled, and you remain non-UK domiciled under general law, you should consider how you may be affected by these rules, as it may be possible to plan effectively in advance. Advice should be taken well in advance of becoming deemed UK domiciled.
Trusts may provide a highly effective planning tool in these circumstances. Trusts settled by a foreign domiciled, and not deemed domiciled, person can provide an enduring shelter from inheritance tax on foreign property held in trust, and on most types of foreign income and gains while these are accumulated within the trust and specific conditions met.
Non-doms – benefits and reviewing your domicile status
If you are a foreign domiciliary under general law, and have not yet been resident for long enough to become deemed UK domiciled, you may be able to benefit from claiming the remittance basis, to limit your liability to UK tax on foreign income and gains which you do not bring to the UK. You will need to structure your assets and banking arrangements to be able to maximise the benefits of the remittance basis and, after 7 years of UK residence, you will need to pay a fixed charge to continue to claim it – which may affect the economic benefits of doing so.
You will also have limited exposure to inheritance tax, as foreign assets will be excluded when considering the chargeability of your estate or gifts you make.
Of course, the ability to claim the various reliefs available for foreign domiciled individuals does depend on maintaining your claim to be foreign domiciled under general law. Domicile is a complex area of law and you must make sure that your position has been professionally analysed, particularly if you have been resident in the UK or are intending to remain here for some time. If you have spent a long time in the UK, or appear to have settled here without a definite contingency which would lead you to leave the UK, HMRC could challenge your claim to retain a foreign domicile. It is good practice to review your domicile status regularly, and while this is not tax year end dependant, it is an ideal time to consider your UK domicile status.
Non-doms – timing of overseas income and gains
You may need to pay a charge, known as the remittance basis charge (RBC), to be entitled to claim the remittance basis.
The timing of any overseas income and gains can be important, if you can control these, to maximise overseas income and gains in those years when you pay the RBC. You may wish to review the level of your overseas income and gains and consider whether or not any action should be taken before 5 April.
Offshore trusts – protect your protections
Trusts provide an important tool in planning for foreign domiciled residents, and for the heirs of foreign domiciliaries. The UK regime applying to offshore trusts, however, is extremely complex and subject to extensive provisions aimed at preventing tax avoidance.
The benefits of the rules relating to protected trusts depend on ensuring that the settlor remains foreign domiciled under general law after becoming deemed UK domiciled, and on there being no additions of value which would ‘taint’ such a settlement.
Trust protections will be lost if only a nominal amount is added and the rules around loans to and from the trustees are complex.
All offshore trusts should be reviewed annually and any necessary actions taken before the end of every tax year. This should include a review of the domicile status of the settlor.
Non-resident companies owing UK residential property
In the past it was common for UK real estate to be held through offshore companies. There were complex considerations where the property concerned was residential property occupied beneficially, but such structures were still to be found. Various measures over the past decade have rendered such structures much less attractive. These include the imposition of an annual tax on enveloped dwellings, the imposition of capital gains tax on disposals of UK real estate, and inheritance tax on indirectly held residential property, which together have led to the use of overseas companies to hold UK land being largely restricted to properties let to third parties.
From April 2023, there will be a new consideration: a hike in corporation tax to 25% from 19%, which could affect how much tax is paid on rental income and gains. While the 25% main rate usually only applies when profits exceed £250,000, non-UK resident landlord companies will pay tax at 25% on all taxable profits.
If you are a shareholder of an offshore property company, you may wish to review whether or not your current structure remains the right one for you. A review now could help avoid a large tax bill later on.
While all the above are important points to consider, a less quantifiable issue is the risk of further changes to the domicile regime. The present Government has not indicated that it will make changes to these rules, though it remains possible at each Budget (the next Budget is due on 15 March). Labour has, however, pledged to overhaul the regime. The next general election is due by January 2025, at the latest, and we would expect more detail on the proposal in Labour’s manifesto. Little is available currently, although it has been suggested that the regime for foreign domiciliaries could be replaced by one which provides limited reliefs on foreign income and gains to immigrants over a 3 or 5 year period. It is not known whether existing arrangements (such as protected trusts) would be subject to any sort of grandfathered and continued protections, nor what would be the implications for inheritance tax. In the meantime, you can continue to make the most of the current regime and exemptions.
You can also read our general tax year end planning article for individuals here, which covers topics including pension contributions, gift aid, ISAs, tax efficient investments, timing of disposals for CGT and using your allowances effectively.
How we can help
Should you need help reviewing your tax position or advice on any of the points discussed, please contact your usual Evelyn Partners contact or one of the contacts listed.
If you have connections to the US, your US tax position will need to be considered alongside any U.K. tax planning. Our specialist US/UK tax team is here to help, and any of the contacts can put you in touch.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.