26 July 2015 | Taxation
The introduction of the statutory residence test provides more certainty over residence status now that lifestyle factors are less important. Ensure that income and gains are not caught by UK tax when split-year treatment is not available or there is an early return to the UK. Entitlement to UK personal allowances for non-residents has been restricted; some UK source income will potentially remain subject to tax and income from UK property has its own regime. The five-year rule for the taxation of UK gains now applies from the date of departure rather than referring to complete tax years. Do not overlook the implications of the tax regime in the destination country – there may be advantages to retaining a UK liability.
Practitioners dealing with internationally-biased private clients, will notice that it tends to be those arriving in the country who seek tax advice rather than those who are leaving. Perhaps this is because people tend to assume that entering a tax system is potentially more problematic than leaving it, but the tax implications of departing should not be overlooked. While there are some who do decide to relocate for tax reasons, and will therefore take timely tax advice, it’s more likely that UK tax planning will be further down the packing list for those preparing to move abroad.
“So what made you decide to up sticks and relocate?” I find myself asking the imaginary client sitting across from me. “It can’t be the weather – we’ve had a great summer. It’s been like the South of France.” “That’s actually where we’re moving to,” replies my client, “although we did very nearly settle on Spain.” “Yes, I suppose there’s something to be said for the pace of life and lower stress levels which you tend to get in sunnier climes,” I find myself conceding. I don’t admit it to my client, but I’m also wondering whether I could get used to the idea of a siesta after lunch, deciding that I probably could. “The cost of living must be a factor as well I suppose, not to mention house prices.” The arguments for leaving start stacking up and I find myself almost drifting off, picturing cycling off to work through dusty Tuscan vineyards and olive groves. My client has to shake me out of my reverie, which is impressive given that I had only dreamt him up myself a couple of paragraphs ago.
Before the introduction of the statutory residence test (SRT), tax advice to individuals considering moving overseas could often leave them worried that, however much they may have thought that they were now overseas, if they were to pop back and end up using a UK mobile phone to arrange a round of golf at their local UK club with their UK doctor, they could risk HMRC treating them as though they’d never left. Since the SRT, we no longer need to worry so much about long lists of lifestyle factors which could have an impact on a client’s status. The “old” rules will, however, still be relevant for at least a couple of years, when there is a need to determine whether someone was resident for the purposes of establishing whether they are an arriver or leaver under the new rules (and where no election is made to, in effect, backdate the SRT criteria for this purpose). The SRT has generated new areas in which clients will need advice, especially those whom we newly meet claiming that they’re aware of a change in the rules because “it’s now 120 days rather than 90, isn’t it?”; a comment that has been overheard more than once. Planning well in advance is therefore, as always, strongly recommended and anyone using HMRC guidance should bear in mind that the rules are still relatively new and guidance could be subject to change.
There is nowhere near enough room to go into the provisions of the SRT in any depth here but, now that clients can be more confident of their residence status in many cases, it’s worth reminding ourselves of what going non-resident means for UK tax purposes and what steps can be taken to optimise the position both before and after the bags have been packed. What follows focuses only on how individuals are affected, although there are residence rules affecting trustees and other entities. A departing individual who is also a trustee will need to consider the impact of their move on the trust and its status where, for example, exit charges may apply. The fact that the tax year can now be split without relying on a concession gives far greater certainty, in many cases, over the date on which someone has left for tax purposes. It should not, however, be assumed that the year can always be split because the opportunities to do so on leaving the UK are limited to where the individual or their partner are starting full-time work overseas, or where they are ceasing to have a home in the UK. A retired couple who move overseas, but retain a home in the UK, are unlikely to be able to split the year on departure, although anyone advising in this area should ensure they are comfortable with the definition of “home” for these purposes.
Whether or not the split-year provisions apply in any particular case, people are generally now more likely to know whether they may be considered tax resident for a particular year. This can be especially important if their residence status changes. In the past, if someone claimed to have been non-UK resident for just a single tax year, within a period of UK residence either side, it is likely that, if challenged by HMRC, it would be decided that they had remained UK resident throughout. Now, it is possible to be non-UK resident for a single year. A raft of anti-avoidance provisions were therefore introduced to prevent what could otherwise have been some basic tax planning involving just a single year abroad. Under these provisions, income earned in years of non-residence can be treated as arising in the year of return to the UK. This applies where the individual has been resident in the UK for four or more of the seven tax years before becoming non-resident and they become resident again within five years. The income taken into account for these new provisions does not include normal salary, self-employment profits or bank interest. However, dividends from close companies, relevant foreign income, life insurance chargeable event gains and payments out of employer financed retirement benefit schemes (EFRBS) are included.
Once an individual is non-resident for tax purposes, and notwithstanding the anti-avoidance provisions above, they will only be taxed on UK source income in the UK (as far as income tax is concerned), although this is usually limited under provisions which allow certain types of income to be “disregarded”: Under the disregarded income provisions, a non-UK resident individual’s exposure to UK income tax is usually limited to the sum of tax deducted at source (including the tax credit on dividends from UK companies), tax on property income, and tax on income from employment or self-employment carried on in the UK. Bank and building society interest (along with interest from authorised unit trusts and open-ended investment companies) can be paid without deduction of tax at source if the appropriate residence declaration has been made to the bank using form R105. Increasingly, banks will not, however, accept these forms, and individuals who wish to leave their savings with a bank which refuses to pay interest gross could find themselves unable to reclaim tax that could otherwise have been saved. Income from overseas employment will not be taxable in the UK where the individual is non-resident. Loopholes have recently been closed, preventing separate contracts being established for simultaneous UK and overseas employments that took advantage of this rule. It should be noted that some termination payments that are taxable on the cessation of a UK employment, remain taxable here, irrespective of being received after the date of departure, as can the exercise of share option awards which relate to the duties of UK employment. This is regardless of when the event which gives rise to the tax charge occurs.
Form P85 is available for those leaving the UK to make a declaration of the relevant facts to HMRC and, although the form is non-statutory, it can be used to reclaim tax mid-year for those not in self assessment. HMRC manuals do suggest that forms P85 submitted for self-assessment taxpayers will be rejected. However, many advisers will submit the forms simply to establish a record of their client’s departure with HMRC, or may just complete the form and hold it on file as a contemporaneous record of the facts relating to the departure.
Submission of form P85 should also allow a no tax “NT” PAYE code to be applied to any continuing UK pension income (or employment income where applicable). Anyone leaving the UK part way through a tax year should consider whether they may have unused allowances or lower rate bands, especially when a PAYE code has been in place on a cumulative basis. On the basis that exposure to UK tax will reduce as soon as an individual is non-resident, potential leavers should ensure that any reliefs that have the effect of lowering tax, such as gift aid donations or pension contributions, are made before achieving non-residence. A charge could arise if gift-aided direct debits to charities continue to be made post-departure without sufficient tax having been paid to account for the credit. Finally, in this section, those departing who are planning on claiming a UK state pension in the future should consider whether they wish to pay voluntary National Insurance contributions while abroad.
Many individuals leaving the UK can continue to benefit from a personal allowance, although HM Treasury is consulting on the restriction of allowances for some categories of non-residents. Those who currently qualify for UK personal allowances include EEA nationals, residents of the Isle of Man or Channel Islands, those who have moved abroad for health reasons and Crown employees, among others. Commonwealth citizens no longer have a statutory entitlement to personal allowances (since 5 April 2010) although many double tax treaties still allow personal allowances for those not covered by any of the specific categories above. In the consultation document (Restricting Non-Residents’ Entitlement to the UK Personal Allowance), HMRC argue that a removal of the personal allowance for those living abroad will bring the UK into line with many other countries and that most of those potentially affected would not be any worse off because they would be able to claim relief where they are tax resident. However, those who live in low tax jurisdictions may pay more tax overall in future if they are unable to claim UK personal allowances. Home and away Many people who embark on a life elsewhere leave a property in the UK to which they intend to return and, as readers will no doubt be aware, if this is let, the non-resident landlord scheme will generally apply. Under this, income tax will need to be withheld and paid over to HMRC each quarter if the rent exceeds £100 a week. The deduction needs to be made by the letting agent or tenant at the rate of 20% on gross income, net of expenses that have been paid in the quarter and which are believed to be deductible. An opt-out is available by submission of form NRL1 to HMRC, as long as certain conditions are met, including the landlord’s self-assessment record being up to date. This allows rents to be received gross on the basis that any tax will be paid via self assessment. The non-resident landlord scheme applies to those whose “usual place of abode” is outside the UK. Confusingly, this is not necessarily the same as being non-resident, so someone who lives outside the UK, but finds themselves resident under the SRT for a particular year, may still find themselves within the scheme. Non-resident gains At present, non-UK residents are not subject to capital gains tax on the disposal of assets unless they are carrying on a trade in the UK through a branch or agency and the gain arises on the disposal of an asset used or held in connection with the trade carried on in the UK. There are other occasions when gains are chargeable on non-residents, and the SRT introduced slight changes to some previous provisions. The two most notable differences that have applied since 6 April 2013 are, first, the ability to split the year of departure for capital gains tax purposes and, second, a change to the anti-avoidance rules affecting temporary non-residents. Previously, if an individual returned to the UK without having spent at least five complete tax years as a non-resident, gains realised in that period on assets that were held at the point of departure came back into charge upon return to the UK. While this rule has been largely retained, the period is now five years from the date of departure, rather than five complete tax years. No changes were made to the fact that gains that have been held over or rolled over are clawed back if the recipient leaves the UK within six years after the end of the tax year of disposal. Planning in this regard is clearly possible, the most obvious example being the ability to delay a disposal by ensuring that the contract for sale occurs after the date of departure. HMRC may be able to successfully challenge this if it can be argued that there was, for example, a binding agreement in place before the date of departure. Careful records should be kept if any such planning is undertaken. Losses realised by those who are temporarily non-resident can be used to reduce gains of the same year which have come back into charge but cannot be carried forward. Care should therefore be taken when making disposals in the early years of non-residence if a return to the UK within five years of departure is a possibility. Residential property gains A major new consideration for non-residents is the proposed implementation of a capital gains tax charge where UK residential property is sold by a non-resident. Unlike the annual tax on enveloped dwellings (ATED) regime, there is no proposed de minimis limit and it appears that rental properties and some communal use properties will also fall within the scope of the charge. Non-UK resident individuals investing in UK residential property through UK real estate investment trusts (REITs) are not expected to be affected by the proposed changes and those individuals who invest in property funds will most likely not face tax on the sale of their investment, although a charge may apply at fund level. The government had initially indicated that its preference for collection would be to apply a withholding of capital gains tax at source on sale. This now appears to have been dropped in favour of the option for the seller to make a payment on account, the submission of a computation of the actual amount due, or the reporting of the gain on the self-assessment tax return. The proposed measures include the notions that non-residents ought to benefit from an annual exemption and that losses incurred on the sale of UK property by non-residents may be allowable. Non-residents with uncrystallised losses on UK residential property who are thinking of selling in the run-up to April 2015 may therefore consider waiting for further information to be released before realising unusable losses prematurely. Finally, those considering looking to escape UK capital gains tax by relocating soon before a proposed sale should be aware that a number of recently updated double tax treaties contain clauses giving the UK the right to tax gains for a period of time after departure.
The fictional client leaving the UK at the start of the article happened to be UK-domiciled and, although we could have added an extra layer of complexity by considering the additional planning available for non-UK domiciliaries, that could perhaps be saved for a later article. For now, it is enough to note that a change in residence, away from the jurisdiction in which one has a domicile of origin, does not automatically equate to a change of domicile (unlike, for example, a change of residence away from a country in which one has established a domicile of choice). Significant steps need to be taken to establish a domicile in another country where a UK domicile of origin is being abandoned. This will need to include breaking ties with the UK. Failure to shed a UK domicile will attract an exposure to UK inheritance tax on worldwide assets as opposed to just those in the UK. Where an individual has been domiciled in the UK and they leave the UK for residence overseas, they will retain a “deemed domicile” status until they have been out of the UK for three calendar years. In addition, where a non-UK domiciled individual is leaving the UK after having become deemed domiciled, they may need to spend up to three tax years non-resident until they have no longer been UK-resident for 17 out of the 20 tax years, ending with the year in question, before losing their deemed domicile status. An exception to the above rule is where a non-domiciliary is married to a UK-domiciled individual and has made an election to be treated as UK-domiciled for inheritance tax purposes. In this case, for the election to lapse, the individual who made the election will need to be non-resident for four complete tax years after departure rather than three. Reaching our destination The importance of the tax regime in the destination country should not be underestimated. It will be crucial, in many cases, to establish whether there will be a period of dual residence; which is often the case given the non-coterminous nature of the UK tax year with those of most other countries. Perhaps more important still is the question of whether the new country has less favourable tax rates than the UK. It may well be that the planning for someone leaving the UK needs to concentrate on maximising the income or gains over which the UK has sole taxing rights if there are higher taxes in store in the other country. It goes without saying that every case is different, there are plenty of traps for the unwary and specialist advice should be taken. Now, where’s my passport?