Retirement Planner Magazine Outline topic list – Tax/Trust Planning for expats.
Wilder Coe Chartered Accountants, discuss Residence, Ordinary residence and Domicile
Residence does not have a legal definition. Practice is based on a mixture of statute and court decisions. Residence determines the jurisdiction in which you will pay income tax
Ordinary residence looks at where your normal place of residence is. You can cease to be resident in the UK, but remain ordinarily resident, which would mean that you remain liable to UK capital gains tax in respect of gain on worldwide assets.
Domicile should not be confused with nationality or citizenship. You are normally domiciled in the country that you regard as your home. It is frequently referred to as the country in which a person intends to die/be buried. Domicile determines where your executors will account for inheritance tax on your assets other than real estate. Real Estate, generally, is also, subject to double tax relief, taxable by the country that it is situated in.
Becoming non-resident
HM Revenue and Customs interprets permanent in the context of residence to mean that an individuals has left the UK for three years or more to live or work abroad full-time, suject to an ongoing review of days spent in the Uk after the initial date of departure. You will be regarded as resident in the UK during a tax year if:
- You spend 183 days or more in the Uk during the tax year, or
- You have spent more that 90 days per year in the country over the past four years (taken as an average). You will then be classed as resident from the fifth year.
Becoming non-domiciled
Each individual is born with a domicile of origin, which is, under normal circumstances the father’s domicile or the mother’s if the parents are unmarried. A domicile of choice can be acquired if an individual makes a new territory their residence and they have a stated intent to remain there for the rest of their days.
There is a third type of domicile that applies to children under the age of 16, known as a domicile of dependency. This follows the domicile of the father or mother as indicated above when their domicile of origin changes.
How to avoid UK income tax
The basic rule is that UK residents are taxed on their worldwide income. Non-residents are only taxed on their UK income. The UK, in common with most countries, claims the right to tax income arising in the UK.
Assuming that an individual cannot or does not wish to divest themselves of all UK source income on departure for foreign climbs, it becomes necessary to take a closer look at the tax treatment of different types of income.
Rental Income: On rental income over £100 per week, there is a 22% withholding tax on the rent, unless the landlords can demonstrate, by reference to annual costs including interest and/or losses brought forward that the property will give rise to a substantially lower or no tax charge.
Pension Income: A UK expat pensioner receiving a UK pension would usually be subject to UK income tax on the UK pension. However, certain double tax treaties permit UK tax to be avoided and it is then only subject to tax in the overseas country. The UK/Cyprus treaty grants sole taxing rights to Cyprus where the tax rate is just 5%. All cases should be looked at independently to establish what the taxing provisions are in the overseas country. Review accrued benefits in UK schemes to see if there is scope to transfer them to an overseas scheme.
Interest & Royalties are subject to 20% or 22% respective rates of withholding tax, with no further liability to tax in the UK. It is possible to apply to have interest paid without deduction of tax, but any tax payable would still have to be accounted for annually via a UK tax return. If the total UK source taxable income exceeds personal allowances for any given year, it is not advisable to have interest paid gross.
Government Bonds: Interest from these investments is completely tax-free for the non-resident investor.
ISA’s: Non-resident individuals are not permitted to make additional contributions, however, they can continue to enjoy the tax-free status of existing account on departure from the UK. The investment may be taxable in the overseas country.
Dividends: There is no withholding tax on dividends and no further liability to tax in the UK.
Earnings: If you leave the UK to work overseas for more than a complete UK tax year, you may be able to avoid UK tax on any employment income you receive whilst you are working overseas. Care should be exercised in identifying duties that need to be performed in the UK, as the earnings attributable to those duties could remain taxable in the UK. National Insurance may still be payable form 12 months form the date of departure in the case of a secondment. Otherwise, the liability ceases on departure form the UK.
How to avoid UK Capital Gains Tax
The basic rule is that for UK individuals to avoid capital gains tax it is usually necessary to remain non-resident for five complete tax years and avoid realising gains in the year of departure, unless it is part of a complete tax year. This rule only applies if you have been a UK resident for at least four of the seven tax years prior to the year of departure. If this is not the case, it is still possible to avoid capital gains tax by becoming non-UK resident and ordinarily resident for the year of the disposal.
How to avoid UK Inheritance Tax
The basic rule is that an individual must first lose a UK domicile status by demonstrating that they have moved all fiscal and emotional ties with the UK and establishing a new permanent home overseas. HM Revenue & Customs will look at many factors when deciding whether an individual has lost their domicile and care is necessary to ensure that assets outside of the UK are not exposed to tax. Uk assets will, of course, remain within the charge to tax as set out previously.
Double Tax Treaties
A key problem is that most countries tax individuals on their worldwide income. If you seek to minimise taxation, your choice of country of residence is critical and could be different depending on which of the taxes it is that you are trying to avoid.
A typical Double Tax Treaty will follow the OECD (Organisation for Economic Cooperation and Development) model. The UK has treaties with a number of the popular retirement destinations including Spain, Portugal, Italy and France. The purpose of the treaty is to determine how and by which jurisdiction income and capital will be taxed.
Making Use of Double Tax Relief
Where income is taxed in two jurisdictions, the first because it arises there and the second because the beneficial owner is resident there, the treaties work to ensure that the tax paid on the income being taxed twice is limited to the highest rate payable in the two interested countries. If the overseas tax rate is 50% and the UK tax rate on the corresponding income is 40%, the overseas country would only collect additional tax of 10% on the income. Tax paid in one jurisdiction can never be repaid by the other jurisdiction.
There is an alternative method of claiming double tax relief, which is to treat the UK tax as an expense and only have the net income charged to tax in the overseas country. In certain circumstances this can lead to a more beneficial result.
Tax benefits offshore trusts
You should only consider using offshore trusts (and other offshore structures) after receiving advice from a qualified professional with a full comprehension of your personal circumstances. The UK has comprehensive anti avoidance legislation for trust set up by UK resident and/or domiciled individuals making it very difficult to avoid inheritance tax consequences.
Offshore trusts are usually set up in tax havens or low tax jurisdictions such as the Channel Islands. A trust is a separate legal entity to which ownership and control of assets can be passed. Generally speaking they are very good at sheltering capital gains from both UK and offshore taxes. However, it is often the case that the tax position for income is determined by the country in which the assets are situated. This works in much the same way as for an individual.
Offshore trusts remain popular for their perceived asset protection benefit.
Offshore company/trust owning overseas property
One option to be considered when looking at keeping significant UK assets in association with a move abroad would be to place an overseas company between yourself and your assets. The shares that you own in that company are a non-UK asset. The disposal of the assets will, potentially, give rise to capital gains and suitable care would need to be exercised to ensure that they fall outside the scope of UK and offshore capital gains tax nets.
Management and control of the company must, clearly, be seen to be offshore. The existence of UK shareholders could result in the apportionment of the gains of a non-resident ‘close’ company amongst the members.
Conclusion
It will be quickly appreciated that much of the preparation required in association with relocating to an overseas jurisdiction is actually a matter of doing your homework with a view to making the right choices. Savings can be made as a direct result without the need for getting involved in complex and costly overseas arrangements.
