Tax guide For individuals coming to the UK

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1 Tax guide For individuals coming to the UK

2 Contents Introduction..01 UK residency rules.02 Domicile.. 04 UK taxation of individuals.. 05 Remittance basis of taxation...09 Pre-immigration planning for non-uk domiciled individuals 10 Compliance 11

3 Introduction The UK has a beneficial tax regime for foreign domiciled individuals who come to the UK to take up residence. Jonathan Kropman Head of Private Client If you become UK resident but remain non-uk domiciled you can avoid UK tax on your foreign income and foreign gains by electing to be taxed on the remittance basis. You will only pay UK tax on your foreign income and gains if they are brought to, or used or enjoyed in the UK. If you claim the remittance basis of taxation it is not necessary for you to declare your worldwide income and gains to the UK Revenue (HMRC). Before becoming resident in the UK, you should take UK tax planning advice and organise your investments and accounts so that you can access funds to cover your UK living expenses with a minimum tax cost. This guide aims to introduce you to the UK tax system and summarise how you will be taxed as a UK resident but foreign domiciled individual. The Lawyer Awards 2012 Private Client Team of the Year We hope it is helpful. BLP Private Client Team Legal Business Awards 2012 Private Client Team of the Year This guide provides a brief overview only and is not a substitute for proper legal or tax advice. This guide is based on the UK tax rules as at 15 April Tax guide for individuals coming to the UK

4 UK residency rules For UK tax years from 6 April 2013 You will be UK resident if: your only home, or if you have more than one home all of your homes, are in the UK, and you visit that home (or one of those homes) on 30 or more days in the tax year; you spend 183 days or more in the UK in the tax year; or you work full time in the UK. In all other cases, if you are coming to the UK for the first time (or you have not been UK resident in any of the previous three tax years) your residence status will be determined according to this table: Days in UK in tax year Fewer than 46 Residence status Always non-resident days Resident if 4 UK ties (otherwise not resident) days Resident if 3 or more UK ties (otherwise not resident) days Resident if 2 or more UK ties (otherwise not resident) 183 days or more Always resident The UK ties which count are: family if your immediate family (wife/civil partner and/or children) are resident in the UK; accommodation if you have accommodation available to you in the UK. The accommodation does not have to be owned by you. If you spend one night in accommodation which is available to you for at least 91 days during the tax year, that will count; 2 Tax guide for individuals coming to the UK

5 substantive work in the UK if you work in the UK on 40 or more days in the tax year. You will be treated as working in the UK on a day if you do more than three hours work in the UK on that day; UK presence in previous years if you spent more than 90 days in the UK in either of the two previous tax years. What counts as a day? You will be treated as being in the UK on any day on which you are in the UK at midnight. For UK tax years up to 5 April 2013 You will be UK resident if: you spent 183 days or more in the UK in the tax year. There are no exceptions to this rule; you came to the UK with the intention of becoming resident, or intending to stay for three years or more; or you spent (on average) more than 91 days per tax year in the UK. Residence was not just a question of the number of days you were in the UK. HMRC will also look at the pattern of your presence and your connections to the UK, including: your family ties - including whether your spouse and children or other family members were in the UK; your social ties; your business ties; and property - including if you own or have leased a house or apartment in the UK. 3 Tax guide for individuals coming to the UK

6 Domicile Your domicile is broadly where your permanent home is and where you intend to live indefinitely. This may not be the country in which you are currently resident. Domicile of origin Every person receives a domicile of origin at birth. If your parents were married when you were born, your domicile of origin will be the country where your father was domiciled at the time of your birth. This may not be the country in which your father was living when you were born. If your parents lived in a number of different countries before you were born (or your grandparents moved countries) you may need to gather considerable information and supporting evidence to establish your domicile of origin. Domicile of choice Your domicile may change if you move to a new country. If you become resident in another country and intend to remain there permanently or indefinitely you will acquire a domicile of choice in that country. If you are domiciled outside the UK you can live in the UK for many years without becoming UK domiciled if you do not intend to remain in the UK permanently or indefinitely and have maintained links with your home country. Although your domicile depends on your intention, your stated intention will need to be supported by the facts and circumstances. It is a good idea to prepare a written declaration of your non-uk domicile status with supporting evidence and relevant details. Deemed domicile for inheritance tax purposes only Even if you remain non-uk domiciled under the general rules described above, you will become deemed domiciled in the UK, for UK inheritance tax purposes only, once you have been resident in the UK for 17 out of 20 tax years. Being resident in the UK for any part of a tax year counts so a person could become deemed domiciled after being in the UK for as little as 15 years and 2 days. 4 Tax guide for individuals coming to the UK

7 UK taxation of individuals Income tax Each person is charged to income tax (and other UK taxes) separately. There is no joint filing for a husband and wife. Income tax is charged at rates up to 45%. The highest rate of income tax dropped from 50% to 45% on 6 April Tax is only charged when a person s income exceeds the personal allowance. The personal allowance is currently 9,440. The personal allowance is progressively withdrawn for those with taxable income over 100,000. If you claim the remittance basis of taxation you lose the personal allowance. Income tax rates for UK tax year 2013/2014: Taxable bands Dividends from UK & non-uk companies All other income 0-32,010 10% 20% (basic rate) 32, , % 40% (higher rate) Over 150, % 45% (additional rate) A person who is UK resident and UK domiciled is subject to UK income tax on his worldwide income as it arises. If you become UK resident but remain not domiciled in the UK you can avoid UK tax on your foreign income by electing to be taxed on the remittance basis. If you do not claim the remittance basis you will be subject to UK tax on your worldwide income. A person who is not UK resident is only taxable on UK source income. In many cases, this liability is limited to any tax deducted at source. Where deductions are made they are at the basic rate (20%). This limited liability does not apply to rental income from UK real estate. 5 Tax guide for individuals coming to the UK

8 Capital gains tax Capital gains tax is charged on disposals of assets (including gifts). Tax is charged on the increase in the value of the asset during the person s period of ownership. Capital gains are taxed at 28% (although those with income and gains below 32,011 are charged at 18%). Individuals have an annual exemption which exempts the first slice of gains realised in a tax year from tax. The annual exemption is currently 10,900. If you claim the remittance basis of taxation you will lose the annual exemption. Transfers between spouses are tax neutral, irrespective of the residence and domicile statuses of the spouses. Your main residence is generally exempt from UK capital gains tax. A number of reliefs from UK capital gains tax are available, including entrepreneurs relief on the sale or gift of qualifying business assets. Subject to a number of conditions, entrepreneurs relief charges tax on the first 10,000,000 of gains on business assets at 10%. The 10m of gains is an aggregate lifetime limit and the gains can arise on different business interests. A person who is UK resident and domiciled in the UK is subject to UK capital gains tax on his worldwide assets. If you become UK resident but remain not domiciled in the UK you can avoid UK tax on your foreign gains by electing to be taxed on the remittance basis. If you do not claim the remittance basis you will be subject to UK tax on your worldwide gains. An individual who is not resident in the UK is not subject to UK capital gains tax, even on UK assets. 6 Tax guide for individuals coming to the UK

9 Inheritance tax UK inheritance tax is charged on: the value of a person s estate on death; gifts made to individuals within seven years of death; lifetime gifts to most trusts and to close companies (broadly, companies controlled by five or fewer persons); and certain assets held in trusts. On death the first slice of a person s taxable estate is charged at 0%. This nil rate band is currently 325,000. Over this amount inheritance tax is charged at 40%. Lifetime transfers to close companies and to most trusts are taxable. Gifts made during a person s lifetime which are taxable are charged at 20% although if the person dies within seven years of the gift the rate may be increased up to 40%. Gifts made by a person to his spouse during his lifetime or on death are, generally, exempt from UK inheritance tax, unless the donor spouse is UK domiciled and the recipient spouse is non-uk domiciled in which case the exemption is limited to the amount of the nil rate band (currently 325,000). Before 6 April 2013, the exempt amount was limited to 55,000. Gifts made by a person, during his lifetime, to another individual only give rise to a charge to UK inheritance tax if the donor dies within seven years of the date of the gift. A person who is domiciled in the UK or deemed domiciled in the UK (regardless of where he is resident) is subject to UK inheritance tax on his worldwide property. A person who is not UK domiciled and not deemed domiciled in the UK (regardless of where he is resident) is only subject to UK inheritance tax on his assets situated in the UK. Gifts of non-uk assets made by a non-uk domiciled person are free of UK inheritance tax even if the gift is to a trust or close company. 7 Tax guide for individuals coming to the UK

10 UK assets held in a non-uk company owned by a non-uk domiciled person are not subject to UK inheritance tax. This is because the person owns a non-uk asset (the shares in the non-uk company) and not the taxable UK asset. Non-UK assets held in a trust set up by a non-uk domiciled individual are known as excluded property. Such assets are outside the scope of UK inheritance tax. If a person gives property away but can still benefit from it or enjoy it he is treated, on his death, as if he still owned the property and it is subject to UK inheritance tax as part of his estate. Gifts of business property such as shares in an unquoted trading company are (subject to certain conditions) effectively exempt from UK inheritance tax. Stamp duty land tax (SDLT) SDLT is paid by the buyer of real estate on the purchase. Value of property Up to 125,000 Rate of SDLT Nil 125, ,000 1% 250, ,000 3% 500,000-1,000,000 4% 1,000,000-2,000,000 5% Over 2,000,000 (individual ownership) 7% Over 2,000,000 (corporate ownership) 15% The 5% and higher rates apply to residential property only. The maximum rate on commercial property is 4%. 8 Tax guide for individuals coming to the UK

11 Remittance basis of taxation If you become UK resident but remain non-uk domiciled you can elect for the remittance basis of taxation. You will normally have to claim the remittance basis through your self assessment tax return. A person who claims the remittance basis of taxation is called a remittance basis user. If you make a valid claim to be taxed on the remittance basis, you will: be liable to UK income tax on your UK source investment income as it arises; only be liable to UK income tax on your foreign source investment income to the extent that that income is remitted to the UK; only be liable to UK income tax on your earnings, from an employment with a foreign employer, where all the duties of the employment are performed wholly outside the UK, to the extent that those earnings are remitted to the UK; be liable to UK capital gains tax on gains realised on the disposal of assets situated in the UK at the time of disposal as they arise; and only be liable to UK capital gains tax on gains realised on the disposal of assets situated abroad at the time of disposal if the sale proceeds are remitted to the UK. You can choose whether to claim the remittance basis on a tax year by tax year basis and may opt in and out of the regime. Irrespective of whether or not you claim the remittance basis, if you remain non-uk domiciled you will only be liable to UK inheritance tax on your UK assets (provided you are not deemed domiciled in the UK). It may be possible to hold your UK assets in such a way that no liability to UK inheritance tax will arise. Remittance basis charge Once you have been resident in the UK for seven out of the previous nine tax years, if you wish to claim the remittance basis you have to pay an annual remittance basis charge of 30,000. A higher remittance basis charge of 50,000 will apply once you have been resident for 12 out of the last 14 tax years. 9 Tax guide for individuals coming to the UK

12 Pre-immigration planning for non-uk domiciled individuals It is important to consider, before you become resident in the UK, how to organise your investments accounts and business interests, so that you can access funds to cover your UK living expenses with a minimum tax cost and to enable you to keep track of the UK tax consequences of using different funds in the UK. If you become UK resident but remain not domiciled in the UK you can avoid UK tax on your offshore income and gains by ensuring that you only remit clean capital to the UK. Clean capital is capital that has not been mixed with any income or gains. Broadly, whenever an asset or money is brought to, enjoyed or used in the UK in any way this should be funded with clean capital. For these purposes, capital comprises monies gifted to, or inherited by, you and offshore income and gains which arose before you became UK resident. If you are coming to the UK for the first time, you will not generally be subject to UK tax on gains you realise, or non-uk source investment income which arises to you, before you become UK resident. You should, therefore, consider receiving non-uk source investment income or realising capital gains before coming to the UK. If you do not want to sell assets standing at a gain before coming to the UK you may still be able to re-base those assets before becoming resident. Use of offshore trusts If you remain non-uk domiciled there are UK tax advantages to establishing an offshore trust. Gains realised by the trustees of an offshore trust established and funded by someone who is, and remains, non-uk domiciled are not liable to UK capital gains tax in the hands of the trustees and are not chargeable to tax on the settlor. This applies to gains realised on the sale of UK assets (other than those used for a business in the UK) and applies regardless of whether or not the non-uk domiciled settlor is a remittance basis user. This means that UK capital gains tax on gains made within offshore trust structures can be deferred indefinitely. 10 Tax guide for individuals coming to the UK

13 Compliance The UK operates a self-assessment tax system. This means that the taxpayer has a legal obligation to determine his tax status, to report his taxable income and gains to HMRC and to pay the tax due. Tax returns must be submitted by 31 January after the end of the tax year to which they relate. Tax which is not deducted at source is due at the same time as the tax return. Tax due for the next tax year also has to be paid on account. If, following the submission of a tax return, it is discovered that additional tax is due, the tax must be paid together with interest from the time when the tax should have been paid and penalties may also be payable. Penalties are based on a percentage of the tax under-declared. The level of penalty depends on whether: the underpayment was careless, deliberate or deliberate and concealed ; the taxpayer informed HMRC of the underpayment or HMRC discovered the underpayment; the jurisdictions involved. The maximum penalty could be 200% of the additional tax due. If HMRC investigate an individual s tax affairs he will need to be able to prove that he has declared all his taxable income and gains and paid all tax due, going back up to 20 years. It is, therefore, essential to keep accurate and complete records. Non-UK domiciled individuals will often have a higher profile than other taxpayers and there may be an increased risk of an enquiry. A claim for the remittance basis must be made through your self-assessment tax return. If you remain not domiciled in the UK and claim the remittance basis of taxation it is not necessary for you to declare your worldwide income and gains to HMRC. 11 Tax guide for individuals coming to the UK

14 Getting in touch If you would like to talk through your project or discuss solutions to your legal needs, please contact: London Adelaide House, London Bridge London EC4R 9HA, England Jonathan Kropman Tel: +44 (0) About BLP Today s world demands clear, pragmatic legal advice that is grounded in commercial objectives. Our clients benefit not just from our excellence in technical quality, but also from our close understanding of the business realities and imperatives that they face. Our achievements for clients are made possible by brilliant people. Prized for their legal talent and commercial focus, BLP lawyers are renowned for being personally committed to clients success. Our approach has seen us win five Law Firm of the Year awards and three FT Innovative Lawyer awards. With experience in over 70 legal disciplines and 130 countries, you will get the expertise, business insight and value-added thinking you need, wherever you need it. Expertise Charities and not-for profit Commercial Competition, EU and Trade Construction Corporate Finance Dispute Resolution Employment, Pensions and Incentives Finance Funds and Financial Services Intellectual Property Private Client Projects Real Estate Regulatory and Compliance Restructuring and Insolvency Tax Clients and work in 130 countries, delivered via offices in: Abu Dhabi, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, London, Moscow, Paris and Singapore. 1 Tax guide for individuals coming to the UK

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