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HMRC is continuing to take an aggressive stance regarding residence issues, both for those who wish to lose their UK residence tax status and those who come to the UK to work temporarily.
One appeal, in which a final decision was given in January 2011, concerned a taxpayer who had carefully followed HMRC guidance as it stood at the time in order to be non- UK resident. HMRC claimed that there was an implied rule in the guidance (albeit not expressly stated anywhere in it) that a distinct break must be made with the UK and he had not complied with this rule. Therefore HMRC claimed that he remained UK resident. The taxpayer took the case on appeal to the Special Commissioners (lost), to the High Court (lost), to the Court of Appeal who referred it back to the Tax Tribunal for final decision. The Tribunal ultimately decided that the tax payer was in fact UK resident.
Much the same story is to be found in the somewhat notorious case of Gaines-Cooper which has been widely reported in the national press. Mr Gaines-Cooper also carefully followed all HMRC guidance and yet the case has gone through countless appeals, all of which to date have been lost. There will be a final hearing in the Supreme Court in June this year.
HMRC now state that its publications on this subject are not guidance at all, which leaves the tax payer in a somewhat invidious position.
The reason for the harsh approach being taken to this matter is that being non-resident in the UK is one of the obvious ways of reducing or even escaping completely UK tax liability. A famous musician took up residence abroad in the 1970s for one fiscal year only in order to escape tax liability on foreign royalties and he won his case in the High Court where it was held that residence abroad for a carefully chosen limited period of time is nonetheless residence abroad for that period even though there may have been tax avoidance motives. HMRC still accept the validity of this decision although they will not apply it where a person keeps a home in the UK and just takes a holiday outside the UK for one tax year.
The benefits of non residence for income tax
Those who are non UK resident for tax purposes have no liability to tax on foreign sources of income and they also benefit from an upper limit on UK tax liability in respect of UK sources of income, this limit being framed in rather complex terms. The broad effect of the limitation is that, although no personal allowances will be given, the significant benefit applies that there can be no liability to UK tax on certain UK income sources. These sources are bank interest, dividends from UK companies and authorised unit trusts, the UK state pension, occupational pensions and annuities paid under an approved retirement annuity contract. Note that this list does not include pensions from personal pension schemes and SIPPs.
Once the above mentioned UK sources of income have been identified, they are also disregarded in calculating the UK tax liability on any other sources of UK income, for example rents. This will help to reduce the tax due on such other UK source income.
It should be noted that becoming non resident will not succeed in avoiding tax liability on the exercise of unapproved share options granted whilst resident in the UK.
If a person has UK rental income and is going abroad to live, he or she should register with HMRC for the non-resident landlord’s scheme.
The basic rules
Under United Kingdom law, an individual is regarded as resident in the United Kingdom if either:
he or she is in this country for 183 days or more in any fiscal year, or
(b) his or her visits to the United Kingdom are, on average, in excess of 91 days in each fiscal year, over any 4 year period.
In counting the number of days of presence in the United Kingdom, a day in which the taxpayer is in the country at midnight is to be counted as a day of presence here. If the taxpayer is not in the country at midnight this will be treated as a day on which the taxpayer was not present in this country. Visits for exceptional circumstances, such as illness of taxpayer or immediate family, may by concession be disregarded.
Leaving the United Kingdom
Because of the tax advantages to be gained by becoming non-resident, in recent years it has become apparent that HM Revenue and Customs (HMRC) have been seeking to reduce such opportunities. People commonly wish to retain some links with the United Kingdom after moving abroad and may make frequent return visits, retaining a property here for personal use. This is exactly the kind of scenario which HMRC are now likely to attack.
However they will not do so in situations where a person goes abroad under a contract of full time employment overseas which will last for at least one complete fiscal year with return visits to the UK under the day count limits set out above. So long as HMRC is satisfied that the employment is genuine and is full time overseas, it will not normally dispute non-resident status in such cases. This is therefore the safest route to acquiring non resident status.
Those not going overseas in connection with work will find it much more difficult to satisfy HMRC as to their future intentions. They will need to demonstrate at the very least that there has been a complete break with the United Kingdom, and return visits to the UK should be minimised and should certainly not be close to the 91 day maximum. As to what constitutes a distinct break, HMRC’s booklet on the subject lists various matters which will indicate a “tie to the UK” and therefore no distinct break. These pointers are:
(a) spouse, partner, children or other family members remaining in the UK;
(b) membership of UK clubs and societies that you regularly attend;
(c) continuing UK directorships or employment, or regular employment duties in the UK;
(d) a UK house or apartment available for use; and
(e) regular business meetings in the UK.
Residence status is, under UK law, determined for each fiscal year only but, by concession, HMRC may agree to split the tax year for income tax purposes (but not for capital gains tax purposes) into a period of residence and a period of non-residence where the taxpayer leaves the country on a permanent basis, or conversely where someone who has always lived overseas comes to this country on a permanent basis for the first time. This concession will not be given where HMRC considers that the taxpayer is attempting to use it to gain an unfair tax advantage, and it principally applies only to tax liabilities on foreign sources of income..
Impact of Double Tax Agreements
The United Kingdom has a significant number of double tax agreements with overseas countries, the purpose of which is to ensure that either certain sources of income or profits are taxed in only one country, and not both the UK and the foreign country or, alternatively, if they are taxed in both then the country in which the tax payer has the closest connections gives a credit against its own tax charge for the tax payable in the other territory.
One way of solving the tax problems of acquiring non-UK residence status is therefore to take up residence in a country overseas which has a suitable double tax treaty with the UK. Treaties will normally give primary taxing rights to the territory in which an individual is most closely connected for the particular fiscal year. If a person is spending less than 91 days in the United Kingdom and has his main assets and interests in the overseas country, a suitable treaty should ensure that it prevents HMRC from claiming that the individual is still UK resident.
The capital gains 5-year rule
There is an anti-avoidance rule that applies in relation to capital gains of those who take up residence abroad. Those who leave the United Kingdom and dispose of assets whilst temporarily non-resident, thereby realising gains that would otherwise have been chargeable, will have tax liability on those gains on their return to the United Kingdom if their period of non-residence extends to less than 5 complete fiscal years. This rule does not apply to assets which the temporary non-resident acquires and disposes of during the non-resident period, but it does operate to reduce considerably the opportunities for avoiding capital gains tax on assets prior to taking up residence overseas.
There is, however, no similar rule in relation to income, so that with careful advice it is possible to ensure that certain income receipts (for example, dividends from a family company) are received during a fiscal year when the taxpayer is non-resident and there may then be no liability at all for certain types of income.
UK duties under foreign employment
The case first mentioned at the beginning of this memorandum concerned a British Airways pilot who lived for many years near Gatwick airport but in 1997 decided to move to South Africa. However he retained his house near Gatwick because his flight schedules would continue to require overnight stays in the UK. His days of presence in the UK after the move were under 91 days per annum, ignoring days of arrival and departure. HMRC presented a different calculation to include those days (thus ignoring their own published guidance on the point) and this showed a UK day count in excess of 91 days per annum. It was held that he remained UK resident after 1997.
HMRC pointed out in their evidence that the pilot remained on the electoral role at Horley near Gatwick and had his post sent to his UK address. He was also registered with a dentist local to the UK address, and had girlfriends in the UK. It will be apparent therefore that HMRC may intrusively examine all the details of one’s lifestyle when it is claimed that non resident status has been acquired.
HMRC now say that they will accept up to 9 working days in the UK as not having any impact on a person’s non resident status.
Those coming to live in the United Kingdom
Ideally foreigners who plan to come to the United Kingdom to live and also returning expatriates should take tax advice before becoming resident here. In particular, any capital gains which are realised by the disposal of assets once resident in the United Kingdom will be fully liable to tax in this country, even though the gain may have mostly accrued during the period of non-residence. It can therefore be advisable in suitable cases to ensure that an asset has a new market value base cost shortly before becoming resident; this may be achieved by selling it and reacquiring it, in which event all the normal capital gains tax rules will need to be carefully followed to ensure that the reacquisition is effective to establish a new base cost – we can advise you further in this regard. Alternatively, it may be appropriate to transfer assets to a short term trust with the funds automatically reverting to the person making the trust after a period of, say, 6 or 12 months. Detailed advice is essential with such arrangements.
Taxpayers who are not domiciled in the United Kingdom and who come here to take up residence will also need considerable guidance concerning the remittance basis rules which apply in the United Kingdom. These rules enable foreign income and gains to escape liability to UK taxation if they are not brought into this country. However, after 7 years of residence in the UK, the remittance basis rules may only be applied if the taxpayer makes a payment of £30,000 for the fiscal year concerned to HM Revenue and Customs. The Finance Act 2008 contains very detailed and complex rules concerning the remittance basis and it is vital that those seeking to take advantage of the tax saving opportunities in this area should take specialist advice on the matter, preferably before becoming UK resident but otherwise as soon as possible afterwards. Significant tax savings can be achieved by putting appropriate offshore structures in place.
The residence of trusts is governed by the residence status of the individual trustees acting. Normally one will ensure that all the trustees are resident abroad, thus making the trust itself non-resident. It will then be liable to UK taxation in respect of UK sources of income only.
At one time, non-resident trusts were widely used as tax-avoidance vehicles for UK residents, particularly in relation to anticipated capital gains. Now, virtually all the opportunities for using such trusts to avoid UK tax have now been swept away. One of the few remaining areas in which UK tax can be saved is in relation to a non-resident trust which invests in property or other types of investments overseas. If the trust accumulates the income on these investments and neither the settlor nor his or her spouse are beneficiaries under the trust, the foreign income can be received by the trustees free of United Kingdom tax liability. In that event UK taxation will only apply at such time as benefits or distributions to UK beneficiaries are made by the trustees.
Next year the Government plans to introduce a statutory rule to set out the tests for residence and non residence. Whilst this should sweep away much of the uncertainty around the topic, it seems unlikely that any new rule will be less stringent than current HMRC practice.
Current proposals are under consultation at present and therefore advice should be sought in the first instance as to how these may impact on tax status.
FOR GENERAL INFORMATION ONLY
Please note that this Memorandum is not intended to give specific technical advice and it should not be construed as doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic.
Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
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