Tales of the unexpected : UK tax where you didn’t think you would find it….
We have seen several examples recently of overseas individuals discovering that they have a UK tax problem, even if they have never visited that country. Lisa Spearman is a partner with Mercer & Hole, a top 40 UK firm and founder member of TIAG. Lisa sets out some signposts to watch out for which could indicate that UK tax could be an issue.
You might not think that UK tax is relevant to you but some recent examples have highlighted that increasingly stringent and aggressive tax rules in the UK have extended its reach way outside our borders and individuals from overseas need to consider whether they could be affected. There are three main taxes in the UK: income tax (IT), capital gains tax (CGT) and Inheritance tax (IHT) and I will look at each in turn together with some more general observations.
The UK taxes its residents on worldwide income and gains (unless they can use the so-called remittance basis of which more later) and non-residents on UK source income. Clearly not even the UK wishes to deter inward investment so there are some exemptions for non-residents who receive only dividends and interest. However if you have any rental income or trading income from the UK, you should make sure that it is fully returned in both countries and that the relevant claims are made under a Double Tax Treaty, if it exists, to minimise any double counting. You should be aware that the basis of taxation can be different from country to country and combined with currency differentials it is not always a perfect system.
Capital Gains Tax
Generally non UK residents are not within the scope of UK tax but there are two important exceptions. The first is that if you have previously lived in the UK and are overseas for less than 5 tax years (a tax year ends on 5 April), any profits that you realise in the overseas period can be taxed on your return to the UK so it is worth keeping the records. Bear in mind that the UK calculates profit or loss in sterling so with recent currency movements some unexpected results can occur.
The second area of concern is that since 2013 for companies and 2015 for individuals, any non UK resident who disposes of residential property must make a tax return within 30 days of the disposal and, if they have made a sterling profit, must pay CGT at 28%. The good news is that the cost basis applies from the dates on which the charge was introduced rather than the actual base cost if acquisition was before then but you may need a local valuer to establish what that cost basis is and 30 days is not much time so forward planning is a good idea. The less good news is that from April 2019 we are expecting this regime to be extended to any sales of real property in the UK. HM Revenue & Customs – the British tax authority- is unsympathetic to the argument that a non-resident may not know about this charge or the need for a tax return (even if there is no gain) and penalties can be expensive.
IHT is our gifts and estate tax which is levied on any UK assets where the donor’s estate is more than £325,000. The rate of tax is 40% on death transfers and 20% on lifetime transfers. There is a relief for lifetime gifts between individuals if the donor survives the gift by 7 years and there are exemptions for certain business property and farmland but many people get caught out as the tax also applies on the creation of and during the lifetime of a trust. Often trusts in other jurisdictions or other vehicles such as foundations work a little differently to UK ones and it is crucial to seek advice – ideally beforehand - if you are thinking about transferring any UK property into a trust or if you are a trustee who holds UK property. For trusts, even if you have purchased the property or it is indebted in some way, if the value derives directly or indirectly from a UK asset then there can also be so-called periodic charges which are at 6% of the value of the assets on every tenth anniversary of the trust or where capital leaves the trust at other times. For example, if you have an Australian trust which owns shares in a company which owns UK real estate, there can be an IHT charge in the trust.
If an individual, anywhere in the world, dies owning UK property IHT is in point even if they have never set foot in the UK. It is worthwhile checking your investment portfolio for UK shares and considering, if the holding is more than £325,000 whether they can be given away during your lifetime or on your death, left to a spouse, or held in some other way to keep the UK IHT to the minimum.
Some other things to think about
The UK looks at the residence and domicile status of individuals in assessing their liability to tax. Residence is considered year by year using criteria set out in our statutory residence test. It is not just about day counts but looks at other connections to the UK such as available accommodation, working time and the location of family. Particularly bearing in mind that we count in years ended 5 April, if you make frequent trips to the UK and have some of these connections it may be worth having your residence status checked out.
Domicile is the long-term concept of where your permanent settled home is. People who are domiciled outside the United Kingdom have historically enjoyed a number of UK tax advantages. From a UK point of view every person is born with a domicile of origin which they inherit at birth usually from the father. A domicile of origin can be changed if connections with the original country are severed and a new permanent home is established. What you need to know is firstly, that the UK has recently limited the tax advantages so that they can only be used for 15 years. Secondly and most relevant here is that for tax purposes, the UK no longer recognises the change in domicile described if the individual resumes UK residence even for a relatively short time. Individuals who were born in the UK of then British parents are known as formerly domiciled residents and they can experience unexpected and expensive tax issues.
Say, for example, that Joe was born in the UK but his parents moved to Australia when he was two. They took citizenship and Joe is Australian for all purposes and he has never been back to the UK. However, he has, now aged 40, been offered a three year job in the UK. From the time he arrives in the UK Joe would be wholly taxable on his worldwide income and gains and subject to IHT on his worldwide estate during his residence and for at least four tax years after his departure. This is often an unexpected complication and Joe who not got United Kingdom focussed finances may need specific advice at an early stage. If you replace Australia with perhaps, United States, the problems can be magnified but the principle is true of any country in the world.
Naturally this article is only a brief summary of some quite detailed and complex law but I hope it is useful food for thought and if you do have any connection with the UK and would like to talk further please do contact me direct at firstname.lastname@example.org or visit our website at www.mercerhole.co.uk
Further specific advice on any matters referred to must be taken at all times. The information is given for general guidance only and publication is without responsibility for loss occasioned to any person acting or refraining from acting as a result of the information given.
Date: 19th October, 2018
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