Infinity, in partnership with international life insurance company, RL360, recently hosted a webinar regarding changes to UK tax legislation. Neil Chadwick, Head of Technical Services at RL360 gave some invaluable advice which we thought we’d pass on to readers of the blog.
Who is liable to pay tax in the UK?
This information concerns you if you:
- were born in the UK
- frequently visit the UK and have UK ties
- own UK residential property
- plan to live in the UK but were not born there
- were born in the UK and planned to return as a non-UK domicile
In this post we highlight some UK tax traps which commonly catch people out and can cost them dearly.
Tax trap 1: HMRC rules are constantly changing
A key – and often overlooked – point that Neil made was that tax legislation is constantly changing. HMRC are no longer required to restrict changes to budget time but can do it whenever they please, and even retrospectively.
As a result, we come across many clients whose tax planning is based on out-of-date legislation because they are unaware of changes even though these could often have a huge impact on their finances. That’s why it is imperative that if you fit into any of the categories listed above you review your situation frequently with a professional who is up-to-date with the latest legislation.
Tax trap 2: Don’t assume you are not liable for UK tax just because you only spend holidays in the UK
The first point to make is that a UK tax liability will arise for anyone who is deemed to be a UK resident and anyone who has a UK source of income or is in receipt of a UK capital gain. Some expats believe that if they only spend holidays in the UK they are not liable for tax there but that is not necessarily the case.
In some cases, expats only need to spend 16 days a year in the UK to qualify as a resident for UK tax purposes and be liable for income tax, capital gains and inheritance tax (IHT). See the information regarding the statutory residence test below.
Tax trap 3: Don’t rely on the 90 day rule – it doesn’t exist!
This rule is spoken about a lot in expat circles and we come across many clients who have based their financial planning on it however there is no 90 day rule and hasn’t been for some time. In fact, some experts argue that there never has been one as this was not a law but merely guidance referred to in IR20 and HMRC6.
Neil gave an example of two airline pilots who lived outside the UK but maintained a home in the UK to stay in while meeting CAA requirements of hours they needed to be in the UK during layovers. HMRC used this as justification that they never intended to definitively leave the UK and that they were still technically residents. This is just one example of many similar cases which went through the UK courts until eventually the courts demanded more clarity on the residence issue from HMRC which led to the introduction of a specific test in 2013.
Tax trap 4: Don’t assume you are non-resident just because you live abroad
The UK now has a three part statutory residence test which all expats should take to ensure that they correctly understand the rules and are clear on whether they are classed as UK residents or not. This can have a huge impact on their tax situation, as we will see later.
You’ll be non-UK resident for the tax year if:
- You were resident in the UK for one or more of the three previous tax years, and you spend fewer than 16 days in the UK in the tax year.
- You were not resident in the UK in all of the previous three tax years and present in the UK less than 45 days in the current tax year
- You leave the UK to carry out full-time work abroad unless you spend more than 90 days in any tax year in the UK or spend more than 30 days working in the UK. A working day is classed as three hours of work and this can be remote work.
Conversely, you will be classed as UK resident if:
- You spend 183 days or more in the UK in the tax year
- You have only one home and that home is in the UK (or have two or more homes and all of these are in the UK)
- You carry out full-time work in the UK
This ‘tiebreaker test’ looks at the days spent in the UK in each year along with connecting factors which include:
- Family (defined as spouse, civil partner, common law partner and minor children) resident in the UK
- Available accommodation in the UK
- Working in the UK for 40 days or more days per tax year (working 3 or more hours a day constitutes a working day)
- Spending 91 days or more in the UK in either of the last two tax years
- Spending more time in the UK than any other single country
The number of connecting factors required for you to be deemed UK resident depends on whether you are an ‘arriver’ or a ‘leaver’. This table clarifies the situation and illustrates the fact that the more days you spend in UK, the fewer connecting factors you need.
It’s really important that anyone with a complicated residence situation keeps evidence of arrivals and departures (boarding passes, hotel bookings etc) and doesn’t rely solely on day counting given the importance of connecting factors. If you are claiming non-residence, be aware of ‘everyday’ connections.
Tax trap 5: Using a correspondence address if you’re not resident
We mention this as it is something which has caught quite a few people out since the introduction of the OECD’s common reporting standard. Most jurisdictions around the world now participate in this financial information sharing scheme. If you have a correspondence address in a different country to where you live for any reason, for example if you don’t trust the postal system where you live) it will be assumed that it is your residential address unless you inform any financial institutions with whom you have an account. Make sure you do this to avoid any issues.
Tax trap 6: Don’t assume you are UK non-domiciled just because you live abroad
Whether you are UK domiciled or not on your death can hugely impact your UK tax liability including IHT. If you are UK domiciled you pay UK IHT on your worldwide estate whereas if you are UK non-domiciled IHT is payable only on assets in the UK. The difference can be significant as illustrated in the following table using a case study of an expat, John, currently non-UK domiciled but planning to return to the UK:
It’s therefore important to be absolutely clear on your domicile, and often expats aren’t.
What is domicile?
Domicile is different to residence. It can most easily be defined as the country with which individuals have the closest connections. Everyone has one, and only one, but it is not necessarily the same as residence, citizenship or nationality, although those things have an influence.
Many people assume they are not domiciled in the UK when this is not the case. If you were born in the UK then you maintain UK domicile of origin unless you actively acquire a domicile of choice and even then it can be challenged by HMRC, as was the case with the famous Barlow Clowes vs Henwood case which was extreme but illustrates a very real danger for those expats who acquire a domicile of choice but move around a lot. Each move will trigger a revival of UK domicile of origin which can have a huge impact as it will expose you not just to IHT but also to income tax and capital gains tax.
If you have tax planning in place it is important that you check that it relates to current legislation. We have come across clients with plans put in place to take advantage of old domicile rules which no longer apply, again highlighting the need for regular reviews on your tax planning.
Tax trap 7: If you have a non-UK domiciled spouse beware of IHT liability
In the UK, the IHT threshold is called the nil-rate band and set at £325,000 although between two UK domiciled spouses there is no limit on transfers upon death (or indeed during lifetimes). This is NOT the case if your spouse is non-UK domiciled and can mean a stark difference in tax due.
The maximum amount you can pass to a non-UK domiciled spouse is £650,000. Above that everything will be taxed at 40%. Non-domiciled spouses do have a get out of jail free card on this. They can apply to become UK domiciled after the death of a UK domiciled spouse if they do so within two years of the death. This will allow all assets to pass over free of IHT. The caveat is that if they die within four years their worldwide estate, not just the UK part, will be subject to UK IHT.
Tax trap 8: Beware of changes to CGT legislation regarding residential property in the UK
HMRC have been introducing a slow equalisation between residents and non-residents in terms of UK assets, focussing first on property. Recent changes to legislation mean that residential property in the UK is now subject to UK capital gains tax (CGT) irrespective of domicile.
In addition, HMRC has clamped down massively on tax avoidance in recent years and shielding ownership of assets via an offshore company is no longer possible. Often we get asked how HMRC will know about assets. Suffice to say the truth will out when a beneficiary wants to transfer property into their own name. The land registry will check with HMRC and if no IHT assessment has been carried out HMRC reserve the right to put a freeze on the transfer while investigation is carried out.
This is why we are now seeing a lot of de-enveloping. This means taking residential properties out of corporate ownership structures and putting them back into an individual’s name. The individual often takes out insurance based on potential IHT liability if they were to die while owning property.
Tax trap 9: Beware of deemed domicile for non-UK domiciled individuals
A non-UK domiciled individual who is resident 15 out of the last 20 years becomes deemed domcile and is treated as a UK domicile for IHT purposes. However, it is possible for them to keep non-UK assets outside the scope of the UK IHT system if certain planning opportunities are put in place before they meet the deemed domicile requirements.
In particular, excluded property trusts can mitigate against the vast majority of taxes. This is a legal, simple, straightforward structure which can wrap around a non-UK investment platform/product or an insurance product. Non-UK assets wrapped in excluded property trusts are ringfenced from IHT provided no changes are made once the individual becomes deemed domicile.
The main conclusion to draw from all these tax traps is that tax legislation is a shape-shifting beast and it is very easy for expats to get caught out because their tax planning was designed to take advantage of rules that don’t exist anymore. We can’t stress enough how important it is to revisit your existing planning on a regular basis, at least annually, to see if it still works.
If there are flaws in your tax planning due to changing laws, you may need to unwind it and replace it with something that won’t fall foul of HMRC or disclosure of tax avoidance schemes.
Another key takeaway from this blog post is to take professional advice from a qualified adviser who will be aware of traps that you may not. If you think that you may have an issue related to any of the tax traps outlined here, do feel free to get in touch.
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