UK: UK Tax Residence - Planning Opportunities, Case Studies And How To Get It Right

Last Updated: 14 March 2016
Article by Paul Webb

Major reforms regarding how UK tax resident, non-UK domiciliaries ("non-doms") are to be taxed will be implemented from April 2017.

The changes will impact on individuals who have been tax resident in the UK for 15 years or more.

The Attractive Remittance Basis of Taxation will Continue for Many Non-UK Domiciliaries

The availability of the remittance basis of taxation for non-UK domiciled individuals who have been resident in the UK for fewer than 15 years will continue. The availability of the remittance basis allows for some interesting tax planning opportunities.

The New "15 year" Rule and Implications Regarding Income Tax and Capital Gains Tax

The current position for UK tax resident, non-domiciled individuals is that they can elect to pay UK income and capital gains tax on foreign source income and gains only to the extent that those monies are remitted to the UK. If the monies are not remitted to the UK, no UK income or capital gains tax is payable.

Since 2008, individuals resident for 7 years or more have had to pay an annual charge for the use of the remittance basis.  As long as the annual charge has been paid, the remittance basis has remained available.

  • It is now proposed that, from April 2017, anyone who has been tax resident in the UK for 15 of the previous 20 tax years will become "deemed domiciled" for tax purposes.  This will mean that these non-dom individuals will no longer have the option to use the remittance basis of taxation and will be taxed on a worldwide basis.

For income and capital gains tax purposes it is therefore important to consider planning opportunities prior to April 2017.

Deemed Domiciled – the Concept and Inheritance Tax

For inheritance tax purposes, a similar "deemed domiciled" rule already exists. The current rule is that an individual becomes deemed domiciled for inheritance tax once tax resident in the UK for 17 of the previous 20 tax years.

From April 2017 there will also be an impact on the inheritance tax payable on  estates.  Deemed domiciled will be triggered, as above, by being tax resident in the UK for 15 of the previous 20 tax years and the full worldwide estate of a deemed domiciled individual will be subject to UK inheritance tax. In contrast only the assets of a UK non-dom's estate situated in the UK will be subject to UK inheritance tax at 40%, for the first 15 years of UK tax residence. 

The concept of "deemed domiciled" for tax purposes therefore already exists, and anyone triggering the current inheritance tax potential liability or the changes to the rules coming into force in April 2017, should definitely consider inheritance tax planning opportunities as soon as possible.

UK Tax Residence and the Possibility of "Resetting" the Clock

The proposed new "deemed domiciled" 15 year rule is based on the tax residence of the individual non-dom.  Individuals should consider their tax residence position and endeavour to spend less time in the UK to terminate their UK tax residence status and to thereby potentially avoid becoming deemed domiciled, if they wish to do so.

As detailed above, the proposed rule is that an individual will be deemed domiciled in the UK if tax resident in the UK for 15 of the previous 20 tax years.  Through appropriate planning, ceasing to be UK tax resident for 6 years will mean that  individuals will lose their deemed domiciled status.  Should they then wish to return to being a UK tax resident, they will have reset the year count for the deemed domiciled test.

Additional detail regarding the factors affecting UK resident and non resident status can be found in the following Dixcart Article: The UK Resident/Non Resident Test.

TAX PLANNING OPPORTUNITIES

Individuals Seeking to Lose their UK Tax Residence for the Requisite 6 Year Period

A Planning Example

Mr and Mrs Taxpayer spend between 125 and 140 days per year in the UK and have done so for 14 years (all of which they have been UK tax resident).  While in the UK they stay in an apartment they own in London.  For the rest of the year they mainly live in Spain.  They are non-doms for UK tax purposes.  They do not have children.

Mrs Taxpayer is a consultant and spends the equivalent of one day per week (i.e. 52 working days) providing consultancy services to UK based clients while they are in the UK.

UK tax residency considerations will take into account the following factors:

  • Mr and Mrs Taxpayer currently spend more than 120 days in the UK per year;
  • Each spouse is UK tax resident;
  • They have both spent more than 90 days in the UK in the previous 2 tax years;
  • They have an apartment available to them while they are in the UK; and
  • Mrs Taxpayer works in the UK for more than 40 days per year.

Mr Taxpayer is UK tax resident and has 3 connecting factors. Mrs Taxpayer is UK resident and has 4 connecting factors.

They both realise that under the new "deemed domiciled" rule, from April 2017 they will be taxed in the UK on a worldwide basis and similarly will be subject to UK inheritance tax on a worldwide basis.  This would be a significant cost to them and they would therefore like to reconsider their UK tax residence position.

They would both, however, still like to spend time in the UK, particularly Mrs Taxpayer who does not intend to cease her UK consulting work.

To cease their UK tax residence, both their day count in the UK and their "connecting factors" as specified in the UK Resident/Non Resident Test need to be considered.

Question - Is it possible to maintain the same day count?

Answer – If they wish to retain the same day count in the UK, they would both need to remove all connecting factors.  This is not possible as they have already triggered the connecting factor of more than 90 days in the previous 2 tax years.  It is therefore not possible to maintain this day count.

Question – if all connecting factors are retained, how many days would they need to drop their day count to?

Answer – Mr Taxpayer would need to reduce his day count to below 90 days.  Mrs Taxpayer to below 46 days (which would prevent her from working her current number of days in the UK).  It is worth noting that if they drop to this level, after 2 years, they will no longer trigger the "90 day" connecting factor and after 3 years they will be considered to be "arrivers" so additional planning options might be available at this time.

Question – how many days can they spend in the UK each year?

Answer – the connecting factors and their status as "arrivers" or "leavers" will change over the years and therefore each year will need to be considered separately.  If they are not prepared to sell the apartment, and/or for Mrs Taxpayer to stop working as many days while in the UK; the table below shows the maximum number of days they could spend in the UK and at the same time lose their tax residence status for the requisite 6 year period (assuming Mrs Taxpayer works all the days she is in the UK for the first 2 years).

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Mrs Taxpayer

45

45

90

90

90

90

Mr Taxpayer

90

90

120

120

120

12 

Question – how would their day count change if Mrs Taxpayer ceased working in the UK?

Answer – this would mean she would lose one of her connecting factors.  Their day count would therefore mirror each other's:

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Mrs Taxpayer

90

90

120

120

120

120

Mr Taxpayer

90

90

120

120

120

120 

Question – if Mrs Taxpayer does not want to reduce the number of days she works in the UK  but they sold their apartment and stayed in a hotel while in the UK, would this change their position?

Answer – yes, as long as care was taken to ensure that this placed them in a position to avoid the accommodation connecting factor, they would both have lost one of their connecting factors:

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Mrs Taxpayer

90

90

120

120

120

120

Mr Taxpayer

120

120

120

182

182

182

The Positive Effects of Tax Planning

The example of Mr and Mrs Taxpayer illustrates the complexities of the statutory residence test and how, for a married couple, joint planning is crucial. 

It also highlights how a single change (in this example, Mrs Taxpayer not working in the UK, or the apartment being sold) might mean that their UK day count need not change significantly for them to become non-UK tax resident for the requisite 6 years. 

  • At the end of this 6 year period they would be able to return to being UK tax resident and would not become deemed domiciled for a further 15 years. This would mean that they would therefore not be taxed on a worldwide basis for this additional 15 year period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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