Relocating from the UK to a low tax jurisdiction, such as Cyprus or the United Arab Emirates (UAE), can offer many potential benefits for business owners and entrepreneurs, including lower tax rates, access to new markets and enhanced privacy, writes Peter Fenyves, a consultant with London-based Sovereign (UK) Ltd.
Selling your business after relocating can also offer significant tax savings and other advantages, but there are a number of rules that need to be considered, such as the UK Statutory Residence Test (SRT), the temporary non-residence anti-avoidance rules, group relief on restructuring transactions and corporate tax exit charges.
This article will explore such considerations and their potential impact for individuals and businesses that might be considering such a move.
Low tax jurisdictions
Many low tax jurisdictions are in regions enjoying a high quality of life, including favourable climates, beautiful scenery, and access to desirable recreational activities. This can be an attractive benefit for those considering a move.
To use Cyprus and the United Arab Emirates (UAE) as two examples, the corporate tax rate in the former is 12.5%, which is significantly lower than the UK's corporate tax rate of 25% and as far as the latter is concerned, most businesses operating in the UAE are not subject to local corporate tax.
Moving to a low tax jurisdiction may offer increased privacy, as these countries often have less stringent reporting requirements and may provide more robust asset protection measures.
Finally, relocating a business to a different jurisdiction can provide access to new markets and potential customers, as well as create opportunities for diversification and growth.
Advantages of selling a business after
Selling a business after relocating to a low tax jurisdiction can result in tax savings on the sale proceeds, because the capital gains tax (CGT) rates in the new country may be lower than in the UK. Many jurisdictions, including Cyprus, Malta, Switzerland and Singapore, relieve residents from CGT altogether.
Selling a business after relocating may simplify the exit strategy for business owners because they can focus on their new location and avoid the complexities of managing a cross-border transaction.
UK Statutory Residence Test
Individuals planning to move from the UK to a new country need to understand the UK's Statutory Residence Test (SRT), which determines an individual's tax residency status. If you spend 183 days or more in the UK in a tax year you will be resident in the UK for that year in almost all cases. But even if you spend fewer than 183 days in the UK in a tax year, it is still possible to be considered resident in the UK.
To determine your residence status under the SRT, it is first necessary to consider whether you meet any of the 'automatic overseas tests'. If you do not, you must then consider whether you meet any of the 'automatic UK tests'. If you do not meet any of the automatic overseas tests or automatic UK tests, you will have to look at the 'sufficient ties test' to determine your tax residence position.
Automatic overseas tests
If you meet any of the automatic overseas tests, you are automatically non-resident for the tax year. The three main automatic overseas tests are as follows:
- You were resident in the UK in one or more of the three previous tax years, and you spend fewer than 16 days in the UK in the tax year under consideration.
- You were resident in the UK for none of the previous three tax years, and you spend fewer than 46 days in the UK in the tax year under consideration.
- You work full-time overseas for the tax year under consideration with no 'significant break', you spend fewer than 91 days in the UK in the tax year, and you work for more than three hours in the UK on fewer than 31 days in the tax year.
Automatic UK tests
If you meet any of the automatic UK tests (and do not meet any of the automatic overseas tests), you are automatically resident in the UK for the tax year. The three main automatic UK tests are as follows:
- You spend 183 days or more in the UK in the tax year under consideration.
- You have a home in the UK for a period of more than 90 days and you are present in the home on at least 30 separate days.
- You work full-time in the UK for 365 days or more with no significant break from UK work. The generally covers two or more tax years because the 365-day period will typically straddle two years.
Sufficient ties test
If you do not meet any of the automatic overseas tests or automatic UK tests for a tax year, you will need to use the sufficient ties test to determine your tax residence status for the tax year. The ties that you must consider differ slightly depending on whether you were resident in the UK for one or more of the preceding three tax years, but are generally as follows:
- Family tie
- Accommodation tie
- Work tie
- 90-day tie
- Country tie (only if you were resident in one or more of the previous three tax years).
Proper planning is essential to ensure that an individual has genuinely become non-resident for UK tax purposes after relocating.
Temporary Non-Residence Anti-Avoidance
The Temporary Non-Residence (TNR) anti-avoidance rules are designed to prevent a formerly UK-resident individual taxpayer from taking advantage of a short period of non-residence to realise income or capital gains – typically in the context of close company distributions, chargeable event gains and lump sum pension distributions – outside the UK to avoid UK taxation on the receipt.
The TNR rules apply if the taxpayer has been UK-resident in at least four of the seven years prior to the date of departure from the UK and becomes UK-resident again within five years of that date. It is essential to be aware of these rules and their potential impact when planning a move.
Group Relief on Restructuring
When considering the relocation of a business or group of companies, it is important to be aware of the potential implications of group relief on restructuring transactions. Group relief is a mechanism that allows UK companies within the same group to offset losses against the profits of other group members. If a restructuring transaction takes place as part of a relocation, the availability of group relief can be affected. Careful planning is therefore necessary to ensure that tax efficiency is maintained during the restructuring process.
Corporate Tax Exit Charges
Companies moving their tax residence from the UK to another jurisdiction may face corporate tax exit charges. When a company ceases to be a UK tax-resident, it may be subject to a variety of exit charges that look to capture:
- Any gains accrued on capital assets whilst the company was resident in the UK.
- Any profit arising on disposal at a market value at the time of exit of intangible fixed assets, financial loan relationships and derivative contracts.
- If the company is trading, it will be treated as ceasing to trade when it ceases to be UK tax resident and will be required to take into account the value of its trading stock, at its market value, when calculating the profits of the trade.
These charges apply to companies that cease to be UK tax resident while still holding chargeable assets. If a company moves its central management and control to a jurisdiction like the UAE, it may be subject to these exit charges.
Exit Taxes for UK Residents
Although the UK imposes no general or limited exit taxes on individuals who are emigrating, an individual will continue to be liable to Income Tax and CGT for the remainder of the year of assessment in which he/she emigrates.
There is one significant exception: the 're-entry charge' by which an individual who emigrates and spends less than five years of assessment outside the UK, and who then returns to the UK, is liable to CGT on disposals of assets made during the interim years when he/she was not resident. The liability arises in the year of return. This provision extends UK CGT to former residents who emigrate and spend less than five years of assessment outside the UK.
Relocating from the UK to a low tax jurisdiction can offer numerous potential benefits but can also impact on all areas of financial planning, including but not limited to:
- Assets subject to Capital Gains Tax
- Assets subject to Income tax
- Investment portfolios
- State benefits
- Pension plans
- Private Residence
- Inheritance Tax (IHT) planning and Wills
Proper planning and consultation with tax professionals can help minimise all potential exit tax liabilities.
How Sovereign can assist with relocation
Sovereign is a global corporate and trust services provider, which can assist with establishing structures to facilitate relocation, market entry and business exits. It is essential, however, that any action should only be undertaken in conjunction with independent tax advice from professional advisors. Sovereign is well-equipped to collaborate with professional advisors to ensure a smooth transition for individuals and businesses contemplating such a move, regardless of the intended country of relocation.
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.