FACT: Expatriates may continue to be subject to U.K. tax even if they have been non-U.K. resident for a number of years.
FACT: HMRC are slowly widening the U.K. tax net to catch expats.
FACT: In particular, expats will soon have to pay capital gains tax when they sell U.K. property.
There have been a large number of changes to the taxation of expats over the last couple of years. I have summarized these below.
Statutory residence test
What do the numbers 16, 21, 30, 31, 40, 45, 60, 90, 91, 120 and 183 have in common? They are all specific day count tests within the statutory residence test that was introduced with effect from April 6, 2013. While the new statutory rules provide some increased certainty from the old position, there are a number of traps and pitfalls, and it is easy to make mistakes and become accidentally U.K. tax resident with devastating tax implications.
Many expats will be relying on the full-time work abroad test to be automatically non-U.K. resident, which requires you to spend fewer than 91 days in the U.K. in the tax year and “work” in the U.K. on fewer than 31 days.
Remember a work day is one where more than three hours of work is carried out, and “work” is broadly interpreted and means any activities carried out in the performance of your duties or, if self employed, the activities you carry on in the course of your trade, profession or vocation.
If the full time test is not satisfied, it might be necessary to turn to the “sufficient ties” test. If this is the case, then the number of days you can spend in the U.K. without becoming U.K. tax resident will turn on the number of ties you have to the U.K.
The relevant ties are family, accommodation, work, the 90-day tie and, in some circumstances, a country tie. Each tie has a number of rules that must be met. For expats who send their kids to school in the U.K., it is possible to have the family tie, and if you retain a property in the U.K., the accommodation tie too
Great care is needed, and remember 90 days is not always the key number.
For U.K. expats to gain maximum tax benefits from being offshore, it is vital to lose your U.K. domicile of origin. You can do this by acquiring a Cayman domicile of choice. This requires you to form the intention to remain in Cayman permanently or indefinitely.
There have been a couple of recent cases where the courts have reinforced the need for there to be clear and cogent evidence of a change, as a domicile of origin has a tenacious hold. I recommend to any expat looking to lose his or her U.K. domicile to put together a formal domicile statement – essentially a life history but drawing on salient points that HMRC consider important in determining domicile status.
To acquire a Cayman domicile, it is vital to establish strong Cayman ties and lose U.K. ties. There are a range of factors and no one factor is conclusive, and every individual has different circumstances. It really does turn on the facts of the individual case, and specific advice is required.
There is a proposal that expats will lose the income tax personal allowance. While in the scheme of things this is a relatively small change, it does signal an increasing restriction on tax benefits for expats. There have also been a number of successful HMRC challenges on income tax avoidance schemes. Employee benefit trusts, which were popular, have now been widely attacked by HMRC, and the use of so-called “split contracts” have been curtailed in most circumstances.
Capital gains tax
This was the headline grabber last year and remains so. Expats will pay capital gains tax if they sell U.K. property. To date, non-U.K. residents did not have a capital gains tax liability on any U.K. assets, subject to temporary non-residence rules if out of the U.K. for less than five tax years.
That will change from April 6, 2015. From that date, if a non-U.K. resident sells a U.K. residential property, there is a potential tax liability. The rules are only in draft form, but it looks like it is only the gain which is realized post the April 6, 2015, value of the property which will be exposed to tax.
This will be a huge relief to those owning properties in the U.K. where there has been a significant increase in value. There are also going to be new restrictions on claiming principal private residence relief.
These rules follow on from the rules introduced in April 2013 which imposed a capital gains tax charge on companies owning U.K. residential property. Companies are also exposed to an annual tax charge, called ATED, on properties more than 1 million pounds, reduced from 2 million pounds with effect from April 1, 2015, and an increased 15 percent rate of stamp duty land tax (SDLT) on properties purchased at a price in excess of 500,000 pounds.
There were surprise changes to SDLT in the December 2014 Pre-Budget Report. There is now a graduated scale, which means that for properties purchased at a price exceeding 937,000 pounds there is an increase in SDLT; for properties purchased at a price below this there is either a reduction in SDLT or it has remained the same. It does mean that the SDLT on higher value properties has increased significantly. On a 5 million pound property purchased by a non-corporate buyer, this has increased from 350,000 pounds to 513,750 pounds.
This is the tax that potentially catches expats even if long term non-U.K. residents. The key here is to lose your UK domicile (see above) but even if that is achieved then directly held U.K. assets are still potentially exposed. Holding assets through an offshore company may not be the solution, certainly for higher value residential property.
Using debt to reduce the net value of U.K. assets may work but, again, there have been significant changes and a tightening of the rules. Remember also that assets passing from a U.K. domiciled spouse to a non-U.K. domiciled spouse do not qualify for an unlimited spouse exemption – this is restricted to 325,000 pounds only.
A number of my U.K. expat clients have a spouse who is domiciled in another jurisdiction – Ireland, Canada, U.S., New Zealand, to name a few. This issue is very relevant to those mixed domicile spouses, but there is positive planning that can be undertaken. Remember also to take into account the local rules in that other jurisdiction, especially if it is the U.S., which has a worldwide basis of taxation.
Trusts remain an excellent way to achieve asset protection from future creditors, divorce and disgruntled beneficiaries, and may also have some tax advantages. Care is needed especially if a U.K. domicile has been retained as there can be an immediate inheritance tax charge. Cayman STAR trusts offer a very flexible way to hold assets.
Tax rules change all the time. There is a concerted effort by HMRC to target the wealthy both in, and now outside of the U.K. With increased tax information reporting worldwide, it is vital to be fully tax compliant and up to speed with the rules that impact.
While living in Cayman might be free of direct taxes, there may well be other taxes that impact in other jurisdictions. But with careful planning, it is still possible to reduce or even extinguish any exposure. Of course, an article on these issues merely brushes the surface, so if you have any concerns advice should be sought.
Marcus Parker is a partner with law firm Forbes Hare in Cayman.