November 5, 2018

Moving away? Know that tax is where the home is

Guidelines for HNWs planning to escape Brexit without losing grip on UK property, writes James Badcock

A combination of tax changes, Brexit and the possibility that a more socialist agenda may be pursued if there is a change of inhabitant in No 10 seems to be making the wealthier inhabitants of the British Isles skittish. After many years of one way traffic to the UK, a flow which continues, there is increasing talk of people moving in the other direction. Contrarily, while it is unclear which way a becalmed property market will move, UK real estate seems to have an enduring appeal as an amenity, long term investment and store of value. For those who are considering a move to foreign climes, whether temporary or long term, there are a number of tax issues to consider, particularly if you intend to retain an interest in UK property, whether residential or commercial.

Even though there has been a stark change in political and media views on the morality of tax planning, it is not yet illegal to leave the country. Also with the introduction of a statutory test of tax residence in April 2013, you can be much more certain about whether you have ceased to be tax resident in the UK. Historically there was no bright line test for what constituted UK tax residence. The introduction of detailed statutory rules has brought considerably greater clarity. Some ambiguities remain and there are areas of the rules which are extremely complex. This is coupled with the UK’s eccentric practice of having a tax year which runs not from 1 January, but 6 April. Advanced planning, attention to detail and careful record keeping are essential.

Even if you successfully become non-UK resident, the reach of the taxman is longer than you might think. Certain sources of UK income will remain taxable and this includes rental income. Since April 2015 (April 2013 in some cases), non-residents have been subject to capital gains tax on UK residential property, and a similar move is planned for commercial property from April 2019. The availability of principal private residence relief to non-residents has been curtailed. If you continue to carry out employment or business activities in the UK then associated income may be taxable. Those who only become resident for a temporary period (less than five years) should also take care – HMRC may be able to retrospectively tax income and gains when you return to the UK.

It is not just about residence. The UK still relies on the fuzzier concept of ‘domicile’ when determining tax liabilities. Domicile is best known in the context of ‘non-doms’, individuals who are resident but not domiciled in the UK and benefit from a beneficial tax regime. However domicile is also relevant to Brits going in the other direction (and indeed someone who has acquired a UK domicile through long residence).

Most significantly, if you are UK domiciled then even if you cease to be resident in the UK your worldwide assets may remain within the scope of UK inheritance tax. To lose your UK domicile you must settle somewhere else and intend to remain in that place permanently or indefinitely. Proving this is as difficult as it sounds and even then the tax legislation dictates that a UK domicile can only be lost for tax purposes after a number of years of non-UK residence.

Then, even for a non-resident and non-domiciled individual, most types of UK assets will remain within the scope of UK inheritance tax. The old method of owning UK residential property through a non-UK company is simply not effective anymore to shield that exposure.