Changes to the taxation of overseas visitors in recent years mean that a UK posting may not be as attractive as it once was but, with appropriate planning, internationally mobile individuals should still find the UK to be a “tax-friendly” jurisdiction.
In early December the British Chancellor, George Osborne, delivered his annual “Autumn Statement”, a sort of mini-tax budget, in which he reiterated his theme that “Britain is Open for Business” and announced yet another future reduction in the rate of corporation tax, this time to 21% in April 2014.
Pro-businesses tax changes under the Coalition government have been designed to lessen the tax burden on companies. They have successfully stopped the trend of UK PLCs moving offshore and in the case of the publishing company UBM and WPP, reported to be the world’s largest advertising company, even persuaded them to return to the UK after four years of tax exile in Ireland. The press and politicians have also applied moral pressure on international businesses to bring their UK-sourced profits onshore and to pay UK tax on a level commensurate with their UK business activities.
As a result, it is expected that as inward investment returns to Europe, the UK will prove to be a popular location in which to establish both trading and holding companies. But what of the executives and senior managers asked to work in the UK for the short or medium term, will the tax regime be as kind to them as it is to their employers?
Living in the UK
Individuals who are born and remain resident in the UK are liable to UK income tax on their worldwide income and UK capital gains tax on their capital gains wherever they arise. By contrast, individuals who move to the UK, whether for work or other reasons, may avoid paying UK tax on their non-UK income and gains if appropriate steps are taken to limit their UK tax liability.
The UK has developed a complicated set of tests to determine whether and to what extent foreign individuals who spend time in the UK may be subject to UK taxation.
Currently, individuals’ basic liability to UK direct taxation will depend on whether they are “resident” and/or “ordinarily resident” and/or “domiciled” in the UK, but these basic tests will be simplified from April 2013.
The “ordinary residence” test will be abolished and a statutory definition of “residence” for individuals will be introduced. At the moment, a person who spends at least 183 days in the UK in any tax year is taxed as resident in the UK and this will remain the same under the new statutory test. The benefit of the new test is that it should bring greater certainty to the treatment of individuals who do not meet the 183-day rule but are nevertheless treated as resident in the UK because of their personal or family connections.
The significance of a person’s domicile, and the tax planning opportunities which come with it, will be retained.
Maintenance of their foreign domicile is of particular importance to overseas individuals who become residents in the UK because, for a number of tax years, they may be entitled to avoid tax on their non-UK income and gains except to the extent that sums are remitted to the UK, the so-called “non-dom” treatment. In broad terms, a taxable remittance occurs when funds arising offshore are brought to, received or used in the UK.
However, after an extended period of UK tax residence, generally seven in nine tax years, an annual charge of £30,000 is payable in order to retain the benefits of non-dom treatment. If the charge is not paid for any tax year, individuals are subject to UK taxation on their worldwide income and gains for that year. With effect from April 6, 2012, the annual charge increased to £50,000 for “non-doms” who have been UK residents for 12 of the preceding 14 tax years.
After concerns had been raised that the system of annual charging effectively discourages non-doms from investing in CHADBOURNE & PARKE LLP CORPORATE PRACTICE NEWSWIRE DECEMBER 2012 19
UK business, the government announced the introduction of a non-dom new business investment relief with effect from April 2012.
Broadly, a non-dom may remit funds to the UK without being taxed to the extent that, within 45 days, the funds are used to subscribe for new shares in, or to make a loan to, a qualifying company. The main qualifying companies are likely to be those which carry on a commercial trade with a view to profit where that is “all or substantially” all the company does. A new company may meet the requirements if the trade is commenced within two years of the investment being made.
Buying a Home in the UK
Until recently anyone going to work in the UK for an extended period would have been well advised to buy, rather than rent, a home. UK residential property was almost guaranteed to increase in value over the medium term and UK taxes on acquisition and eventual sale could be legally avoided without too much difficulty.
A non-UK individual who buys a home in the UK can usually avoid paying capital gains tax on the increase in value when it is eventually sold and this “loophole” is not affected by the proposed tax changes. However, property owners who have become residents in the UK will have to delay the sale until after they leave in order to avoid the charge.
Changes are proposed which will affect existing and prospective indirect ownership structures which until now have proved a popular method for non-UK owners to minimize UK property transfer charges.
Anyone who buys UK real estate usually has to pay stamp duty land tax at the time of purchase. Duty is charged on the property price according to a sliding scale with rates of 4, 5 or, even 7% commonly payable. By contrast, stamp duty on the purchase of shares in a UK company is charged at just 0.5%, whilst the shares in many non-UK companies may be sold without duty of any kind.
In recent years, and chiefly as a reaction to these differences in transfer duties, the ownership of many high value residential properties in fashionable parts of London and beyond has been transferred into single purpose companies. Besides saving stamp taxes, the use of offshore vehicles also increased the planning options for avoiding capital gains and inheritance taxes.
The Chancellor has announced the government’s intention to challenge such arrangements on three fronts.
First, he has introduced a stamp duty land tax charge of 15% of the full value of residential property worth at least
£2 million which is transferred to a “non-natural person,” typically a company.
Secondly, the government intends to introduce an annual charge on such high value residential properties which are already held in corporate “wrappers” or “envelopes.” Returns and payments will generally be due on April 30 but for its first year returns will be due October 1, 2013 and payment by the end of the month. The amount of tax payable will depend on the band that the property is in.
Thirdly, the Government has consulted with interested parties on how to bring any gain realized on the eventual disposal of the residential property within the charge to tax on capital gains and has announced that draft legislation will be published in January 2013.
The proposal is that after April 1, 2013 a “non-natural person” disposing of UK residential property or an interest in such property will pay UK tax on the gain. The extended charge to capital gains tax will also catch disposals of shares, interests or securities in a corporate wrapper where more than 50% of the value derives from UK residential property.
This will not affect individuals who directly own homes in the UK, only those who have purchased residential property through an intermediate ownership vehicle.
Subject to certain thresholds and exemptions, individuals who are domiciled in the UK are subject to inheritance tax on their worldwide estate. The charge primarily applies on death but may also extend to assets disposed of prior to death.
Individuals who are not domiciled in the UK are subject to the UK’s inheritance tax regime on their UK estate, which includes UK real estate.
Inheritance tax is not payable on gifts made between spouses or civil partners provided both individuals are domiciled in the UK or outside the UK. If only one is UK-domiciled, the complete exemption applies on gifts to the UK-domiciled spouse but there is a £55,000 limit to the exemption on gifts made by UK-domiciled individuals to their non-UK-domiciled partner.
The Government has proposed that the £55,000 exemption be increased and that it track any future increases in the inheritance tax nil rate band which is currently fixed at £325,000 until April 2015. It has also proposed an option for non-domiciled spouses to elect to be treated as deemed domiciled so that they can benefit from the unlimited spouse exemption that gifts to UK-domiciled spouses currently enjoy.
Draft legislation and a technical note on these proposals were published on December 11, 2012 and the changes are expected to take effect from next year.
Despite recent and announced changes, the UK’s tax regime continues to provide notable planning opportunities for individuals who go to work in the UK or buy second homes there. Non-doms should still pay significantly less local tax than would be due from UK individuals in similar circumstances.
Although the UK rules on the taxation of non-UK individuals remain broadly beneficial, their complexity can create traps for the unwary — so anyone who may be contemplating working or acquiring a home in the UK should take appropriate advice at an early stage. And for those who already own UK residential property through an intermediate company or other “non-natural person” (which includes a partnership unless all the partners are individuals), a review of their current positions should be a priority.