Breaking UK residence - what to watch out for?

If you are planning to leave the UK and live abroad, you may be wondering how this will affect your tax situation. In particular, you may want to know how to stop being UK tax resident and what are the consequences of returning to the UK too early. 

There are a number of tax benefits available to new arrivers in the UK but the definition of a new arriver depends on the benefit you are considering. In order for those benefits to be reset properly, you need to have stayed outside of the UK for a sufficiently long period depends on the given benefit. 

In this article, we will explain the main rules and concepts that you need to be aware of, such as the statutory residence test, the overseas workday relief, the remittance basis and the temporary non-residence rules. We will also give you some practical tips on how to plan your departure and potential return in a tax-efficient manner. 

The Statutory Residence Test 

The first thing you need to know is how to determine your UK residence status for tax purposes. This is done by applying the statutory residence test (SRT), which is a set of rules that came into effect from 6 April 2013. The SRT consists of three parts: an automatic non-resident test, an automatic resident test and a sufficient ties test. You need to consider them in that order and stop as soon as you meet one of them. 

The automatic non-resident test 

You will be automatically non-resident for a tax year if you meet any of the following conditions: 

• You spent less than 16 days in the UK in that tax year and you were UK resident for one or more of the previous three tax years
• You spent less than 46 days in the UK in that tax year and you were not UK resident for any of the previous three tax years
• You worked abroad full-time (averaging at least 35 hours a week) for that tax year, without any significant breaks (more than 30 days), and you spent less than 91 days in the UK, of which no more than 30 were spent working 

If none of these apply, you need to move on to the automatic resident test. 

The automatic resident test 

You will be automatically resident for a tax year if you meet any of the following conditions: 

• You spent 183 days or more in the UK in that tax year
• You had a home in the UK for at least 91 consecutive days (including at least 30 days in that tax year), and either you had no home overseas or you spent less than 30 days at each of your overseas homes in that tax year
• You worked full-time in the UK for at least 365 days (including at least one day in that tax year), without any significant breaks, and more than 75% of your working days were in the UK 

If none of these conditions apply, you need to move on to the sufficient ties test. 

Remitting money from mixed funds: the ordering rules

Most people who are UK resident, non domiciled and who use (or have used) the remittance basis of taxation know that they should only remit funds from a capital account if they don't want to pay taxes on the funds remitted. And most people who intend to benefit from this advantageous tax system will have created a capital account prior to coming to the UK that allows them to live in the UK without having to pay any tax on the funds they bring over. 

But sometimes, people will only have been made aware of those rules once they are in the UK. Or they might have created a capital account without enough funds to maintain their lifestyle. In those instances, they will have to bring revenue from what the HMRC calls mixed funds. A mixed fund account is an account that has capital and revenue mixed together. If they need to remit funds from such an account, they will have to pay some tax. But the calculation of that tax can very complex because of what the HMRC calls the ordering rules, and which have been in place since 2008.

Each mixed fund account is actually a series of virtual buckets which are increased or decreased every time there is money coming in or out of the account. There are 8 buckets per tax year:

1. UK employment income 
2. Foreign employment income not subject to a foreign tax 
3. Other foreign income (ie. trade profits, rental income or investment income) not subject to a foreign tax 
4. Foreign capital gains not subject to a foreign tax 
5. Foreign employment income subject to a foreign tax 
6. Other foreign income (ie. trade profits, rental income or investment income) subject to a foreign tax 
7. Foreign capital gains subject to a foreign tax 
8. Any funds not covered above (i.e. capital)

Non doms: BIR rules relaxed

Business Investment Relief (BIR) is a very attractive relief for non domiciled persons who have untaxed earnings or mixed funds abroad and who wanted to invest in the UK.

It is used a lot in conjunction with EIS or SEIS investments allowing people to bring in untaxed earnings without being taxed under the remittance basis and at the same time benefit from the tax relief provided by such schemes. New legislation included in Finance Bill 2017 now makes the BIR scheme even more flexible for any investment made on or after 6 April 2017. Here are the changes:

1. The definition of a qualifying investment will be extended to the acquisition of existing shares and not just newly issued shares in a target company.
2. Where the target company is preparing to trade or hold trading investments, the period during which it must actually do so will be extended from 2 to 5 years.

Feared non-dom reform is a go!

Following the Brexit vote, some people were wondering if the non-dom reform announced in the previous budget would indeed go forward or be shelved for the time being. There were concerns that many high net worth individuals would then decide to leave the UK putting further pressure on the premium property market. It seems that these concerns were not enough to stop the changes and now the government has released a further consultation document in which they confirm that they will press ahead with the proposed changes to the taxation of non-domiciled individuals. Here are the key changes:

IHT on Residential Property

The government has confirmed that, from 6 April 2017, all UK residential property will fall within the scope of UK inheritance tax. This means that shares in overseas companies holding UK residential property will no longer be considered as excluded property for IHT purposes, and will therefore be chargeable to UK IHT on the death of the owner, regardless of their domicile status. This treatment will also extend to overseas partnerships owning UK residential property. The definition of residential property is likely to follow the existing definition of a dwelling under the Non-Resident Capital Gains Tax rules.

Many non-UK domiciled have traditionally held UK residential property through an offshore structure in order to avoid exposure to IHT. Even following the introduction of the ATED (Annual Tax on Enveloped Dwellings) charge that now applies to properties worth over £500,000 held by an overseas company or other structure, many non-doms chose to retain their structures, accepting the ATED charge on the basis that the property would not be subject to UK IHT on their death.

Back to Back loans and Remittance

The Government has announced that it is withdrawing its current treatment for commercial loan arrangements secured using unremitted foreign income or gains as collateral for a loan enjoyed in the UK. Money brought to or used in the UK under a loan facility secured by foreign income or gains will be treated as a taxable remittance of that amount of foreign income or gains. If the loan is serviced or repaid from different foreign income or gains, the repayments of capital and interest will constitute remittances in the normal way. HMRC have updated their guidance at RDRM33170.

HMRC consider that a large numbers of arrangements are not commercial and are not within the intended scope of the guidance. There was no consultation prior to the announcement and was effective immediately following HMRC’s announcement on 4 August 2014. Further details from HMRC can be found here.

Nominating income when paying the RBC

For non-domiciled residents (RND) who have been in the UK for more than 7 out of the 9 previous tax years, using the remittance basis (i.e. choosing to be taxed on UK income only as long as it's not remitted into the UK) has a cost beyond the loss of personal allowances. It's called the remittance basis charge (RBC) and it's currently £30,000 if you have been in the UK for 7 out of the previous 9 tax years or £50,000 if you have been in the UK for 12 out of the previous 14 tax years.

What is less known is that the RBC is actually a tax and therefore if you decide to pay that charge, you also need to nominate the corresponding income. You would think that doing so allows you to bring that taxed income back to the UK without further cost. Unfortunately, HMRC designed the rules so that it becomes impossible to take a credit for the remittance basis charge until and unless all other non-UK income and gains are remitted to the UK. As this is rather unlikely, the RBC is essentially an additional cost of electing to be taxed on the remittance basis.

UK expats at risk of being caught by residency test changes

As the British government seeks ways of supplementing its tax take, the British residency test will be changing from April 2012. If you are a British citizen who’s working in Dubai, Hong Kong or Singapore because you want to pay less tax, this could be a big issue. The new rules are very complex but in a nutshell, you could put yourself at risk if you visit the UK for more than 10 days per year. Coming back to the UK for more than that makes you fall into the connections tests and at risk of being classified as UK resident.

These connections tests look at various things, including whether you still have a house in the UK, whether your family are based in the UK and whether you have financial ties to the UK. Although children at boarding school are not counted as being ‘family in the UK’ during term time, they will count as ‘family in the UK’ if they remain in the country staying with grandparents or friends during school holidays. Equally, when the new rules come into effect in April, there will be a look back over three years at people’s previous visits and connections.

Should I pay taxes in France or the UK?

A lot of French people live in the UK, up to 200,000 in London alone. And yet when it comes to taxes, information is scarce. If you have assets or revenue outside of the UK, some tax maybe due in France or in the UK depending on the asset class. This article tries to explain the rules, some driven by the tax treaty and some by residency. Indeed, the UK residency concept is more complex than the French one: you can be resident and non-ordinarily resident, or resident, ordinarily resident and non-domiciled. And if non-domiciled, again you have the option of being on a remittance basis or on an arising basis.

Residence and Domicile

Those 2 concepts are different in the UK and independent from one another. If you spend more than 90 days in a fiscal year in the UK you become resident. And if you come to the UK with the intention to stay less than 3 years you can get a status of non-ordinarily resident (NOR). That allows you to only pay tax prorated by the time spent in the UK. You have to be careful however to act in a way consistent with that intent. In other words, if you buy a flat, HMRC would consider that your intent is to stay longer than 3 years and they would invalidate the non-ordinarily status.