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.

Non doms: rebasing opportunity in April

We mentioned a fund un-mixing opportunity for non-doms in a previous article. There is another opportunity for non-doms this year, albeit only available to non-doms who become deemed domiciled in April 2017 and that have actually paid the Remittance Basis Charge (RBC) in a previous tax year. In order to become deemed domiciled in the UK in  April, one needs to have been resident for at least 15 of the last 20 tax years. If the RBC has been paid in a previous tax year past, it will be possible to rebase any assets which hold unrealised capital gains as at 5th April 2017. If those assets are then sold and remitted into the UK, only gains that accrue after April 2017 will be taxable in the UK.

Rebasing applies on an asset by asset basis and there will is no requirement that any part of the sales proceeds relating to the part of the gain which arose before April 2017 should be left outside the UK. Where the asset was originally purchased with clean capital, the entire proceeds from the disposal can be brought to the UK without triggering a remittance. However, where it was purchased wholly or partly with foreign income and gains, an element of the disposal proceeds will still relate to those income and gains and so will be subject to the remittance basis in the normal way when the proceeds are brought to the UK.

Non-doms: New Mixed Fund Cleansing Opportunity

Individuals who have been taxed on the remittance basis will have a window of two tax years from April 2017 to rearrange their mixed funds held in overseas bank accounts. Where adequate records have been kept, some amounts can then be remitted to the UK from such accounts free of tax.

The opportunity will be available to all non-UK domiciled individuals who have paid tax on the remittance basis at some point prior to 6 April 2017, even if they have not paid the remittance basis charge. This includes those where the remittance basis applied without being claimed (for example when an individual's foreign income or gains were less than £2,000). It is not available however to individuals born in the UK with a UK domicile of origin who would have become non domiciled at a later date.

This will provide a valuable opportunity for many non-UK domiciled individuals to "top-up" clean capital accounts to finance UK expenditure. The individual will need to analyse the sources of funds in the account such that an amount equal to or at least less than the clean capital can be identified. This could prove to be a time-consuming and potentially expensive process for accounts which have been in existence for some time and / or where there has been plenty of activity, particularly in terms of additions, acquisitions, disposals and withdrawals.

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.

The Remittance: some examples

HMRC will be soon be undertaking an "educational exercise" in respect of individuals taxed under the remittance basis in 2011/12. They are of the opinion that taxpayers may not fully understand the remittance basis, and are concerned that they will have experienced problems in completing their tax returns accurately. They will also be sending out a factsheet with this letter. They say that the intention behind the letters is primarily educational, and hope that it will prompt taxpayers to conclude that they need extra help in this area.

People don't always understand that it's not just a transfer of money that can trigger a remittance. Here are the examples mentioned in the fact list:

Money transfers to the UK

• You transfer some of your foreign income from your offshore bank account to your UK bank account.
• You withdraw some cash from your foreign bank account (that contains your foreign income) whilst overseas and bring the cash with you when you return to the UK.
• You give some of your foreign income to your spouse or civil partner who brings the money to the UK.
• You transfer some of your foreign income to the UK account of a registered Charity.
• You rent out your holiday home abroad and the customer pays the rent directly into your UK bank account.
• You loan some of your foreign income to a company you control overseas or settle some foreign income in an offshore trust. The company or trustees bring the money to the UK.
• You inherited money a few years ago that you deposited into a foreign interest bearing bank account and you transfer some of the money from this account to the UK. Although the inheritance is not taxable when remitted, the account will also contain taxable interest that will be treated as remitted before any of the non taxable inheritance.