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. 

Can a director provide services to his own company?

If you are the director of a limited company, you may be tempted to provide yourself some services to your company rather than hire a third-party freelancer and then bill the company for those services. However, this practice can have legal and tax implications that you should be aware of. Let's go over the potential pitfalls and the steps that can be taken to avoid them. 

Conflict of Interest

The first issue you need to be aware of is the potential conflict of interest you might create between your duties as a director and your interests as a self-employed contractor. As a director, you have a fiduciary duty to act in the best interests of your company and its shareholders, which means that you should not enter into transactions that are detrimental to the company or that give you an unfair advantage over other shareholders. However, as self-employed contractor, you may have an incentive to charge your company more than the market rate for your services or to provide substandard services that do not meet the company's needs. This could expose you to legal action from the company or other shareholders for breach of fiduciary duty or unfair prejudice. 

To avoid any conflict of interest, you should make sure that the terms and conditions of your invoices are fair and reasonable and reflect the market value of your services. You should also document the nature and scope of your services and keep records of the time spent and the expenses incurred. And then you should make sure that you obtain the consent of other company directors as well as other shareholders, if any, before billing your company. You disclose any potential conflicts of interest. Your objective is to prevent HMRC from challenging the validity of your invoices and tax your self-employment income as disguised payments for your work as a director. Which means that you would have to pay income tax and National Insurance contributions (NICs) at higher rates and that your company would have to pay employer's NICs as well. 

Private Residence Relief and deemed occupation

If you sell a property that was your main residence at some point during your ownership, you may be eligible for private residence relief (PRR) which can reduce or eliminate your capital gains tax liability. However, there may be periods when you were not living in the property, such as when you moved out before selling it, or when you let it out to tenants. In this blog post, we will explain how you can claim PRR for periods of non-occupation and what conditions you need to meet.

The basic rule is that you can claim PRR for the period of your actual occupation, plus the last 9 months of ownership, regardless of whether you were living there or not. This is to allow for some flexibility in case you have difficulties selling your property or buying a new one. However, there are additional reliefs that can extend the PRR period beyond the 9 months. Previously that period of 9 months was 36 months. You could also claim letting relief if you had rented the property during a certain period. Those benefits have been curtailed now but you still can claim relief in some cases where you did not occupy the property. It's called deemed occupation and here are the different scenarii where it's available. 

Final period of ownership

That's the one we just talked about and it is the most common scenario where relief is available despite not being in occupation of a property. Since April 2020 the final period is nine months and those are always available if you have lived in the property as some point (to exclude the buy-to-let properties where no such relief is available). The intention of the exemption is to aid sellers who are having difficulties finding a buyer. This is regardless of having difficulties finding a buyer or the use of the property during that period. 

Delayed occupation

Another scenario where a period of non-occupation will be treated as a period of occupation is where there is a delay in taking up residence of a dwelling. The following conditions must be satisfied:

• occupation of the property happens within two years of purchase;
• the property was not another person’s residence during the period of non-occupation; and
• a qualifying event happens during that period of non-occupation. A qualifying event can be a delay due to the completion of construction, renovation, redecoration of the property, or because the individual can't move in until he disposes of his previous residence.

What is Gift Aid and how does it work for Corporations?

Gift Aid is a UK government scheme that allows for tax relief on donations to UK registered charities. For individuals, the scheme allows the charity to receive an extra 20p for every £1 donated. When an individual donates money to a UK registered charity, it can claim back the basic rate of income tax on the donation. This is done by completing a Gift Aid declaration form and sending it to the charity which then allows the charity to claim back the 20% tax paid by the taxpayer. If the taxpayer is a higher rate or additional rate taxpayer, he can get relief for the additional tax paid above the 20% by doing a tax return or by calling HMRC and requesting that they change their tax code. This additional tax relief goes to the taxpayer instead of the charity. 

Gift Aid for Corporations

Gift Aid for corporations is different from Gift Aid for individuals in terms of eligibility and benefits. As seen above, individuals who are UK taxpayers can use Gift Aid to increase the value of their donations to charity. For corporations, there is no such thing and the whole tax relief goes to the corporation that gives money to charity. 

To be eligible for Gift Aid, corporations must be UK taxpayers and must make a donation to a charity that is registered with HM Revenue and Customs (HMRC). The donation must be made without any conditions attached, and the charity must not provide any significant benefit to the corporation in return for the donation.

There is no limit on the amount that can be given by a company to a charity under gift aid, as long as the company has enough taxable profits to cover the donation and the charity is recognised by HMRC. In particular a donation cannot create a loss for the business. However, as mentioned above, there are some limits on the value of benefits that the company can receive from the charity in return for the donation. The value of the benefits must not exceed 5% of the donation, up to a maximum of £2,500 per donation. Additionally, the total benefit that can be received by a close company or connected persons from the same charity in the same tax year is £250. If benefits exceed these values, the payments will not qualify for relief under gift aid.

A Fine Balance between Salary and Dividends

The tax code changes that have been announced by the UK government will have an impact on the way a company owner pays himself. One of the main changes is the increase of the corporation tax rate, which is the tax paid on company profits. The corporation tax rate will rise from 19% to a maximum of 25% from April 2023 for companies whose profits are above £50k. That means that company owners who pay themselves dividends will have less profits left in their company after having paid corporation tax. 

Another change is the reduction of the dividend allowance, which is the amount of dividend income that is tax-free. The dividend allowance will be cut from £2,000 to £1,000 from 6 April 2023 and then again to £500 from 6 April 2024. This means that company owners who pay themselves dividends above these thresholds will pay, again, more tax on their dividend income. 

If you add to that the fact that in contrast to salary, dividend rate increase was not overturned last year resulting in 1.25 percentage point across the board (8.75% for the basic rate, 33.75% for the higher rate and 39.35% for the additional rate) it's easy to understand why the tax situation has seriously worsen for the UK company owner. 

How Tax Code Changes Impact Company Owners 

One may wonder if these changes will affect the optimal split between salary and dividends for company owners who want to minimise their tax liability. Generally speaking, paying a low salary and high dividends has been a tax-efficient strategy for company owners, as dividends are not subject to National Insurance contributions and have lower tax rates than salary. However, with the increase of the corporation tax rate, the reduction of the dividend allowance and the increase of the dividend tax rates, this strategy may become less attractive. 

One thing is certain, the situation is now a lot more complex. In order to assess the optimum split between salary and dividends, one now needs to know the profit level of the company since it affects its corporation tax rate, the size of the payroll since it affects the availability of the employers allowance (the £5K NIC allowance), the overall level income of the company owner since it affects the availability of the personal allowance and many other factors. While in most situations it's still more tax efficient to take a salary of up to the personal allowance of £12,570 there are many cases where it's not necessarily true anymore. 

Because we now have effectively 3 different marginal corporation tax rates, let's look at the effective rates of taxation combining corporation tax, national insurance, and income tax in each different case. We assume that the dividend allowance has already been used. 

Major UK Corporation Tax Changes in April

Corporation tax is a tax that companies pay on their UK profits. The current rate of corporation tax for all companies in the UK is 19%, regardless of how much profit they make. 

However, this was not always the case. Corporation tax was introduced in 1965 as part of the Finance Act 1965. 

The rate has changed over time, from 28% in 2010 to 19% in 2017 and it will change again from 1 April 2023, when new rules will come into effect. Here are the details.

The New UK Corporation Tax Rates

From 1 April 2023, there will be two different rates of corporation tax, depending on the level of profits:

• A small profits rate (SPR) of 19% for companies with profits up to £50,000
• A main rate of 25% for companies with profits over £250,000

There will also be a marginal relief for companies with profits between £50,000 and £250,000, which will reduce their effective tax rate gradually from 25% to 19%.

The new rates will apply to financial years starting on or after 1 April 2023. For example, if your company's accounting year ends on 31 December, you will pay corporation tax at the new rates for the year ending 31 December 2023.

How to Calculate Your Corporation Tax

To calculate your corporation tax liability, you need to work out your taxable profits. This is done by deducting your allowable expenses from your income. Some examples of allowable expenses are:

• Staff salaries and wages
• Rent and utility bills
• Business travel and subsistence
• Advertising and marketing costs
• Interest on business loans
• Research and development costs

60-day Capital Gains Tax Reporting

As a property owner, it is important to be aware of the tax implications of disposing of your residential property.

The 60-day capital gains tax reporting requirement for residential property disposals is a crucial aspect of the tax system that all property owners should understand. It was implemented in 2020 (initially as a 30-day rule later relaxed to 60-day) and most people are not aware of this requirement.

In this article, we will provide a comprehensive overview of the 60-day capital gains tax reporting requirement and how it applies to residential property disposals. 

What is the 60-day Capital Gains Tax Reporting Requirement? 

The 60-day capital gains tax reporting requirement is a regulation that requires property owners to report the sale of their residential property to the HMRC within 60 days of the sale. They also need to pay the tax (or an estimate of that tax since in many instances the exact calculation can only be done after the tax is finished in April) at the end of this 60-Day period. This requirement applies to all individuals or trustees who sell UK residential property for a gain, regardless of the amount of the gain. If the sellers are non-UK residents they have the obligation to report even if they haven't made a gain which is not the case for UK residents. They also need to report any sale of UK land not just residential sales like UK residents. 

Brexit VAT changes: a practical step by step guide

The Brexit transition period ended at 11pm on 31st December 2020, and there are changes that you need to be aware of when preparing your VAT return. 

Some of the key changes relating to businesses in Great Britain and their implications on the running of their business are outlined below. Please note however that businesses in Northern Ireland are subject to a new NI protocol and that the rules below don't apply to them. 

VAT Returns 

Boxes 8 and 9 were used for reporting sales of goods to, and purchases from the EU, so those will no longer be required for transactions from 1st January 2021 onwards. You will however need to report any transactions which took place prior to 1st January. These boxes will eventually be removed from the VAT return format. 

Box 2 was used for reporting ‘acquisition tax’ on goods bought from EU VAT registered businesses. From 1st January this box will only be used by businesses in Northern Ireland who buy goods from the EU. 

Service supplies

Business to Business (B2B) supplies of services

The general rule is that the place of supply is where customer belongs  and that does not change. So treatment of these sales will remain the same.

• EU customers will continue to account for local VAT in their own countries via the Reverse Charge.
• EU suppliers will continue to supply their services to UK businesses free of any VAT.  UK businesses must continue to account for reverse charge VAT on receipt of these services.
   

Business to Consumer (B2C) supplies of services

The general rule is that the place of supply is where the supplier belongs  and that does not change either. So UK VAT will continue to apply (note there are some exceptions to the general rule).

 

There is an another exception for businesses making B2C supplies of digital services as the current threshold of £8,818 no longer applies from 1st January (see below for more details).

Goods sold to the EU 

Goods sold to a EU customer will now be reported as zero rated sales - regardless of whether the customer has an EU VAT registration number or not. 

UK businesses who sell to non-VAT registered EU individuals will need to consider whether they or their customer will be responsible for paying EU VAT when the goods arrive in the EU. This must be made clear to the purchaser in the terms and conditions of sale. If the UK business is responsible then it will need to register in the relevant EU countries. 

How to put Bitcoin in your ISA or in your SIPP

With the recent run-up in Bitcoin price, a number a people in the UK have been wondering how to get some Bitcoin exposure inside their pension or their ISA. 

While in many jurisdictions such as the US or Canada, it's possible to get exposure to Bitcoin in tax wrappers such as pension funds, the UK financial conduct authority, in its great wisdom, decided that it was way too risky for the average Joe. 

The way most people get Bitcoin exposure in tax wrappers is by buying exchange listed trackers such as the Grayscale Bitcoin Trust (GBTC) in the US, the Bitcoin Fund (QBTC.U) in Canada or XBT Provider and BTCetc in Europe. While it was possible to buy such trackers into SIPPs in the past, the FCA made it illegal in early 2020. And the situation will actually get even worse next year since sale of such trackers will be altogether forbidden to all private investors in the UK. 

While it's still possible to get Bitcoin exposure directly by buying the cryptocurrency on exchanges such as Coinbase, Kraken or Gemini (and soon Paypal), some people would rather do that into a tax friendly container such as an ISA or a SIPP. And in such containers you cannot buy cryptocurrencies nor any of the available listed trackers. 

But a recent development that we talked about in our previous post is providing an alternative way to achieve that goal in a stealth way. Indeed, as more and more listed companies put Bitcoin on their balance sheet, and as the price of Bitcoin increases, those companies in effect are becoming virtual Bitcoin ETFs, allowing shareholders to get indirect exposure to Bitcoin if they buy the stock. 

How to put Bitcoin on your Balance Sheet

The COVID-19 pandemic and the resulting economic crisis has pushed all governments around the world to print money like never before resulting in a global devaluation of cash assets. People and companies sitting on large piles of cash have struggled to invest that cash into harder assets such as gold, real estate or equities (in particular big techs that have been perceived as less immune to the COVID-19 dislocation event). 

But more and more people have been turning to Bitcoin as well. Indeed the cryptocurrency has all the characteristics of a hard currency (the supply is limited by a hard cap of 21 million coins) without the downside of existing options (lack of convenience, low liquidity, elastic inflation -- as prices increase, inflation rate increases as well along with economic incentives). As fears that government might outlaw the cryptocurrency fade away, more and more corporates are taking the plunge. This is a virtuous circle: as more and more companies hold the cryptocurrency on their balance sheet, and as governments acknowledge and regulate that behaviour, the legal risk evaporates. 

Microstrategy was the first public company to announce that they converted the majority of their Treasury into Bitcoin, a total of $425 million. Since then a number of businesses have disclosed that they had done or intended to do that as well. Coldcard creator, Rodolfo Novak, has even put up a web page listing those businesses. 

Converting part of your Treasury into Bitcoin is more complex than converting it into another currency, especially if you don't have the resources of a large public company. But if you're ready to protect your funds with a swarm of cyber hornets, here are some of the issues and how to deal with them:

Security

As most people know, holding Bitcoin is hard. Everyone has heard of hacks or mistakes that have cost Bitcoin owners their savings. As a company putting a significant amount of your Treasury in Bitcoin, you have a fiduciary responsibility to ensure that those funds are secured properly. You have basically 3 options.