Everfair Tax

Specialists in UK, US and Expatriate Tax.

Residence Positions and Offshore Trusts

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Before considering the UK tax position for an offshore trust, it is important to first determine that the trust – is in fact – offshore. So in this second part of our series on offshore trusts, we consider the rules for establishing trust residence. If a trust is UK-resident (singular for a reason – read on), then an entirely different set of tax rules apply.

This is part 2 of our Offshore Trusts blog series, written by our Senior Tax Manager Lawrence Adair. Read part one here: ‘all you need to know about Offshore Trusts’

How can a trust be considered as a resident?

For trust residence purposes, the trustees are treated as a single body. Technically, it is the trustees as a body who are the taxable ‘person’, rather than the trust. But for simplicity, we will refer to trusts rather than trustees. We will also use the terms offshore and non-UK resident interchangeably.

For income tax and capital gains tax a trust will be non-UK resident if:

1. All trustees are non-UK resident; or

2. There are a mixture of UK and non-UK resident trustees, and the settlor was both non-UK resident and non-UK domiciled when the trust was created.

For individual trustees, their residence is determined in accordance with the UK statutory residence test. This is a test based on days spent in the UK and connections to the UK such as having verifiable accommodation, or full-time work in the UK.

Splitting tax years with offshore trusts

It is possible under the UK statutory residence test for an individual to have a tax year split into residence and non-residence periods.

An individual trustee having a split year could cause issues with trust residence, unless they were only a trustee during the non-resident part of a split year.

Corporate trustees and offshore trusts

Their residence is determined in accordance with company residence rules. Company residence is usually the place of incorporation or where the central management and control is i.e. where corporate and strategic decision making takes place, rather than day-to-day management.

Care is needed by non-UK resident trustees – whether for individual or corporate trustees – to ensure that in their roles as trustees, they do not carry out trustee business through a fixed place of business in the UK (such as a branch, agency or permanent establishment). Business for this purpose is broadly regarded as providing professional services of acting as a trustee for a fee. It is distinguished from, say, where the trustee may operate a property business in the UK, managing the trust’s UK property portfolio.

To avoid having a permanent establishment or other fixed place of business in the UK requires the core activities of acting as a trustee to be kept outside the UK. This means where the strategic decision making takes place, rather than any auxiliary activities e.g. information gathering for making decisions.

An offshore trust will usually have a single, non-UK corporate trustee, often based in the Channel Islands.

The benefits of having a single, non-UK corporate trustee for offshore trusts:

1. It provides certainty over the corporate residence, since the corporate trustee will ensure its core activities of acting as a trustee are kept outside the UK.

2. It avoids the uncertainty of the mixed trustee rule where the settlor’s residence or domicile position could taint the trust’s residence position. Or perhaps, it could be tainted by a UK resident or domiciled person inadvertently becoming a settlor.

3. It avoids any complications which could arise from the trust having a split tax year due to its residence changing part way through.

Where a trust does have at least one individual trustee, their residence position must be kept under constant review to avoid inadvertent UK trust residence.

Of course, the trustees of a UK trust might want to consider moving the trust offshore. If considering this, the trustees need to be aware of the possibility of a capital gains tax exit charge, whereby all assets deemed to be sold and reacquired at market value.

Finally, residence is not particularly important for Inheritance Tax (IHT) purposes, though it does have a bearing in some fairly benign situations such as foreign currency bank accounts.

Our key take-aways for you from this article:

It is important to determine that a trust is in fact non-UK resident before considering the UK tax treatment

Usually there is a single corporate trustee based in the Channel Islands to ensure clear and consistent non-UK residence treatment

Regardless of where trustees are based, it is important that the core trustee activities are carried on outside the UK

Written by Lawrence Adair

Moving to the UK – when do you pay tax?

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When do you pay tax when moving to the UK? Well, not only is it important, but it’s also extremely useful to be aware of your tax responsibilities and the allowances available to you in the UK and your home country. In this article, we briefly overview the rules about when do you pay tax when moving to the UK.

The UK Statutory Residence Test – The Three Types

This is where it all starts – identifying whether or not you can become a UK tax resident. It’s determined by what’s called the Statutory Residence Test.

The UK statutory residence test has three parts:

  • The automatic overseas residence tests
  • The automatic UK residence tests
  • The sufficient ties tests

If you meet any of the automatic UK resident tests, or are resident in accordance with the sufficient ties, the default position is that you are resident for the whole tax year.

What are the automatic UK resident tests?

They look at a combination of physical presence and relevant connections to the UK to determine whether you are considered to be a UK resident.

Split Year Tax Treatment (of your Split Year Provisions)

It’s important to bear in mind the UK tax year (running Apr – Apr). In specific circumstances, when you arrive in the UK, you are allowed to divide the UK tax year in which you arrive into two parts.

A. The part before arrival (non-resident) and;
B. The part following your arrival (resident)

These are known as the ‘split year provisions’. They are for those who are arriving in the UK, who are starting to have a home in the UK, starting a full time job in the UK or returning to the UK from working full time overseas.

Non-residents are only taxed on specific types of UK-source income. Sometimes non-residents are taxed on UK-source capital gains, whereas UK residents are potentially taxable on their worldwide income and their capital gains too.

What is Domiciled in the UK?

The extent to which you are required to pay UK tax on income and gains generated outside the UK, entirely depends on what is termed your ‘domicile status’. The concept of domicile is essentially where you consider your permanent or indefinite home to be. This can be:

The country of your birth, or;

Where your father considered his permanent or indefinite home to be during your childhood or;

Somewhere that you build a life and consider home as an adult

Domicile and Remittance Basis

If your domicile (the place you consider your permanent home) is not in the UK, then you can potentially claim the remittance basis. Claiming the remittance basis allows you to only pay tax on non-UK income and capital gains, to the extent that it is considered to be “remitted” (ergo received into) to the UK. The remittance basis can be claimed or not claimed each year, that’s your choice and dependent on your preferences and circumstances. It’s important to note that the annual cost of claiming the remittance basis increases, alongside the length of your residence in the UK.

  • < 7 years residence of previous 9 – loss of income tax allowance and capital gains tax exemption
  • 7 years of residence of previous 9 – loss of income tax allowance and capital gains tax exemption, +plus flat fee of £30,000
  • 12 years of residence out of the previous 14 year – loss of income tax allowance and capital gains tax exemption plus flat fee of £60,000
  • After 15 years of residence in the previous 20 years, the remittance basis can no longer be claimed

For non-UK domiciled individuals (i.e. those who don’t consider UK as their permanent home), the first three years of residence in the UK (including the year of arrival), can also bring an entitlement to tax relief. This tax relief is based on any proportion of salary which relates to the number of days spent working outside the UK. This first three years tax relief also depends on conditions being met, as to where the salary is paid and retaining an appropriate proportion of the salary outside the UK.

Monies that you had before becoming resident in the UK would be considered tax free. Therefore, to benefit from this and any claim to the remittance basis, it is important to structure your bank account properly. This is something a specialist can help you with.

Finally, it’s important to know that there is no uplift to market value on arrival in the UK in terms of the basis for assets for UK CGT purposes, if that asset is sold whilst you’re a UK-resident. The entire difference between the original purchase price and sale process would potentially be subject to tax.

If you have any specific questions about your tax responsibilities, we can answer those for you based on your specific circumstances. We can also work with you on an on-going basis to help you to always prepare well in advance.

Here are some further useful, reputable UK tax resources for you:

https://www.gov.uk/tax-come-to-uk
https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3
https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm10200
https://www.rossmartin.co.uk/overseas-residence/2357-split-year-treatment-toolkit

What it means to be domiciled for UK tax purposes

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The concept of domicile essentially means which country an individual ultimately considers to be their home and to which they will at some point return.

There are two main ways that an individual can establish a domicile.

The first is at their birth though the domicile of their parents although it is typically the domicile of the father which is considered here. This is known as the domicile of origin.

The other main way is through making a new country their home as an adult, known as a domicile of choice.

The domicile of origin is the stronger of the two domicile concepts and it is necessary to prove that a domicile of choice has been created to replace the domicile of origin. HMRC for example would need to prove that an individual who has his domicile of origin outside the UK has established a domicile of choice in the UK. An individual who had a UK domicile of origin would likewise need to prove that they have established a domicile of choice outside the UK. This is done by demonstrating the extent of ties to the country in which it is said a domicile of choice has been established and that ties to the country of origin have been broken.

So having established that you are a non UK domiciled individual, what are the benefits available to you?

The first benefit is being entitled to access the remittance basis of taxation. This means that non UK income and gains are only subject to tax if they are brought to or used in the UK by you or what is termed a relevant person which includes your spouse, co habiting partner and minor children. Whether to make a claim to the remittance basis is a decision which can be made each year when the tax return for that year is prepared.

The cost of claiming the remittance basis depends on the length of time you have been resident. For the first seven years the cost of the remittance basis is the loss of your tax free allowances for income and capital gains tax. After you have been resident for seven of the last nine years (including part years of residence) the cost increases to £30,000 per annum and after you have been resident for 12 out of the years the cost goes to £60,000 per annum.

Another benefit to being non UK domiciled is that for inheritance tax (IHT) you are only subject to IHT on UK based assets such as real estate, cash balances in UK accounts and UK registered shares. Gifts of non UK assets are also not subject to the seven year rule and are immediately outside your estate for IHT.

Once you have been resident in the UK for 15 of the last 20 years you become deemed domicile and the remittance basis and protection of your non UK assets for IHT are no longer available.

Planning is key to making the most of any opportunities presented by being non UK domiciled, especially ahead of increases in the cost of claiming the remittance basis and becoming deemed UK domiciled.

Tax when arriving in the UK

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The UK Statutory Residence Test, and other important things to know

For anyone arriving in the UK, a key piece of information is to understand the point at which they would be considered tax resident in the UK, and therefore when their liability to UK income and capital gains tax will begin.

You can read the full article now, or download the PDF version for free below.

Since 2013 the UK has had a more formal test included within its legislation to determine when an individual will become a resident in the UK for tax purposes.

It often takes those moving to the UK by surprise that tax residency is determined entirely independently from an individual’s immigration status.

UK Tax Residence & the Statutory Residence Test

The test for UK tax residence is known as the Statutory Residence Test (SRT). The SRT has three parts:

  1. Rules under which an individual will automatically be considered UK tax resident
  2. Rules under which they will automatically be considered non-UK resident and;
  3. Then an effective tie breaker test known as the Sufficient Ties Test.

When are you considered a UK Resident?

An individual will be considered automatically a UK resident if they spend more than 183 days in the UK, have their only or main home in the UK or work full time in the UK. The concept of having an ‘only’ or ‘main’ home in the UK, or ‘working full time in the UK’ are then defined further.

An individual who has not previously been a UK resident and is spending time in the UK for the first time, will automatically continue to be a non-UK resident if they spend 45 days or less in the UK or continue to have a full-time job outside the UK and spend 90 or fewer days in the UK with 30 or fewer of these being work days. Again, full-time work outside the UK and what counts as a work day for this purpose are further explained in the rules.

If an individual doesn’t meet either the automatic UK residence or non UK residence tests, then their residence status will be determined by the Sufficient Ties Test.

The Sufficient Ties Test looks at a balance of:

  • physical days of presence and
  • four relevant connections to the UK
    • being whether you have spent more than 90 days in the UK in either of the previous two tax years;
    • whether you have worked in the UK for more than 40 days in the tax year;
    • whether you have accommodation available to you in the UK and;
    • whether you have a spouse or minor child who is resident in the UK (known as the family tie)

As with the other tests, all these important concepts have further specific definitions which are included in the legislation and need to be considered.

Changes, given the Covid-19 Global Pandemic

In response to the current movement restrictions across the globe in the wake of the Coronavirus pandemic, HMRC have released additional SRT guidelines, to work in conjunction with their existing guidance for exceptional circumstances. Up to a total of 60 days in the UK which are considered to result from exceptional circumstances do not count for certain parts of the SRT.

The additional circumstances for COVID-19 that are being considered as exceptional are:

  • Quarantine or self-isolation from following public health guidance or advise from a health professional as a result of the virus
  • Advice not to travel from the UK by recommendation from the Government as a result of the COVID-19 virus
  • The inability to leave the UK as a result of international border closure
  • If your employer requests that you return to the UK temporarily as a result of the virus

Although individuals may by necessity have to remain unexpectedly in the UK, whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case.

This may be relevant to a number of people arriving in the UK to delay the date of their residence in the UK, or prevent them from being considered resident earlier than would otherwise be the case.

What are the Split Year Rules?

Generally, an individual is either resident or non-resident for the whole of a UK tax year. But in certain circumstances, known as the split year rules, it is possible to divide the UK tax year into two parts:

  1. one that is prior to the point at which the individual triggers the condition which made them UK resident and
  2. the part following that point

Where these rules apply, UK tax residence (and therefore liability to UK tax) only arises in the later part of the year.

The split year provisions generally apply in circumstances when an individual becomes resident because they have taken up a full-time job in the UK or are accompanying someone who has a full-time job in the UK or when someone acquires a home in the UK.

It is obviously very important to establish whether you are entitled to benefit from these rules on arrival in the UK, as this may also help line up your tax position in the UK with your tax position in the country you are moving from.

This can prevent problems arising, from being taxable for a period of time in both countries, and needing to rely on tax treaties to avoid double taxation.

Tax, for UK Residents

The UK operates a system of independent taxation, with individuals having their own residence status, having their own entitlement to annual allowances and each being responsible for any taxation in respect of their own income and capital gain.

This means that situations can arise where one spouse is resident and the other is not, especially where the move is for work reasons for one spouse, and there is children’s education to consider. This can be an advantage where it does occur and present more planning opportunities.

Tax, for non-UK Residents & Remittance

For an international individual, whose usual home is not in the UK (what is referred to as being non-UK domiciled under UK tax rules), they may be able to benefit from specific tax rules in respect of their non UK income and gains, known as the remittance basis. Under these rules, the foreign income and gains are only subject to UK tax if brought to or used in the UK.

Those non-domiciled individuals with jobs that still require them to work partly overseas after arriving in the UK, can also benefit from a further advantage under the remittance basis.

How does the Remittance Basis work?

Under what are known as ‘the overseas workdays relief rules’, non-uk domicilied individuals can pay tax on just the proportion of their salary which relates to UK working time. It just needs to be paid into a specific, non-UK bank account, and they must keep the proportion of their salary which relates to non UK working time outside the UK. This relief is available for the first three years of residence in the UK. There are detailed rules to follow when claiming this relief, so advice should be sought on an individual’s particular circumstances.

The cost of claiming the remittance basis increases over time with it just resulting in a loss of tax free allowances for the first seven years, then increasing to £30,000 per annum and to £60,000 after 12 years. After 15 years of residence, the remittance basis cannot be claimed.

All the rules outlined above count part years of residence in the time limits so timing of becoming resident in the UK can often be very important.

Another key point: to benefit fully from the remittance basis (and the fact that the UK will not tax amounts of money that an individual had accumulated before becoming UK resident…), it is important to have bank accounts set up correctly and plan in advance how you’ll pay for UK living costs as efficiently as possible. It also helps avoid what are known as the mixed fund rules that apply to accounts with different sources of income where you are considered to withdraw the least tax efficient amounts first.

Finally, it is worth being aware that there is no increase for capital gains tax in the value of assets to their market value at the date of arrival. Capital gains tax will potentially be due on increases in value, from the original purchase price and for foreign assets take exchange rate movements into account.

In summary, to make the most of your move to the UK, the old adage forewarned is forearmed rings true – advance preparation is crucial.

This is our area of technical expertise, so we’re proactive in seeking new regulation changes, and knowing what’s on the horizon. Everyone we work with has different goals. We honour your unique starting point, proudly offering a truly personal and adaptable service for you.

For advise and to see how we can add value to your move to the UK, please contact us at Everfair Tax.