Tax implications of longer periods of UK residence - what to consider

The Tax implications of longer periods of residence in the UK and what to consider

Regardless of a domiciled status, an individual resident in the UK for 183 days or more in a tax year, is deemed to be a resident. If a person is resident in the UK for less than 183 days, it is still possible to become an automatic resident depending on the results of the automatic overseas test or on the number of connections you have with UK and the amount of time you spend in the UK as defined in the Statutory Residence Test (SRT).

However, the tax residence status can change from year to year and therefore the tax liabilities and reporting procedures may change with it. Domiciled residents in the UK will report their worldwide income and gains using the arising basis and for a non-domiciled UK resident, the remittance basis may be applicable.

Individuals resident in the UK, but with a non-UK domicile of origin are able to preserve their non-dom status for up to 15 years, provided their intention is to not reside in the UK permanently or indefinitely. At the beginning of the 16th tax year the taxpayer will then be treated as ‘deemed domicile’ and their use of the remittance basis, which may have negated tax on overseas income and gains is no longer available.

For long term residency in the UK and as a remittance base user, it is recommended that tax planning advice is sought to ensure that pre-arrival planning takes place. And, this needs to occur before the residence starts to maximise both tax efficiency and streamline the tax reporting to avoid onerous compliance costs. It is a lengthy process and should therefore take place up to a year in advance, as the SRT process can conclude quicker than expected and catch taxpayers unawares.

When undertaking pre-arrival planning, we would advise that the following areas should be investigated:

  • The taxpayer’s immigration position in the UK.

  • Compliance with the statutory residence test requirements, and when UK residency will commence.

  • Will the first tax year be a complete, or a split year for tax purposes?

  • Is the taxpayer they able to befit from tax relief via split year treatment, and/or a double taxation treaty.

  • Look at how a home purchase should be structured for UK Tax efficiency.

  • What changes may need to be made to the individuals banking arrangements.

  • With regards to the remittance basis requirements, review all investments and consider how existing ones should be managed and new investments selected.

  • Are there any investments such as ‘wrappers’ that are unsuitable for a UK resident?

  • Can any investments be re-based?

  • Would the individual benefit from making an election to HMRC to make use of foreign losses?

  • Do any changes need to be made to employment, directorships and working practices for the management of non UK companies?

The preparation for becoming a deemed domicile is especially essential if trusts are involved. In these cases, it is prudent for non-UK residents who are non-UK domiciled individuals born in the UK and with a UK domicile of origin, to seek advice before becoming UK resident; as trusts can be severely affected if an individual then becomes deemed domiciled by settling in the UK.

Regardless of original intentions, many foreign domiciliaries remain in the UK for longer than intended and become deemed domiciled. In such cases care must be taken to lessen the impact taxation will have on moving to the arising basis. To mitigate the negative impact it may necessary for a trust to be created, assets to be given to other family members or an investment-linked life insurance policy to be created.

In addition, there are many other areas to consider in this highly complex arena and a selection are detailed here. However, this is not an extensive list and professional advice is once again recommended to ensure costly errors are not unwittingly made.

Additional areas for consideration are:

  • Inheritance Tax Planning

  • Converting foreign income or gains into clean capital by gifting it to family members;

  • Remittance basis users have the opportunities for tax-efficient philanthropy

  • Estate planning for foreign assets, the impact of local succession laws and whether foreign law wills are necessary

  • Consideration of a taxpayer’s domicile or nationality and where is assets are held. Some countries enable the use of a IHT double tax treaty.

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