Personal taxation issues
UK residence status of individuals and trusts; pre-arrivals and pre-departure tax planning
Tax residence in the UK is based on the “Statutory Residence Test”. This is in fact a series of tests, which consider a number of factors in determining whether a person is UK resident in a tax year (which in the UK runs from 6 April to 5 April). Once residence for a tax year is determined, “Split Year Treatment” applies in certain circumstances to treat an individual as being non-resident for part of a tax year. UK residence determines the exposure to UK tax, subject to the application of double tax treaties. A UK resident is taxed on income and gains arising throughout the world (with the possibility of the remittance basis applying where non-domiciled.) A non-resident is taxable only on UK source income (with an exception for “disregarded income” – certain investment income) and certain UK capital gains (in particular gains on UK property). The application of UK tax rules, and in particular capital gains tax, make it important to obtain tax advice ahead of changes in residence status or arriving/leaving the UK. Anti-avoidance rules also lead to UK tax applying to certain income and gains arising in a period of temporary non-residence (less than 5 years).
Inheritance tax planning and review of individuals' domicile status
UK inheritance tax (IHT) is based on an individual’s domicile status. Individuals are also “deemed domiciled” where UK resident for 15 of the previous 20 years. Those that are UK domiciled or deemed domiciled are subject to UK IHT on their worldwide estate, while non-domiciliaries are taxable on their UK estate, including certain holdings of UK residential property held through company structures. Advice around domicile and IHT exposure is essential for those arriving in the UK as the structure holding assets can have a major bearing in the level of IHT exposure. More general IHT and estate planning will also identify potential options to minimise any exposure to UK IHT.
Income tax reliefs for non-domiciliaries – the application of the remittance basis of tax, overseas workday relief and business investment relief
UK residents that are not domiciled can, with some exceptions, claim the remittance basis of tax in respect of their non-UK income and gains. This results in UK tax only being due to the extent that foreign income/gains are brought into the UK. This comes at the cost of the personal allowance and capital gains annual exemption. After 7 years of residence, a £30,000 charge applies (which increases to £60,000 after 12 years of residence.) The operation of the remittance basis and identifying what constitutes a remittance to the UK is a complex matter. Difficulties also arise in respect of “mixed funds” – bank accounts that hold income/gains of different types or years. Care has to be taken to put in place the correct system from the outset (prior to arriving in the UK.) For employments with a mixture of UK and overseas duties, “overseas workday relief” can apply to allow the remittance basis to apply to the overseas aspect of employment income in the first three years of UK residence. The remittance basis is limited to foreign employments carried on purely overseas after that time. Business Investment Relief relaxes the rules to allow remittance basis users to bring funds into the UK to invest in business ventures without making a taxable remittance.
UK tax on foreign investments, life assurance and pensions
The UK tax treatment of foreign investments and pensions can often involve a considerable degree of complexity and it is essential to consider the various factors applied under the UK tax system in determining the potential UK tax exposure before these are realised.
Tax-efficient structuring
How businesses and assets are structured has a major bearing on the UK taxes due. Ownership of property, for example, can impact matters such as the level of Stamp Duty Land Tax (or Land and Buildings Transaction Tax in Scotland) applying on the purchase, as well as potential ongoing tax charges under the Annual Tax on Enveloped Dwellings in certain scenarios, as well as general considerations over the tax suffered on income, gains, and dividends/distributions. The use of companies, partnerships, trusts and other structures all have their place in ensuring that the level of tax payable is minimised and that disproportionate tax charges do not arise.
Capital gains tax for non-residents on UK property (including holdings of UK property via companies)
Non-residents are now subject to UK capital gains tax in respect of land and property held in the UK. From April 2019, this includes “indirect holdings” – sales of certain shares in companies that are UK “property rich” (i.e. where UK property is held through a company.) The gain arising prior to the introduction of the rules in April 2015 (residential) and April 2019 (non-residential and indirect holdings) are not taxable, with a choice of methodologies to calculate the relevant gain. Non-residents must report disposals of UK land within 60 days of a sale completing on a capital gains tax return.
Income tax and social security (national insurance) on employment income and share awards for non-residents and internationally mobile employees
With some exceptions, a non-resident is liable to UK tax on UK source income, including employment income that relates to work carried out while physically present in the UK. The application of “NT” tax codes, “s690 directions” and the application of “short term business visitor” (STBV) rules are important in ensuring that the tax deducted at source through the PAYE system is not excessive. The social security (national insurance) rules also require careful consideration, in view of relevant social security agreements. Relaxations are in place for non-resident directors in certain situations. The impact of residence on the tax position on share awards (and “employment related security” tax charges) is an important consideration. Employment benefits for internationally mobile employees or those seconded to or from the UK, with some useful reliefs applying.
Double taxation relief and foreign tax credit relief
The UK has double tax treaties in place with the majority of countries, which provide relief from double taxation by limiting taxing rights and/or providing foreign tax relief. Relief can also be available for foreign tax against UK tax in the absence of a treaty. Social security agreements are in place with selected countries, and with EU/EEA states (which largely continue rules in place prior to Brexit.) Inheritance tax treaties are in place with certain countries.
Tax for UK residents in respect of offshore trusts, companies and other structures, and application of UK anti-avoidance rules
The UK has a complex system of anti-avoidance rules aimed at the use of offshore entities to shelter income and gains from UK tax. The rules can apply UK income tax (under the “transfer of assets abroad” rules) and capital gains tax in respect of income/gains arising in offshore entities (trusts, companies and other structures). In certain circumstances, this can result in tax being due by a transferor/settlor/shareholder on income or gains as they arise in the offshore entity. In other circumstances, UK tax arises when a distribution or benefit is received by a UK resident.
UK tax returns and other tax related reporting for individuals, trusts and other non-corporate bodies
Generally, a UK tax return is required to be filed with HM Revenue and Customs (HMRC) under the self-assessment system wherever a UK tax liability arises. A liability should be notified to HMRC by 5 October following the end of the relevant tax year. The UK tax year runs to 5 April. The tax return is lodged by 31 January following the end of the tax year, with payment due on the same date. A system of payments on account can require a payment of 50% of the liability to be paid at the same time in respect of the following tax year, with a further payment of 50% becoming payable by the following 31 July, although it is possible to claim a reduction of these payments. Late filing and late payment penalties are applied automatically by HMRC and will only be cancelled in limited circumstances. Partnerships, trusts and estates are also subject to similar requirements in respect of tax returns, although tax is not generally payable at the partnership level.
Key Contacts
Alan heads the personal tax advisory team at Chiene and Tait. He has worked in personal tax since 2006, at prominent Scottish legal and accountancy firms. He advises personal, trust and business clients on a wide variety of tax areas.
Alan is CTA and ATT qualified, and is a past winner of the Chartered Institute of Tax’s Spofforth Medal for IHT. He is member of the Private Client Committee of the Institute of Chartered Accountants Scotland (ICAS) and the Scotland committee of the Chartered Institute of Taxation (CIOT).
Outside of work he competes in cycle events and is also a member of the committee of Edinburgh Road Club.
Michelle Fallon
Alan Dean
The team can provide advice on international issues including:
- UK residence status of individuals and trusts; pre-arrival and pre-departure tax planning.
- Inheritance tax planning and review of individuals’ domicile status,
- Income tax reliefs for non-domiciliaries – the application of the remittance basis of tax, overseas workday relief and business investment relief,
- UK tax on foreign investments and pensions,
- Tax efficient structuring,
- Capital gains tax for non-residents on UK property (including holdings of UK property via companies),
- Income tax and social security (national insurance) on employment income and share awards for non-residents and internationally mobile employees,
- Double taxation relief and foreign tax credit relief,
- Tax for UK residents in respect of offshore trusts, companies and other structures and application of UK anti-avoidance rules.
- UK tax returns and other tax related reporting for individuals, trusts and other non-corporate bodies.
Michelle leads Chiene + Tait’s Personal Tax function.
She is a private client partner and specialises in advising high-net-worth individuals in all areas including succession and capital taxes planning, as well as working with a number of family-run businesses which involves advising on partnership and trust matters.
Michelle has experience of advising on transactional work including share acquisitions, share disposals and management buy-outs.