If you are resident outside of the UK, it remains important for you to consider your UK tax position. Our UK solicitors and tax advisors are qualified to advise you in relation to your UK tax affairs, including inheritance tax (IHT), income tax and capital gains tax (CGT).
When considering your liability to UK tax, it is important to determine whether you are considered UK resident and UK domiciled. The two should not be confused. Whether or not you are deemed to be UK resident will impact upon the way in which you will be taxed in the UK for income tax and CGT purposes, whereas your domicile status will determine any charges to IHT.
Income Tax and Capital Gains Tax
Determining where you are tax resident
It can be tricky to determine your residence status, but there are tests that can help, and we can talk you through these if you are unsure. Generally, you will automatically be classed as non-UK resident if any of the following apply:
- You were not UK-resident for the preceding 3 tax years and you are present in the UK for under 46 days in the current year; or
- You were UK-resident for at least 1 of the preceding 3 tax years and you are present in the UK for under 16 days in the current year; or
- You work ‘sufficient hours’ overseas with no ‘significant breaks’ and you are present in the UK for under 91 days and under 31 working days for more than three hours a day in the current year.
If you are not automatically classed as non-UK resident, you may instead be automatically classed as UK resident if any of the following apply:
- You are present in the UK for 183 days or more in a tax year; or
- You have a ‘home’ in the UK available to you for at least 91 consecutive days (30 of which are in the current tax year), with no home overseas during this time and you are present in the UK for at least 30 days in the current tax year; or
- You have a ‘home’ in the UK available to you for at least 91 consecutive days (30 of which are in the current tax year) and you are present in the UK for at least 30 days and you are present in your overseas home for under 30 days in the current tax year; or
- You work ‘sufficient hours’ with no ‘significant breaks’ in the UK for at least 12 months and at least 1 working day falls within the current tax year and over 75% of your working days in the 12 months are UK working days.
When determining whether you are either automatically UK or non-UK resident as above, there are rules to determine what is meant by ‘sufficient hours’ and ‘significant breaks’, which we can discuss with you. Also, an exemption will apply to the ‘significant hours/breaks’ tests if you work in certain industries. In addition, you should note that there are different tests if your tax residence status needs to be determined because of death.
If you are neither considered to be automatically UK nor non-UK resident in line with the above tests, a further test is applied known as the ‘sufficient ties’ test. This can be complicated and your tax status will be determined dependent on your ties to the UK based on your family here, where you work, whether you have a place to live in the UK and how long you have spent in the UK compared to any other country, in particular if you have spent over 90 days in the UK in the last 2 tax years.
The effect of residence status on income tax and capital gains tax
Your tax residence status is the primary determining factor when considering both income tax and CGT. If you are UK tax-resident, you will be liable to income tax on both UK and foreign income, although there may be double tax relief depending on whether you are also subject to taxation in another country, such as Spain. You will be liable to CGT on any gains that arise worldwide, which can occur if you dispose of an asset either by way of a sale or gift.
UK-residents who are non-UK domiciled have special treatments. They are known as a ‘resident non-domiciliary’ or ‘RNDs’. RNDs are liable to income tax and CGT on all UK income and gains as they arise and all foreign income and gains as they arises unless they choose to be taxed on the ‘remittance basis’. For more information on what the remittance basis means for you and when it can be claimed, you should speak to one of our specialist advisors.
Non-UK residents are only subject to income tax on UK income and not foreign income, and in addition some exemptions apply, which we can discuss with you.
Non-UK residents are generally not liable to CGT on any gains worldwide, even those arising on the disposal of UK assets. However, they will be liable to CGT on the disposal of UK land, including shares in property rich companies. It used to be that this related only to UK residential property but will now (since 6 April 2019) also apply to the disposal of UK commercial property.
Temporary non residence rules
You should be aware that if you temporarily leave the UK for a year or two in order to avoid UK taxation (e.g., if you are selling an asset and you want to avoid CGT that year), anti-avoidance rules can kick in to prevent this. For further advice on this, you should speak to one of our specialists.
Residence of trusts
The taxation of trusts is complex, and our specialist advisors can give you some guidance and advice if you are appointed as a trustee of a trust. This can become even more complex if the trust becomes non-UK resident (referred to as ‘offshore’).
Usually, a trust will be UK resident if all trustees are UK resident or there is a mixture of both UK resident and non-UK resident trustees and the settlor (the person who set up the trust) is UK resident or UK domiciled at the ‘relevant time’ (see below for a guide about domicile).
A trust will usually be classed as offshore if all trustees are non-UK resident or if there is a mixture of both UK resident and non-UK resident trustees and the settlor is non-UK resident or non-UK domiciled at the ‘relevant time’.
If the trust is created by a person’s will upon their death, the ‘relevant time’ will be the date of death. If the trust is created during a person’s lifetime, the ‘relevant time’ will be the date the trust was created or the date funds are added to the trust.
There are significant tax implications of a trust being either UK or non-UK resident, and care should be taken to ensure that the trust doesn’t become one or the other unintentionally. This can happen for example if a trustee retires, dies or changes their own residence. If the trust accidentally becomes UK resident, then it will fall within the UK taxation regime and this often cannot be reversed without triggering an ‘export charge’.
Inheritance Tax
Determining where you are domiciled
The concept of domicile is fairly unique to the UK and is not a unified global concept. Your domicile may differ from your nationality and your place of residence.
Everyone is born with a domicile of origin, which is usually based on your parentage. If your parents are married, then your domicile of origin will be that of your father’s, but if your parents are unmarried of your father has died before birth, then your domicile of origin will follow your mother. A foundling’s domicile is determined by the place they are found.
A domicile of origin within the UK can be displaced by acquiring a domicile of dependency or a domicile of choice. A domicile of dependency generally only applies to children under 16; essentially if the parent from whom you acquired your domicile of origin changes his/her domicile, your domicile will change also. It also used to be that upon marriage, a woman would acquire her husband’s domicile, but this is no longer the case post 1 January 1974. If you acquire a domicile of dependency, then this will remain your domicile beyond the age of 16 until the point that a new domicile is acquired.
A domicile of choice is acquired by having a physical presence in the relevant country, with the intention of remaining there ‘permanently or indefinitely’ and what this means has been interpreted by case law as meaning the intending to be there for ‘the rest of your days’. This is particularly hard to evidence, but generally would involve severing all ties with the UK. A domicile of choice in Spain, for example, would not necessarily simply be acquired by leaving the UK if you were to retain assets in the UK or if there is a clear intention to return.
For those without a UK domicile of origin, it is also possible to acquire what has become known as a ‘deemed’ UK domicile, and this usually be the case where you have been resident in the UK for 15 out of the last 20 years (i.e., you are therefore deemed UK domiciled at the beginning of the 16th year of UK residency). It is therefore often important to consider your tax-residence status (as outlined above) when determining your deemed domicile status.
For those that have acquired a deemed UK domicile, for income tax and CGT purposes, you will remain deemed UK domiciled for 6 tax years after leaving the UK, but if you were to return to the UK within this 6-year period, you will then immediately become UK deemed domiciled again. Conversely, for IHT purposes, you will remain deemed UK domiciled if you have been UK resident for at least 1 of the 4 tax years ending with the tax year in which the charge arises. Therefore, you will lose the deemed UK domicile status after your 3rd complete tax year of non-UK residence. However, if you return before a complete 6 years has expired, you will again become deemed UK domiciled immediately.
The effect of domicile status on inheritance tax
The effect of domicile on the charge to IHT is significant. If you are UK domiciled, your whole worldwide estate upon death will be chargeable to IHT in the UK. However, if you are non-UK domiciled, only your estate in the UK will be chargeable to IHT in the UK.
Further, the exemption that applies to an inheritance from a spouse may be limited if you or your spouse has a non-UK domicile. In these cases the value of the exemption is currently limited to £325,000. It is possible to avoid a charge to IHT in these cases if the spouse receiving the inheritance is non-UK domiciled but elects to be treated as UK domiciled, but he/she would then be treated as such for the rest of his/her lifetime, and this can have significant consequences.
You should also be aware that there may be IHT (or a similar tax) payable in Spain, or other relevant country/countries. If this is the case then relief from IHT may apply; whilst the UK and Spain have not signed a taxation treaty, a relief known as unilateral relief may sometimes be claimed.
Inheritance tax and trusts
Trusts may also become chargeable to IHT. The IHT regime for trusts is outside the scope of this article, but it is important to note that domicile is also of relevance here. In summary, if a trust is created by a non-UK domiciliary and contains non-UK assets that qualify for an exclusion, then it may qualify as an excluded property trust. This means that the trust may not be subject to some of the usual IHT charges that apply to trusts generally.
The tax position for both individuals and trusts is complex and you should always seek the advice of a specialist tax advisor if you live in Spain for at least part of the year, or if you have assets in Spain. Similarly, Spanish nationals or residents who have assets in the UK should also take tax advice in conjunction with their succession planning. Our lawyers and accountants at Nockolds are here to help!
For more information and to find out how we can help you, please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.