Escape UK Tax as a Non-Resident Tax Exile
THE NEWSPAPERS often tease us with stories of rich and famous actors and sports stars who live in glamorous tax havens like Monaco or the Bahamas.
With the UK’s top income tax and national insurance rate rising to 52% in April, many taxpayers may be considering moving abroad to escape High Tax Britain.
For more up to date information on this subject, browse our tax guide for non-residents
A non-resident may be able to avoid both UK income tax and capital gains tax. The problem is that nobody seems to know how to become one! The term non-resident has never been defined in the tax legislation.
It used to be thought that to become non-resident all you had to do was leave the country and limit your visits to the UK to less than 91 days per year on average (and less than 183 days in any single tax year).
It turns out that the number of days you spend in the UK is just one of the factors HMRC will look at when determining your residence status.
Nowadays you have to show that you have made a ‘distinct break’ from the UK and severed many of your ties to the country. Unfortunately this is an extremely subjective test.
As a result, many expats can no longer be absolutely certain that they are in fact non-resident, even though they have lived abroad for many years.
Before we explain how HMRC determines your residence status, it’s important to point out that there is one type of individual who will probably still find it relatively easy to become non-resident.
If you go abroad to work full time you will become non-resident, without having to sever your ties to the UK, providing:
- You are leaving to work abroad under a contract of employment for at least one whole tax year,
- You have actually left the UK to begin your employment abroad and not to have a holiday before you begin your employment,
- You will be absent from the UK for at least a whole tax year, and
- Your return visits total less than 183 days in any tax year, and average less than 91 days per tax year on a four-year average.
Under these circumstances, you will become non-resident for income tax purposes from the day after the day of your departure. (You will not become non-resident for capital gains tax purposes until at least the start of the next tax year.)
Your spouse will also enjoy the same tax treatment, even if not in full-time employment abroad, providing he or she lives abroad for at least a whole tax year and meets the 183 day and 91 day tests.
Leaving the UK Permanently
If you do not leave the UK to work in full-time employment, you can become non-resident by demonstrating to HMRC that you have left the UK permanently or indefinitely.
According to HMRC guidance:
“Leaving the UK ‘permanently’ means that you are leaving the country to live abroad and will not return here to live. Leaving ‘indefinitely’ means that you are leaving to live abroad for a long time (at least three years) but you think that you might eventually return to live here, although you do not currently have plans to do so.”
Apart from leaving the country you must also make a definite break from the UK and sever many of your social and economic ties.
How to Sever Ties with the UK
The following are some (but not all) of the factors HMRC will look at when building a picture about your ties to the UK:
- Family ties – do your spouse, children or other family members live in the UK?
- Social ties – do you have club memberships or regularly attend events?
- Business ties – are you a director of a UK company? Do you have employment or self-employment in the UK? Do you have regular employment duties in the UK? Do you repeatedly come to the UK for business meetings?
- Property ties – Do you own a property in the UK? Do you own a rental property that also provides you with accommodation when you visit the UK?
Some ties are easier to sever than others. Selling your UK home
and making sure that you do not have available accommodation here is very important and arguably one of the easier things you can do.
Clearly some emigrants will find it easier to convince the taxman that they are non-resident than others.
Those who leave the country, sell all their UK assets, take their families with them, set up a new business or start a new job in their new homeland, only returning very occasionally (for example for a couple of weeks every year to visit friends), will probably not find it difficult to convince the taxman that they are non-resident.
It seems that HMRC’s main grudge is against those who want to have their cake and eat it: by keeping a home and business interests in the UK, while also claiming non-resident status.
One such individual is Robert Gaines-Cooper, whose case goes before the Supreme Court later this year, following his defeat in the Court of Appeal last year. As much as £30 million of tax is at stake.
Gaines-Cooper is a multimillionaire globetrotting businessman with interests in many countries. He insists that he is non-UK resident because he has been based in the Seychelles for the last 30 years and has religiously kept to the taxman’s published guidance by spending less than 91 days per year in the UK.
Unfortunately the judges in the Court of Appeal disagreed. They followed the taxman’s line that day counting is just one factor that needs to be taken into consideration when determining an individual’s residence status.
The judges looked for the ‘centre of gravity’ of Mr Gaines-Cooper’s life and interests and decided that it had remained in the UK.
Gaines-Cooper made many mistakes which could arguably be avoided by anyone wanting to become non-resident: he kept many unnecessary UK ties, he didn’t move to a country which had a tax treaty with the UK (a tax treaty could have more easily determined in which country he was resident), he kept a home and car collection in the UK and his wife and child lived in the country.
Many expats won’t know where they stand for sure until the final outcome of this case is known.
Possibly the most difficult tie to sever could be your business interests in the UK. Those who retain business interests in the UK face the possibility of having their non-resident status challenged.
It’s important to remember that, even if you do achieve non-resident status, you will still have to pay UK income tax on certain assets you leave behind. Furthermore, to avoid capital gains tax, you will need to be both non-resident and non-ordinarily resident for at least five complete UK tax years.
For example, if you own rental properties in the UK, you will probably have to pay UK income tax on your rental profits.
I say ‘probably’ because the tax treatment may depend on the terms of any double tax agreement between the UK and your new country of residence. Most treaties give the UK the right to continue taxing you on property here however.
So, if you earn all your income from UK rental property, you may not save a penny in tax by fleeing to a tax haven.
By becoming non-resident you will, however, be able to sell your properties and escape UK capital gains tax, providing you remain non-resident for at least five complete UK tax years. You can then start a new property empire elsewhere!
For those with more modest incomes, it is worth noting that UK nationals, EU citizens and certain other individuals who become non-UK resident are still entitled to claim the income tax personal allowance, which will increase to £7,475 from 6th April 2011.
Couples will therefore be able to enjoy up to £14,950 of UK rental profits without having to worry about UK income tax.
If you own a sole trader business or a share of a partnership based in the UK, you will be subject to UK tax on your profits.
If you own a UK company, you generally can’t take it with you when you become non-resident. Its profits will usually continue to be subject to UK corporation tax. From April 2011, the tax rate is 20% on the first £300,000 of profits.
The after-tax profits can, however, be extracted by way of a dividend which could be tax free if you live in a tax haven.