Tax Advice and Tax Planning: Non-Resident Taxation in the United Kingdom
. Generally speaking an individual is assessed to income tax in the United Kingdom if he is deemed to be UK resident for fiscal purposes. Unlike the United States, citizenship is not a basis for levying income tax. Generally speaking a person is deemed UK resident for fiscal purposes: in any tax year in which he lives in the UK for more than 182 days or if his visits to the UK exceed 91 days per tax year for 4 consecutive tax years in which case he is tax resident in the 5th year or alternatively from the commencement of the tax year in which he first stated his intention to make such visits to the UK. If he makes regular visits which are substantial, habitual and obligatory: Such visits may indicate residence provided they exclude an element of chance and occasion and provided they follow an almost mechanical regularity. An existing resident of the UK can become non-resident for tax purposes by being out of the country for at least one period of 365 days, during which he did not spend more than 91 days in the country, with days of arrival and departure not being counted.
An individual can also claim "non domicile" status if this is beneficial. Domicile is less governed by the length of an assignment, and individuals who do not intend to remain in the UK permanently are likely to be able to claim non domicile status. An individual who is considered non domiciled in the UK will only pay UK tax on overseas investment income and gains to the extent that the income or proceeds are remitted to the UK. The claim can be made through the submission of Inland Revenue form DOM1.
There are a number of tax planning strategies that may be available to individuals moving to the UK which can significantly reduce the liability to UK tax. Many of these opportunities will require the correct structuring of a taxpayer's financial affairs, and advice should therefore be sought at an early stage to maximize any applicable tax savings. There is no system of joint filing and therefore married couples must submit separate tax returns. For all tax resident individuals, a personal allowance of tax-free income is available. Non-residents who are nationals of EU or Commonwealth countries can also claim a personal allowance. Understanding this complicated tax system and paying the minimum amount of personal tax, at the correct time, through the correct mechanism, is what most clients seek. Speak to our tax technicians and put your mind at ease. We may even be able to suggest ways to restructure your affairs to save further tax.
Further information
UK Tax Planning for the Non-Resident and Non-Domiciled. Domicile, ordinary residence and residence are the main determinants of liability to UK tax. The issues are complex and the rules are under review. Basically a person's domicile is the country that the individual regards as his or her natural home. Each person has only one domicile which is normally, but not always the country of birth; it can be changed, usually with some difficulty. Ordinary residence is the country where a person normally lives or makes habitual visits, ie visits of three months or more a year over four consecutive years. Residence in the UK is normally established by someone who visits the UK for at least six months in any one tax year, or three months a year over four consecutive years.
Non-UK Income. UK residents pay tax under Sch D Cases IV and V on income from overseas trades, professions, property and investments. Income is calculated similarly to UK income. UK residents who are non-UK domiciled or are UK or Eire citizens not ordinarily resident in the UK, pay tax only on income brought into the UK (remittance basis). Employees who are UK resident and ordinarily resident pay tax under the earnings rules on their remuneration wherever the duties of their employment are carried out. Employees who are not ordinarily resident in the UK, and UK resident non-domiciled employees working wholly abroad for a non-resident employer, pay tax on their overseas remuneration on the remittance basis. Non-UK residents are not normally liable to UK tax on overseas income.
Non-UK residents generally pay tax on their UK income.
Tax may be deducted at source from property income. Only certain non-residents are entitled to personal allowances. They include all Commonwealth citizens, all nationals of European Union states, Norway, Iceland and Liechtenstein and all residents of the Channel Islands and Isle of Man. The UK income tax liability of a non-resident is subject to an upper limit. The calculation is complex but the broad effect is that no tax is charged on UK bank and building society interest and state pensions paid to non-residents provided they do not claim any personal allowances. Subsection (1) provides that a non-UK resident company is only within the charge to corporation tax if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.
This does not necessarily mean that a non-UK resident company that is not carrying on a trade in the United Kingdom through a permanent establishment is not subject to UK taxation on its profits, as it may well fall within the charge to income tax. This is typically the case for non-UK resident companies that receive income from UK land, where income less expenses is charged to income tax at the basic rate (22% in 2005-06). The precise meaning of non-UK resident, carrying on a trade in (the United Kingdom) and permanent establishment are all important in deciding whether a foreign company is within the charge to corporation tax, and if so, to what extent. Subsection (2) provides that a non-UK resident company within the charge to corporation tax is charged to corporation tax only on its profits, wherever arising, that are attributable to the permanent establishment.
Subsection (2A) provides a list of which profits are attributable to a permanent establishment, namely: trading income arising directly or indirectly through or from the establishment. income from property or rights used by, or held by or for, the establishment, and; chargeable gains failing within Section 10B of TCGA (i) by virtue of assets being used or held for the purposes of the trade carried on by the company through the establishment, or (ii) by virtue of assets being used or held for the purposes of the establishment or being acquired for use by or for the purposes of the establishment. In practice, deciding what this amounts to can be difficult, particularly in the financial services industry, where funds held overseas may be supporting business arising from a UK permanent establishment.
This Subsection is therefore supplemented by Section 11AA and Schedule A1. Life insurance companies have their own rules set out in Sections 11A to 11C of ICTA (as deemed to be inserted by Schedule 19AC to ICTA). Subsection (3) mimics the provision in Section 7 that applies to UK resident companies. It provides that where a non-UK resident company to which this Section applies has received income under deduction of income tax, and it brings that income into its corporation tax computation, the income tax suffered may be used to offset the corporation tax charge for the period in which that income is brought into the corporation tax computation. Subsection (4) disapplies subsection (3) for a payment of loan interest to which Section 369 of ICTA applies.
Section 369 deals with mortgage relief at source. As mortgage relief at source no longer applies, this subsection no longer has any practical effect. This Subsection mimics Section 7(3).
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The United Kingdom is not tax haven, but it does have relatively low tax rates compared with some other European countries, and it offers exemption from tax for income from foreign investments for people who are resident but not domiciled in the United Kingdom. For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities.
The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few "visiting" residents will therefore have a United Kingdom domicile.
Foreign investment income is exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they can safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation. Note however that capital gains crystallised abroad during a period of residence are deemed to be remitted to the UK, and are then taxed. Some types of mutual or hedge fund impose capital gains unilaterally on members.
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American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of this UK possibility, but for all other nationals, it is available. This rule has led to many foreign celebrities making the UK their home for tax purposes.
The United Kingdom tax year runs from 6 April to the following 5 April. The Inland Revenue requires taxpayers to file an annual return of taxable income and gains arising in that period by 31 January in the year following the end of the tax year. For many individuals, all their tax is either collected and paid by their employer or otherwise deducted at source (e.g. on bank interest), so no return is required.
However, most individuals who pay tax at the higher rates and have sources of income other than from employment are likely to need to file a tax return.
LIABILITY - RESIDENCE & DOMICILE
An individual's liability to UK income and capital gains tax will depend principally on their residence and domicile status. The rules are complex, and specific advice should always be taken, but in general terms:
If you are not resident or ordinarily resident in the UK, you will be subject to tax on United Kingdom source income but not capital gains. If you are resident, but neither ordinarily resident nor domiciled in the UK, you are taxable on income and gains from United Kingdom sources (with the exception of certain United Kingdom government securities) and on foreign income and gains paid in, or remitted to, the United Kingdom. If you are United Kingdom resident and domiciled but not ordinarily resident, you are taxable on worldwide income (with the exception of certain United Kingdom government securities) and gains.
Domicile is a general law concept and broadly speaking, you are domiciled in the country where you have your permanent home. In this way, domicile is distinct from nationality or residence and an individual can only have one domicile at any given time. It is possible to have more than one tax residence.
CAPITAL GAINS TAX (CGT)
Generally speaking an individual is assessed to income tax in the United Kingdom if he is deemed to be UK resident for fiscal purposes. Unlike the United States citizenship is not a basis for levying income tax. Generally speaking a person is deemed uk resident for fiscal purposes:
In any tax year in which he lives in the United Kingdom for more than 182 days. If his visits to the United Kingdom exceed 91 days per tax year for 4 consecutive tax years in which case he is tax resident in the 5th year or alternatively from the commencement of the tax year in which he first stated his intention to make such visits to the United Kingdom. If he makes regular visits which are substantial, habitual and obligatory: such visits may indicate residence provided they exclude an element of chance and occasion and provided they follow an almost mechanical regularity.
An existing resident of the UK can become non-resident for tax purposes by being out of the country for at least one period of 365 days, during which he did not spend more than 91 days in the country, with days of arrival and departure not being counted. Non-residents are generally speaking only liable to uk income tax on income derived from:
Property situate in the United Kingdom. Any trade or profession carried on through a branch or agency in the United Kingdom. Any employment the duties of which are performed in the United Kingdom.
This rule has led to many UK nationals seeking to become non-resident by moving abroad. In the United States by contrast the mere fact of citizenship means that a US national living in a foreign country is still liable to pay income tax in America on his worldwide earnings with a credit being given for any taxes already paid or due in a foreign country.
UK non-residents do not pay tax on:
Interest from certain United Kingdom Government securities. Interest from UK-situate bank and building society deposits. However, it is no longer possible to avoid capital gains tax by arranging for a gain to crystallise during a short period of overseas absence: five years' of non-residence is required before a gain on an asset acquired during residence is exempt from United Kingdom capital gains tax. The new rules for taper relief have made this provision almost irrelevant, in fact.
Capital gains tax (CGT) arises on the disposal of assets. This covers a sale, gift or compensation for loss or damage to an asset. The value on which the gain (or loss) is based is normally the consideration received, less the acquisition cost. However, on a gift or on certain sales, the open market value is used instead.
The first £7,700 of an individual's net gains realised during the tax year are free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £1,920, 20% on the next £27,980 and 40% on the balance.
Taper relief is available to reduce the chargeable gain on disposals made after 5 April 1998. Different rates of taper relief apply to business assets and non-business assets. There are very generous rates for business assets, which include shares in trading companies. A number of other reliefs are available to reduce or defer the charge to CGT in specific circumstances.
Gains on certain assets are exempt (and losses not allowable). These include: an individual's or married couple's only or main residence; private motor cars; chattels worth less than £6,000, enterprise investment scheme and venture capital trust shares; government securities; qualifying corporate bonds and individual savings accounts.
NON-UK RESIDENT CORPORATE TAX PLANNING OBJECTIVES
The principal concerns in the corporate taxation field will often be to ensure:
That the overseas parent does not become resident in the UK for tax purposes (and it should be noted here that under UK tax law, a corporation can be resident in more than one jurisdiction). To isolate, so far as possible, the profits of the parent from the charge to United Kingdom tax.
UNITED KINGDOM CORPORATE RESIDENCE
Companies incorporated in the United Kingdom are UK resident for tax purposes. Companies incorporated outside the UK are UK resident for tax purposes if their central management and control is exercised in the UK. The place where the central management and control of a company is exercised has been determined under English law by reference to where its board of directors exercise their control, which is not necessarily where they meet. It is a question of fact in each case where the central management and control is exercised.
If in practice the central management and control of the overseas parent takes place in the UK, there is a risk that the United Kingdom Inland Revenue will claim that the overseas parent is for tax purposes centrally managed and controlled in the UK. It may therefore be prudent in such circumstances to arrange for a formal separation of the parts of the business carried on in the UK from those carried on outside the UK by the creation of a separate corporate entity to perform those functions within the United Kingdom.
A non-UK resident company which carries on trade in the UK through a branch is chargeable to UK Corporation Tax on the profits arising directly or indirectly through or from the branch. Clearly such a charge will arise if a branch operation is established and the difficulty then will be to agree with the UK Inland Revenue the amount of the overseas corporations profits which arise in that way.
The danger of a charge on the overseas parent also exists where a subsidiary company is established if it is done on the basis that the subsidiary is the parent's agent in the UK. In such a case it should be possible to argue (if careful internal procedures are followed) that it is the subsidiary rather than the parent that is trading in the UK and that therefore only the profits of the UK company, which are clearly identifiable, should be charged to UK Corporation Tax.
TRANSFER PRICING
All transactions between the overseas parent and a UK subsidiary are subject to scrutiny by the UK Inland Revenue to ensure that they are on an arm's length basis. Under the new self-assessment regime, the taxpayer is under a duty to ensure that its tax liabilities are on the basis of arm's length prices. Failure to do so will involve penalties and interest. It is now important to have evidence available as at the time prices are arrived at to justify the arms length basis, and avoid penalties if different figures have to be substituted for tax purposes.
Since they will be "associated companies" under the tax legislation, the United Kingdom Inland Revenue will be able to substitute for UK tax purposes arm’s length charges for services provided in the place of those charges actually made.
The UK Inland Revenue will expect a UK subsidiary to make a profit so it is prudent that charges should allow for generation of such a "profit" in the region of 10% of the costs incurred by the UK company in conducting its activities.
DEFINING STATUS
Whether a branch or subsidiary is used, it will be important that its activities are clearly defined and preferably documented in an agreement with the overseas parent. Where the overseas corporation wishes to avoid UK tax residence, it is particularly important that the UK operation does not have authority to conclude contracts on behalf of the parent.
CONTROLLED FOREIGN COMPANIES
Whilst the rules for taxation of "controlled foreign companies" (CFCs) are not directly relevant to setting up a UK subsidiary or branch, they could become relevant if a UK subsidiary eventually holds shares in overseas companies. The main purpose of the legislation is to counter the abuse of tax havens by companies diverting profits to low tax countries.
Under the provisions of Income and Corporation Taxes Act 1988 relating to CFCs, companies are required to compute their tax liability including the profits of any CFCs.
There are a number of exclusions whereby the CFC rules do not apply such as where the chargeable profits of the foreign company for the accounting period do not exceed £20,000 where the foreign company is situated in a territory which does not have a lower level of taxation, where the foreign company follows an "acceptable distribution policy" or where the main motive is not to divert profits out of the UK.
The Government announced several changes which tighten the CFC regime. From 21 March 2000 the definition of control is changed from 50% to 40% i.e. a company not resident in the UK will be regarded as a CFC for UK tax purposes if it is at least 40% controlled by a United Kingdom company and at least 40% controlled by a foreign company.
IMPORTANT NOTE
Our corporate, tax and securities lawyers have extensive experience in the issues involved in all type of business entities, including corporations, private limited companies, public companies, limited liability companies, limited partnerships, general partnerships, limited liability partnerships and professional associations. Our lawyers advise clients in the choice of entity to utilize for any given business venture. Such advice includes the tax advantages of the respective entities as well as the non-tax or business issues involved in each type of entity.
Our lawyers continue their representation of such entities on an ongoing basis and advise the entity and its owners regarding the business issues which arise from time to time (such as labor and employment issues, tax issues, negotiating contracts, securities issues and licensing and regulatory matters). Our lawyers also represent many entities which are involved in negotiating mergers with other entities or acquisitions of other entities. This representation includes advising the business and the owners on the purchase or sale of a business and on tax-free mergers or other reorganizations of business entities, as well as structuring divisions of an existing entity into two or more new entities.
We structure a variety of commercial lending transactions including corporate loans, real estate development loans, asset based loans, agri-business loans, floor plans and home builder lines of credit. Members of our firm advise financial institution clients and their corporate counsel on a daily basis with respect to general lending issues including those relating to UK and Cyprus documentary stamp and intangible taxes, bankruptcy and creditors' rights, environmental concerns and problem loans. We have extensive experience in complex loan workouts.
The firm's Trusts and Estates attorneys specialize in estate and trust administration matters and the development of estate tax planning strategies designed to help our clients achieve maximum savings in income, estate, gift and generation skipping taxes. Our Trusts and Estates attorneys handle the traditional aspects of personal estate planning, such as the preparation of revocable trusts, wills and irrevocable trusts, and also deal with all aspects of tax controversies with the Internal Revenue Service dealing with estate, gift and generation skipping tax, including filing estate and gift tax returns, representing our clients in audits of those returns, and appeals to the IR and courts of proposed tax deficiencies.
Our attorneys monitor the latest developments in both tax and non-tax laws affecting estates and trusts and lecture extensively on those subjects around the country to numerous professional groups and organizations. The firm's Trust and Estate attorneys are proficient in analyzing and implementing the latest techniques to reduce estate and gift taxes, including, for example, family limited partnerships, GRATS and charitable remainder and lead trusts.
The firm's Trusts and Estates attorneys also advise our clients on the income, gift and estate tax consequences of charitable gifts; handle the negotiation and preparation of marital agreements; provide asset protection planning for individuals; and have extensive experience in the establishment of private and publicly supported charitable organizations, international estate planning and estate and trust litigation, as well as post-mortem tax planning. We recognize that a client's estate planning needs and matters that arise in the course of estate planning and administration frequently require expertise in other areas of the law, and we work closely with the firm's attorneys in other practice areas, including litigation, real estate, corporate and tax, to provide our clients with thorough legal advice.
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