Tax Exile Status
Tax Exile Status. We've all read in novels and the popular press of the rich and famous avoiding UK taxes by basing themselves overseas and flitting in and out of the country to conduct business dealings. In the past, obtaining tax exile status in this way was reserved for the very wealthy who had the access to the expertise, as well as the cash resources, to allow them to gain residency in low-tax jurisdictions and to fund this kind of lifestyle.
Now, though, with the ease of international travel and the rise in wealth of the middle classes, there are more openings to allow anyone to consider taking advantage of these opportunities to obtain tax exile status.
Why obtain tax exile status?
Well the answer to this is pretty obvious...to avoid taxes! Although the UK does have some generous tax reliefs, especially for businesses or assets that are used by a business, there are still a significant number of people who could be subject to high rates of tax.
Who becomes a tax exile?
Anyone can become a tax exile, but here are some of the typical people who move overseas to avoid UK taxes:
- UK property investors
One of the biggest groups of people who can be hit by higher tax rates are property investors. The high price rises over the past couple of years have left many with huge paper gains, but also significant levels of debt. If properties have been remortgaged to obtain funds to invest in more property purchases it could easily be the case that there may not be enough cash left after the sale to satisfy any UK tax bill.
By moving overseas before disposal, they would be looking to ensure that any disposal of the properties would be free of UK capital gains tax. If they also establish residence in a capital gains tax-free country, they could avoid overseas tax as well.
- UK shareholders
They can avoid UK income tax on dividends and capital gains tax on share disposals by becoming a tax exile
The nature of the internet means that they can conduct their business from anywhere. Many websites are run from one-room operations and have limited staff or running costs. Depending on the services actually provided, they can structure their activities as being conducted from overseas to ensure that they avoid UK tax and filing requirements.
- Wealthy Pensioners
Inheritance tax is a big issue for many. Losing UK domicile allows them to potentially avoid UK inheritance tax on their overseas estate.
How to avoid the main UK taxes
This is determined to a large extent by your residence status. Therefore if you are UK resident you'll be charged UK income tax on your worldwide income. If you're non-UK resident, you'll only be charged UK income tax on your UK income. However, in practice there are a number of exemptions for non-UK residents.
In particular, if you're non-UK resident (and ordinary resident -- see below) you should be able claim an exemption for UK source interest and dividends on the basis that no tax is deducted at source.
So a non-resident shareholder can avoid UK income tax on dividends. Any overseas income will be excluded from UK tax but other UK income, such as UK trading income and rental income, will still be taxed in the UK, even if you're non-resident.
Capital gains tax
This is one of the key tax exemptions. Individuals who are non-UK resident are exempt from UK capital gains tax on UK and overseas disposals provided they're not used for the purposes of a UK trade. So unless you use the UK assets for the purpose of a UK trade you should be able to claim the capital gains tax exemption.
Note that a caveat here is that if you've owned the asset before you leave the UK you will usually have to remain overseas for five full tax years to avoid the capital gains tax charge.
This is the main attraction for many tax exiles, and UK property investors, for example, could take advantage of these rules to avoid paying any tax on the disposal of UK properties.
Your liability to inheritance tax has nothing to do with your residence status. Instead this is almost solely concerned with your domicile status. If you lose UK residence, you'll be able to take advantage of the income tax and capital gains tax exemptions as above, but your worldwide estate will still be subject to UK inheritance tax.
If you lost your UK domicile you'd only be subject to inheritance tax on your UK estate, although you'd find that most UK domiciliaries would have a UK estate that was below their UK nil rate band (as they'd hold assets overseas) to ensure there was no inheritance tax charge.
So if you wanted to become a total tax exile you'd need to lose both your UK residence and domicile status. If you weren't too concerned with inheritance tax, at least not for the time being, you'd be mostly focused on losing your UK residence status.
Losing UK residence status
There is a much-publicised rule from the Revenue that states you can lose UK residence if you are in the UK for less than 90 days per tax year (on average over a period of up to four tax years). However it's crucial that when considering this you don't see it as just a case of counting UK visits. Other people have done this and have come a cropper.
The Revenue are concerned with people leaving the UK, claiming non-residence but still having significant UK ties. So if you want to establish non-UK residence you should look at:
- Keeping UK visits to an absolute minimum, especially in the three tax years after you leave the UK
- As well as keeping the number of days to a minimum, you would also need to keep the number of separate visits to the UK to a minimum. The UK tax requires not only the number of days here to be disclosed but the number of visits.
- Selling UK property
- Buying a property overseas
- Gaining residence overseas
- Avoiding being a director in UK companies
- Transferring any remaining UK assets overseas
- Moving your family with you overseas
- Having your possessions with you overseas
When going overseas you should always try to ensure that your absence is for at least three years. When combined with the above this would then also assist in ensuring your are non-UK ordinarily resident (which is important, particularly in terms of the capital gains tax exemption).
Whichever option you go for or whatever tax you wish to avoid, actually cutting UK ties, selling UK assets and minimising visits are crucial. Ensure you take detailed advice on any plan to become non-resident for tax purposes.