Taxcafe.co.uk - Essential Tax Information

Non-Resident Taxation

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Non resident taxation treatment can be very advantageous and can significantly reduce or even completely eliminate your UK tax charge. We therefore thought it would be useful to look at some of the common non resident taxation mistakes. Have a read through these and make sure you don't fall into any of the traps!

1) Non resident taxation mistake #1
Not establishing yourself as non resident from your departure

It sounds pretty obvious but unless you give up your UK residence you'll still be within the scope of UK taxes. In order to give up your UK residence status the best way is to move abroad permanently. This would entail selling or leasing (on a long lease if possible) your UK property, acquiring property overseas, transferring as many UK investments etc overseas and restricting UK visits. You should also ensure that you're non resident for at least three tax years. Other ways include going abroad under a full time contract of employment that will last at least a complete tax year or going abroad for a settled purpose.

2) Non resident taxation mistake #2
Not paying enough attention to timing

Ideally you should wait until the tax year after you leave the UK before realising any gains or receiving significant income. This way you'd be outside the scope of UK taxes on most income. There's no point leaving the UK in September and then selling assets in December at a substantial gain. The UK Revenue would usually still look to tax the gain even though you left the UK before the disposal. In this case wait until the following 6 April to crystallise the gain. If you needed to delay the disposal you'd be looking at using conditional contracts or cross options to ensure the disposal date was after the beginning of the new tax year.

3) Non resident taxation mistake #3
Not establishing non UK domicile status

If you're looking to avoid UK Inheritance taxes establishing non UK domicile status is crucial. A UK domiciliary is deemed to be domiciled in the UK for three years after leaving the UK, but after this date in these circumstances it is generally advisable to establish non UK domicile status as soon as possible. This would also help to protect the position if you needed to come back to the UK for any reason (eg medical care etc)

4) Non resident taxation mistake #4
Spending too much time in the UK

If you spend either in excess of 183 days in the UK in any tax year or average over 90 days in the UK on average over four tax years you will be classed as UK resident. It's frequently this last time limit that is exceeded.

The recent Budget has confirmed that you’re classed as being in the UK if you’re here at midnight. So although the day of arrival will be classed as a day spent in the UK the day of your departure shouldn’t be.

The Revenue have also made it clear that in certain circumstances just abiding by the daily requirements on their own isn't sufficient to avoid being classed as UK resident. You would need to ensure that you followed point 1 above to make yourself non UK resident. If you still had the UK as your main 'home', even though you spent less than 90 days per tax year here you'd run the risk of still being classed as UK resident.

5) Non resident taxation mistake #5
Not establishing treaty residence overseas

In order to safeguard your non residence position it's always a good idea to get yourself classed as treaty resident overseas. This of course assumes that the country you are planning to be a resident of has a tax treaty with the UK.

Most 'standard' tax treaties would include a provision along the lines of this (which is taken from the UK-Cyprus treaty):

'...(2) Where… an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:

(a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer.

(b) If the Contracting State with which his personal and economic relations are closer cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode.

(c) If he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national.

(d) If he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall determine the question by mutual agreement...'

Therefore, essentially, if you are classed as resident according to both the UK and overseas tax rules you should be looking to establish yourself as having a permanent home overseas.

6) Non resident taxation mistake #6
Failing to adequately plan for the overseas tax regime

Essentially this is the 'out of the frying pan and into the fire' scenario. There's no point leaving the UK to avoid high rates of income tax, and moving to Spain for example which can have even higher rates of income tax (although the same rate of CGT). Therefore ensure you know exactly which UK taxes you are keen to avoid/minimise and research the overseas jurisdiction to ensure that you really can achieve that tax saving.

7) Non resident taxation mistake #7
Assuming that all assets will be outside the scope of CGT when you're non resident

This is a common mistake. You leave the UK, become non UK resident/ordinarily resident and plan to sell your UK business free of UK tax. Unfortunately the CGT rules would still tax any gain arising from a UK branch or agency trade. Essentially this means that most UK sole trader or partnership businesses would still be within the scope of CGT even if you were non UK resident. A common way to get around this would be to incorporate the businesses and sell the shares. This would then not be classed as a gain from a UK branch or agency trade.

8) Non resident taxation mistake #8
Using UK companies to establish businesses which retain profits within the UK tax net

Unlike the above, using a UK business can be disadvantageous in terms of ongoing profits. If you ran a business as a sole trader you could personally move overseas and providing the business was not carrying on a trade in the UK via a permanent establishment there should be no UK tax to pay. This means if you established residence in a zero tax haven eg Monaco or Andorra you could escape tax completely.

By contrast if you used a UK company you'd be subject to UK corporation tax even if you were non UK resident. You could extract cash from the company free of tax, but the actual profits of the company would be subject to UK tax.

Therefore if you're planning on becoming non UK resident you may want to think twice about using a UK company to run a non UK business (eg an internet trading business).

9) Non resident taxation mistake #9
Not considering the National Insurance position

Most people moving abroad only think about the tax implications. However national insurance can also be important particularly where you go to work overseas.
As a general rule there is a requirement for an employer to pay Class 1 NIC's on salary for the first 52 weeks you are working abroad if it’s a short term posting. However this will depend on the country you’re working in, your employer having a place of business in the UK and you being UK ordinarily resident.

10) Non resident taxation mistake #1
Not notifying the Revenue

This can be costly. You should let them know on a form P85 and also complete your self assessment returns on the basis of your non UK resident status (ie complete the residence supplementary pages). If you don't you won't be receiving your tax returns and unless you elect to file online you'll be racking up penalties for not filing returns. If you are non UK resident and have no UK taxable income you should write to the Revenue asking them to amend their self assessment records.