COMING TO LIVE IN THE UK– WHAT MAKES THE UK SO

POPULAR?

For further information please contact:

WENDY WALTONTax PartnerPrivate Client Services

t: +44 (0)20 7893 2252e: wendy.walton@bdo.co.uk

RICHARD MONTAGUETax PartnerPrivate Client Services

t: +44 (0)20 7893 2213e: richard.montague@bdo.co.uk

PAUL AYRESTax PartnerPrivate Client Services

t: +44 (0)20 7893 2247e: paul.ayres@bdo.co.uk

For many years the UK has been a leading destination for wealthy individuals from around the world. London is the second most popular city in the world for the wealthy and it is predicted to remain so for at least the next 10 years.

BACKGROUND

There are many reasons why the UK is so popular with wealthy individuals including geographical location, language, schools, high quality residential property and political stability.

An extra reason is taxation. The UK is a relatively high tax jurisdiction but offers exceptional opportunities to wealthy individuals who move here from overseas to minimise their taxation liabilities.

UK tax law is exceedingly complex and it is essential that individuals obtain detailed professional advice on taxation, preferably well before they move to the UK.

The following paragraphs offer an introduction to the opportunities and pitfalls in UK tax law.

RESIDENCE

From 6 April 2013 the UK has introduced new rules to decide whether an individual is resident in the UK or not for tax purposes. The residence position of an individual with homes in different countries will be determined having regard to a combination of the time spent in the UK and the number of ties the individual has with the UK.

The legislation sets out four ties that are relevant to an individual who arrives in the UK for the first time. These are location of family, accommodation, work and ‘90 day’ ties. The ties have detailed definitions but are generally self-explanatory except the ‘90 day’ tie which asks whether the individual was present in the UK for more than 90 days in one or both of the previous two tax years.

An individual who comes to live in the UK and has a home, family and carries out more than 40 days of work in the UK each year may spend up to 90 days in the UK without becoming tax resident.

If they spend more days than that in the UK they will be tax resident.

THE REMITTANCE BASIS

The UK offers very favourable tax rules for individuals who, although they are tax resident, are not domiciled in the UK. The so called ‘non-doms’. As a general rule an individual who was born abroad with a foreign father and does not intend to remain in the UK permanently or indefinitely will not be domiciled in the UK.

A non-dom is subject to tax on UK income, such as bank deposit interest, dividends from UK companies and rent from UK property, and gains from disposals of UK assets (except their main home).

Foreign income and gains are only taxable if they are ‘remitted’ to the UK.

All income, profits, earnings and gains realised before an individual arrives in the UK are classified as ‘capital’ which will never be taxed when remitted to the UK.

With careful planning a wealthy individual can ensure that they live off remittances of capital to the UK and keep all their foreign income and gains outside the UK. A very attractive proposition for many which means they can minimise the amount of tax they pay in the UK and in many cases pay no UK tax at all.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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The concept of the remittance basis is rather simple, however the practical application is vastly complex. The idea of remitting capital to the UK is attractive, however if the individual wishes to grow their capital offshore it is difficult to separate the original capital from the growth. When capital becomes mixed with income and gains at banking level there are specific rules which state the order of remittances to the UK, which can be unfavourable. However with advanced planning it may be possible to ring-fence capital away from growth.

This favourable basis of taxation must be claimed each year if it is to apply. For the first seven years of residence the only cost of the claim is the loss of an annual personal allowance and the exemption of an amount of capital gains.

Once an individual has been UK resident in seven out of the nine previous years, they must pay a ‘remittance basis charge’ of £30,000 a year from the next year if they wish to continue to enjoy this favourable basis of taxation. This rises to £60,000 a year after 12 years of residence and £90,000 a year after 17 years of residence.

The definition of a taxable ‘remittance’ is very wide and includes both direct and indirect transfers of foreign income and gains to the UK. Examples of remittances other than simple transfers of income and gains to the UK are situations where an individual uses funds derived from foreign income and gains to:

• settle debts incurred in the UK (eg. purchases made in the UK using a credit or debit card)

• pay interest on a debt incurred in the UK

• settle a debt (including interest) incurred outside the UK, the funds from which were brought into the UK

• purchase an asset abroad and bring it to the UK (subject to a number of exceptions)

• pay outside the UK for a service provided in the UK (subject to a number of exceptions).

In addition, a taxable remittance may be made by the individual himself or by a ‘relevant person’ which includes the individual’s spouse, minor children and grandchildren, certain closely held UK and foreign companies in which the individual is a shareholder and offshore trusts of which they are a beneficiary.

Because of these complexities, it is essential for detailed advice to be obtained to ensure that an individual enjoys the maximum benefit from the availability of the remittance basis.

INHERITANCE TAX

Liability to inheritance tax is generally limited to UK assets for non-domiciled individuals although worldwide assets come within the scope of this tax once an individual has been UK resident in 17 of the last 20 years.

OFFSHORE STRUCTURES

It is common for non-doms to hold assets within offshore trust and/or company structures. This may be for asset protection or succession planning purposes, but such structures offer significant tax benefits, such as:

• Keeping assets out of the scope of UK inheritance tax indefinitely

• Favourable tax treatment of capital gains on UK or foreign assets

• Assistance in ring-fencing capital away from growth.

Careful formation and maintenance of such structures is key to secure such benefits.

CONCLUSION

The UK tax system offers huge benefits to individuals who come to live in the UK from overseas for a number of years but many pitfalls and traps exist in the legislation and it is essential for appropriate advice to be obtained if they are to be avoided.