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MERIDIAN PRIVATE CLIENT LLPFor a truly specialist law firm focused on clients’ specific needs:
• Estate planning and long-term tax planning for entrepreneurs and high net worth individuals• Trusts and wills• Contentious probate and trust disputes• Tax planning for internationally mobile individuals.
Call Philip Harrison on 01675 442430 or visit www.meridianprivateclient.co.uk
Meridian Private Client LLP Wood Rydings CourtPackington LaneLittle Packington Warwickshire CV7 7HN
MeridianS O L I C I T O R S
Meridian Private Client LLP
Winter 2013-2014
Philip HarrisonPartner
Meridian Solicitors | 1
Welcome to our Winter Newsletter
The content of this newsletter is not a detailed statement of all the law on the matters referred to. Specialist advice should be taken from ourselves in all cases.
This edition, the latest in our series of newsletters, looks at considerations for internationally mobile clients. There have been many changes affecting those who seek to establish that they are not resident in the UK for example.
Those who advise such clients should be wary too. In a recent High Court case (Mehjoo v Harben Barker), a Chartered Accountant was ordered to pay damages to a client after the accountancy firm had failed to advise the client in relation to tax mitigation opportunities which were available to him as a result of his non-UK domicile.
Without being alarmist, this does show the danger of general advisers tackling such complex questions as domicile.
In this newsletter, we have aimed to provide useful information on a number of recent developments but, as always, it should be remembered that this is a guide only and specific advice is essential in all cases.
At Meridian Private Client LLP, we are happy to have initial informal discussions with clients or their advisers to ascertain ways in which we can assist.
www.meridianprivateclient.co.uk
In this Issue
Statutory residence test page 2 Would you like to save some Income Tax page 3
Non-dom spouse exemption page 4
High value property tax page 5
Prior to April 2013, many of those who planned to be non-UK resident simply relied on the fact that they were not in the UK for more than 90 days in a tax year. In some cases, this was a correct assumption but in others, it stretched the bounds of credibility. The legal tests were never as simplistic as this (though for a few years, from 1993, HMRC did seem to accept a day-counting approach).
Whilst the recent motivation for a slew of tax legislation appears to be a crackdown on tax avoidance, tax evasion and everything in between, the new SRT is an attempt to clarify the position regarding residence and provide certainty for the taxpayer.
The SRT introduces an automatic overseas test and an automatic UK residence test. For those who do not meet either test, there are a series of ‘ties’ or connecting factors which, coupled with the number of days spent in the UK, will then determine whether you are UK resident for the tax year or not.
There are three main automatic UK residence tests which are:
• You spend more than 183 days in the UK in a tax year; or•You have a home in the UK; or• You work full time in the UK.
There are three main automatic overseas residence tests which are:
• If you were resident in the UK in one or more of the previous three tax years, you are in the UK for less than 16 days in the tax year; or•If you were not UK resident in any of the three previous tax years, you are in the UK for less than 46 days; or• You work ‘sufficient hours’ overseas, broadly equating to full time work based on a 35 hour week.
It is worth noting that the automatic overseas test ‘trumps’ the automatic UK test.
In the event that neither test is satisfied, the legislation provides a series of connecting factors to be considered.This introduces the concept of ‘arrivers’ and ‘leavers’. Broadly speaking, arrivers have not been UK resident for the past three years whereas leavers have been UK resident in one or more or the previous three tax years.
There are four ties which are relevant to both arrivers and leavers:
•Family tie;•Accommodation tie;•Work tie;•90 day tie.
For leavers, there is an additional country tie. The ‘sufficient ties’ test considers the number of ties an individual has in conjunction with the number of days they have spent in the UK in the tax year to
determine their residence status.
The more ties you have, the fewer days you can spend in the UK without becoming UK resident. Arrivers have more leeway than leavers. For example, a leaver with three ties or more must spend fewer than 90 days in the UK to be non-resident, whilst an arriver with the same number ties can spend up to 120 days.
As with all tax legislation, the SRT is poorly drafted in places and may not achieve the clarity it seeks. In any event, the devil is in the detail and there are anti-avoidance provisions which will trip up the unwary.
HMRC have launched a ‘pilot’ online residence indicator and appear to be actively encouraging people to rely on their own judgement as to their tax residence rather than take professional advice. The cynical amongst us may say that this is to snare the unadvised into the UK tax net.
For those reliant on their non-resident status for tax planning, a review is urgently needed. As with all things, good advice at the outset and regular contact with the adviser will generally provide the required outcome and avoid unexpected and costly mistakes.
Please note that this is intended to be an overview of the SRT only. Each individual’s circumstances are different and require a bespoke approach.
For those who are ‘certain’ that they are non-UK resident, the introduction of a Statutory Residence Test (SRT), may prove to have some unwelcome consequences requiring an urgent review of their circumstances.
[email protected] [email protected]
2 | Meridian Solicitors
“DOUBT IS NOT A PLEASANT CONDITION, BUT CERTAINTY IS ABSURD”
(according to Voltaire)
The new Statutory Residence Test by Philip Harrison and Grace Quinn at Meridian Private Client LLP
Meridian Solicitors | 3
Benjamin Franklin said ‘An investment in knowledge pays the best interest’ and whilst we can’t influence the interest rate on your current account, if people are coming to the UK temporarily, we can help to maximise the income tax reliefs available to them.
The government is keen to attract talented people to the UK and, though they have abolished the concept of ordinary residence, they have retained overseas workday relief (‘OWR’). Previously OWR was partly dependent on HMRC practice but the rules are now laid down in detailed legislation.
This is an incredibly valuable relief which enables those relocating to the UK, who perform duties of their employment both inside and outside the UK, to pay UK taxes only on the income which relates to
their UK earnings. The earnings which are attributable to overseas work only bear UK tax when they are actually brought into the UK.
Special banking arrangements are required. Even someone who needs most of his salary to live on in the UK may be able to take advantage of OWR by bringing previous savings to the UK in place of current income.
It is crucial to ensure that proper advice is taken before arriving in the UK to ensure that the myriad of conditions are satisfied. It is not difficult to claim OWR where you meet the criteria but it is very easy to lose the relief if you don’t arrange your affairs appropriately.
OWR is only available to people who are not UK tax resident and have not been so
for at least three tax years before arriving in the UK to work. Where it does apply, they can claim OWR in the tax year of arrival and the two following tax years. It doesn’t matter how long you stay after the initial three years but if you miss claiming the relief in the initial three years then the tax benefits could be lost forever.
OWR is also not the only relief available. It can be claimed in conjunction with other reliefs such as ‘temporary workplace relief’, which can save a vast amount of tax for higher rate taxpayers by giving tax deductions for living expenses when certain conditions are met.
We recommend everyone who is planning to come to the UK to work to take initial advice before arrival to see what tax can be saved.
WOULD YOU LIKE TO SAVE SOME INCOME TAX?
by Grace Quinn, Solicitor, Meridian Private Client LLP
MeridianS O L I C I T O R S
Meridian Private Client LLP
www.meridianprivateclient.co.uk
Our specialist law firm is entirely focused on helping clients to protect their wealth through estate planning and long-term tax strategies.
We work in partnership with our clients and their other professional advisers to deliver creative and practical solutions that will help secure the financial future of entrepreneurs and high net worth individuals and their families.
A Lasting Legacy
Wood Rydings Court, Packington Lane, Little Packington, Warwickshire CV7 7HN T: 01675 442430
International marriages and civil partnerships, where the parties come from different countries, are becoming ever more common. But married couples and civil partners with different domiciles should review their affairs in light of radical new inheritance tax (‘IHT’) changes in the Finance Act 2013.
by Philip Harrison, Partner, Meridian Private Client LLP
GOVERNMENT CAPITULATES TO EU ON NON-DOM SPOUSE EXEMPTION
In October 2012, the EU issued a notice of infringement to the UK government in relation to the difference in tax treatment of transfers between domiciled and non-domiciled spouses. Since 1984, transfers of assets between husband and wife have generally been exempt from IHT where both spouses are UK domiciled or where neither is UK domiciled, both during lifetime and on death.
However, the exemption is restricted where the spouse or civil partner making the gift is UK domiciled but the spouse or civil partner receiving the gift is non-UK domiciled. For many years the exemption has been limited to £55,000 (the IHT nil rate band in 1983!). ‘Domicile’ is a concept separate from residence and often relates to the country from which you originate. However, it is never safe to simply ‘assume’ someone’s domicile, it should always be checked. There is also a concept of ‘deemed domicile’ under which long term UK residents are treated as domiciled in the UK for IHT purposes only, subject to a small number of exceptions for those domiciled in certain countries.
Since 6 April 2013, there have been two major changes. Firstly, the exempt limit for the transfers of assets to a non-UK domiciled spouse or civil partner has been increased to £325,000, and will, from now on, track the IHT nil rate band.
Secondly, the non-UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes, with the result that transfers between spouses will be fully exempt from IHT. This change in
particular creates tax planning opportunities allowing the deferral of IHT until the death of the second spouse or civil partner where previously there may have been a tax charge on first death.
The election, which has to be in writing, may be made at any time after marriage or the registration of the civil partnership and can be made up to two years after the death of the UK domiciled spouse or civil partner. In certain circumstances, the personal representatives of the non-domiciled spouse or civil partner may make the election. It is only effective for IHT and not for private international law purposes or other taxes.
An election will be irrevocable as long as the person who makes it remains in the UK. If the person making the election becomes non-UK resident for four full consecutive tax years from the date of the election, it will cease to have effect.
The consequence of making the election is that the assets of the non-UK domiciled spouse are brought into the UK tax net, which may not have been the case had the election not been made.
Whether an election is appropriate or not needs to be considered in the light of all the circumstances, including the location of the assets of the marriage and the future plans of the couple involved. We can offer specialist advice in this area in the context of overall estate planning.
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The content of this newsletter is not a detailed statement of all the law on the matters referred to. Specialist advice should be taken from ourselves in all cases.
The new tax charges are designed to tackle perceived SDLT avoidance through buying and selling property-owning companies rather than the underlying properties, though this may not have been anything like as common as the government appears to imagine.
The new ATED and CGT regimes will apply from April 2013 (albeit on different dates) despite the Finance Act 2013 having only received Royal Assent on 17 July 2013. Some SDLT charges came into effect in March 2012 with relaxations to mirror the ATED and CGT reliefs coming into effect from Royal Assent of Finance Act 2013. The new ATED regime will apply to residential properties owned by a company (whether UK or offshore) or a partnership with a corporate member, which are valued at over £2 million on 1 April 2012. The tax due is related to the value of the property, from a minimum of £15,000 per annum for properties valued at £2million to £5million, to £140,000 per annum for properties valued at more than £20million.
The value of the properties is to be re-assessed every five years and, if historic price rises are anything to go by, further increases are likely. The tax charged is also index linked to reflect inflation and therefore is likely to rise each year. However, the bands themselves are not index linked so that more and more properties will be dragged into the tax net and those already within the net may well move into the next band.
The first tax returns for ATED were due by 1 October 2013 with the tax due by the end of October.
Fortunately, the government has responded to criticism and the regime is, perhaps, more benign than originally feared. In particular, there are various reliefs which will apply to both UK and offshore companies. The reliefs which are likely to be most valuable are those for property rental companies and property development companies. Whichever category a company falls into, it must be run on a commercial basis and with a view to profit to enable it to qualify for the relief.
The key point to note with the property rental relief in particular is that it will not simply be enough for the occupant of the property to pay rent to remove the property from the new regime. If the occupant is connected to the ultimate beneficial owner of the property, then the property will remain within the ATED regime and tax will be due. This includes, for example, the settlor of a trust owning the company, the settlor’s spouse, children and grandchildren.
Other reliefs from the tax include those for historic houses, bed & breakfasts and agricultural properties. The ATED regime is supplemented by new SDLT provisions which impose a super-rate of SDLT of 15% when properties are acquired by companies. This is compared to a rate of 7% when properties over £2 million are acquired by an individual.
The CGT rate for the new regime will be 28% and will take the gain out of the corporation tax regime. There is also relief where properties are valued around the £2million mark to ensure that it is never worthwhile to sell the properties for less than their true market value. The provisions do provide for automatic rebasing of the value as at April 2013, which is welcome for those who have benefited from substantial capital growth in the London market.
There are many reasons, apart from SDLT, for holding a property through a company, including succession planning, inheritance tax planning or simply privacy. For those who wish to ‘envelope’ properties, for whatever reason, it is important to give serious thought to the ownership arrangements in advance of purchase.
For those who already have a link to a property held in such a way, in particular professional trustees, serious thought should be given to the mitigation of the tax and the possibility of ‘de-enveloping’ the property (which can itself give rise to complex tax issues).
ATED has now been brought within the DOTAS (Disclosure of Tax Avoidance Schemes) regime.
[email protected] [email protected]
REVIEW URGENTLY NEEDED WHERE HIGH VALUE PROPERTY TAX THREATENSBy Philip Harrison and Grace Quinn from Meridian Private Client LLP
For those who own a high value residential property in the UK, typically London, the government have introduced a new tax, the annual tax on enveloped dwellings (‘ATED’), alongside special capital gains tax (‘CGT’) and stamp duty land tax (‘SDLT’) charges.
