Failing to do so could mean paying more than necessary, writes John Goodchild, partner at law firm Cripps Pemberton Greenish.
If you are someone with past connections to the UK and/or have been tax resident here in the past there are considerations that apply to you that would not be relevant to an individual with no prior connections.
Sudden changes of circumstances are sometimes unavoidable but it is always wise to plan significantly in advance and, if possible, prior to the commencement of the UK tax year (6 April to the following 5 April) during which you expect to arrive in the UK.
There are two reasons for that.
First, it is generally not possible to split UK tax years between a non-resident period and a resident period.
There are certain statutory exceptions to that general rule, the main ones of which relate to either ceasing full time employment abroad or coming to the UK for full time employment, and careful advice is required in order to establish whether or not you would satisfy the detailed requirements of those exceptions.
Secondly, individuals who have been UK resident in the past also need to be careful not to return too soon since they may fall foul of the “temporary non-residence” rules.
In broad terms, if an individual has been UK tax resident during four of the seven UK tax years prior to the first year of non-UK residence and he resumes UK tax residence less than five full years later capital gains and certain species of income derived by the individual during the “temporary” non-resident period are taxable in the UK in the tax year of return.
Ducks in a row
One of the key elements of any planning is to generate income and capital gains prior to the tax year in which you are likely to become UK tax resident.
Pre-residence income and gains (assuming that you do not fall foul of the “temporary non-residence” rule) will not be taxable in the UK and if you are non-UK domiciled can be remitted to the UK free of income tax and capital gains tax.
So, it is potentially important to segregate cash representing this from other cash.
If you own an asset which is heavily pregnant with gain but which you do not intend to sell until sometime after you become UK tax resident you should obtain advice on whether to realise that inbuilt gain before you become UK resident.
Obviously you would need to factor in the tax rules of the country in which you are presently resident or where the asset is located.
Remittance and domicile
You should also obtain advice on your “domicile” status since this is a potentially crucial issue which will influence the extent of the tax planning you may be able to carry out.
If you are presently domiciled outside the UK there may be advantages to you in electing to be charged to UK tax on your foreign income and capital gains on the “remittance basis” after you become UK resident.
Depending upon the analysis of your “domicile” status both now and when you were born there may be a benefit to you in transferring assets to a trust with non-resident trustees.
A number of potential benefits attach to such trusts, namely:-
- If the settlor is neither domiciled nor “deemed domiciled” in the UK when they transfer assets to the trust, any assets of the trust located outside the UK are beyond the scope of inheritance tax. (But, note that there are presently important exceptions to this rule in relation to entities which own an interest in UK residential property and/or assets which reflect loans used to acquire or improve UK residential property).
- Any non-UK income received by the trust structure will not be charged to tax in the UK unless or until a benefit from the structure is received by a UK resident beneficiary.
- Similarly, any capital gains arising in the trust structure are not charged to tax until a benefit is received by UK resident beneficiary.
Such settlements may provide a more effective means of deferring or avoiding UK income tax and capital gains tax than the “remittance basis” applicable to assets owned by individuals (who have to pay the remittance basis charge for the use of that basis once they have been UK tax resident for seven years).
But, there are two important factors in relation to trusts that need to be borne in mind.
If the transferor had a “domicile of origin” in the UK and was born in the UK the settlement cannot qualify for “protected” status in relation to the income tax and capital gains tax anti-avoidance rules.
Furthermore, a settlement created by such a transferor would not shelter the trust assets from an inheritance tax charge during any tax year in which the transferor was resident in the UK.
The second factor is that protection in relation to the income tax and CGT anti-avoidance rules falls away if the trust is “tainted” by the transferor adding assets to the structure after they become domiciled or deemed domiciled in the UK.
Careful advice on all the relevant issues is essential if you are thinking of coming or returning to the UK. That said, it may be that that advice will be able to find some significant planning opportunities for you.
This article was written for International Adviser by John Goodchild, partner in the international tax team at law firm Cripps Pemberton Greenish.