Tax Considerations – Moving to the UK

• 30 November 2021
• News

Pre-UK Tax Residence Planning

Individuals and families intending to relocate to the UK should ensure they undertake pre-arrival tax planning in advance of a move, so that their affairs are arranged as efficiently as possible for UK tax purposes.

Such planning should be carried out in the UK tax year before arrival (i.e. before 6 April in the year of relocation).

Individuals moving to the UK will need advice about becoming UK tax resident and the potential UK tax consequences for their personal income and capital gains worldwide, as well as for any non-UK operating businesses or offshore trusts over which they exert a degree of control or influence or (in the case of trusts) of which they are beneficiaries. Such advice is crucial to identifying appropriate planning and structuring that may be implemented before individuals arrive in the UK to mitigate adverse tax consequences.

Becoming UK Tax Resident

Tax residence is determined under the Statutory Residence Test, which combines tests of presence in, and connections with, the UK. An individual who is present in the UK for 183 days or more in the tax year (which runs from 6 April to 5 April each year) will always be UK resident. The default position is that an individual who is tax resident in the UK will be subject to UK income tax and Capital Gains Tax (“CGT”) on their worldwide income and gains as they are generated (known as “the arising basis”).

Remittance Basis

Non-UK domiciled individuals who become UK resident may elect for the “remittance basis” to apply instead. Individuals taxed on the remittance basis are:

• Liable to UK income tax and CGT on their UK source income and gains realised on UK assets
• Only taxed on non-UK source income and gains realised on non-UK assets if these funds (or property deriving from them) are “remitted” to (i.e. brought to) the UK
• Able to bring “clean capital” (e.g. gifts, inheritances, income and gains generated prior to becoming UK resident) to the UK without incurring a tax charge

The remittance rules are complex, and the definition of what constitutes a remittance is extremely wide.

Non-UK domiciled individuals should create segregated offshore accounts, separating clean capital and post-UK residence non-UK income and capital gains for remittance planning purposes.

Remittance Basis Charge (‘RBC’)

Claiming the remittance basis is free for the first seven years of UK residence. Thereafter:

• For individuals who have been resident in the UK in at least 7 of the preceding 9 tax years, there is an annual charge of £30,000 to claim the benefit of the remittance basis
• The RBC increases to £60,000 per year for individuals who have been resident in the UK in 12 of the preceding 14 tax years

Domicile

In the UK, the concept of “domicile” (broadly speaking) denotes the jurisdiction with which an individual is most closely connected and is often said to be the country which they consider to be their permanent home, or where they intend to end their days. Whereas an individual may be tax resident in more than one jurisdiction at any given time, an individual is only capable of having one domicile.

It is likely that an individual moving to the UK for the first time will be non-UK domiciled, and (if that is the case) should remain non-UK domiciled provided they do not form an intention to remain in the UK permanently or indefinitely.

Deemed Domicile

A person who is not otherwise domiciled in the UK will be treated as deemed domiciled in the UK once they have been UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year. Consequently, a non-UK domiciled individual will become deemed domiciled for all UK tax purposes from the start of their sixteenth year of UK residence, from which time they will no longer be eligible to claim the remittance basis of taxation.

Conclusion

The above guide provides a high-level overview of some of the key UK tax rules that need to be considered in advance of moving to the UK. If only one thing is clear it’s that the UK tax system is complicated and navigating the rules will be unique for each person’s individual circumstances. Therefore, it is vital that individuals looking to move to the UK, obtain advice on the UK tax rules at as early a stage as possible and, where relevant, put in place robust and appropriate pre-arrival structuring and planning.

If you have a questions in relation to any of the matters raised in our briefing, or for further information on the subject, please contact a member of our team.

Non-dom rules to be replaced with four-year temporary residence regime

The Chancellor of the Exchequer, Jeremy Hunt, has announced that the government will abolish the current tax regime for individuals who are UK resident but not UK domiciled in favour of a residency-based system, which will apply from 6 April 2025.

Moving to the UK – Everything you need to know

Moving to the UK is an exciting life event whether it be a short-term move for work to explore business prospects or a more permanent relocation with the whole family; the UK offers an eclectic range of options to live, work and learn, from the cityscapes of London to vineyards in the English countryside and historic university towns in-between. Setting up life in a new country can feel daunting too and it can be difficult to know where to start.

Crypto-Asset Nudge Letters: a cause for concern?

• 29 November 2021
• News

In November 2021 HMRC will begin sending ‘nudge letters’ to UK domiciled individuals they have identified as holding crypto-assets to encourage them to ensure they have paid the correct amount of income tax and capital gains tax (CGT) on any income they have received from their crypto-asset holdings. At present, HMRC will not send nudges to resident non-domiciles however their gains will still be subject to CGT.

Nudge letters should not be ignored and early open communication and co-operation with HMRC is advised to avoid any potential civil or criminal penalties.

The nudge letters arrive amidst a rapidly changing crypto eco-system and there are many ways in which a crypto-asset investor may unknowingly make a taxable disposition. The onset of Decentralised Finance (DeFi) has further complicated an already complex sector.

A nudge letter need not necessarily be a cause for concern but it should be an opportunity to take expert advice on the potential tax liabilities affecting an investor’s crypto-asset holdings.

I have been sent a nudge letter, am I required to act?

HMRC typically sends nudge letters when it has grounds to suspect that an individual’s tax affairs are not presently in order. They are not always a mere ‘fishing expedition’.

HMRC may take further action against a nudged individual if they do not respond within a proscribed period, usually 60 days from receipt of the letter. Open, early communication and full co-operation is essential to minimise the risk of civil or criminal sanctions being imposed.

The current landscape for crypto-assets is far from user friendly at present and there are numerous ways in which an individual may be unknowingly triggering UK tax liabilities. For example, should a UK resident non-domiciled individual personally purchase crypto-assets using unremitted foreign income or gains they could be deemed to have remitted the funds to the UK and be taxed on the purchase accordingly.

DeFi presents further potential pitfalls for crypto-asset investors with a lack of certainty of how different applications will be taxed. Broadly, the wide range of potential DeFi profits are subject to income tax on staking and other DeFi activities. However, there is also concern that clients may trigger CGT disposals if staking and other activities involve crypto-to-crypto disposals (such as may occur when a token, or pair of tokens, is staked in exchange for Liquiity Pool tokens). Expert advice should be sought on these issues, which vary depending on the DeFi application being used. The vast majority of DeFi activities, such as yield farming, whereby investors lock up their crypto-assets in exchange for interest or other rewards, are not accounted for in HMRC’s guidance and careful analysis is required on their tax treatment.

How can HMRC identify my crypto-asset holdings?

The nudge letters form part of a wider trend of increased data gathering by HMRC due to the suspected increase in hidden wealth generated through crypto-assets and left undeclared for tax purposes as investors mistakenly believe that they cannot be traced by HMRC.

HMRC is empowered by legislation and through international treaties to gather information from crypto-asset exchanges and data holders about their customers’ transactions in and holdings of crypto-assets both in the UK and abroad. This includes personal data in the form of names and addresses, the value of crypto-asset holdings and trading frequency. This data can be collected from both one time and recurring customers. HMRC has requested and received bulk user data from exchanges from 2017 onwards.

Conclusion

It is clear that HMRC will continue to step up its data gathering activities and crypto-asset investors will come under increased regulatory scrutiny in the near future. The proposed incorporation of crypto-assets within existing automatic information exchange initiatives under DAC 8 will further progress this agenda. Investors must carefully manage their crypto-asset portfolios to ensure their holdings are not incurring unintended tax liabilities and should take expert advice to ensure they are structured as efficiently as possible.

The Forsters team were very early entrants into the crypto advisory market, and have been advising some private clients for over five years. Forsters is ideally placed to advise clients on the full scope of crypto issues, including the management and taxation of crypto-assets.

James Brockhurst is a Senior Associate in our Private Client team and Cameron Turnbull is a Trainee Solicitor.

A Great British Welcome to Asset Holding Companies? – an update on the new tax regime

• 26 November 2021
• News

The government is keen to encourage funds to be set up in the UK, rather than, for example, Luxembourg. With this aim in mind, HM Treasury has been consulting with the British Property Federation (the BPF) and other relevant organisations to devise a regime that will be attractive to private equity funds, real estate funds and debt funds, so encouraging them to either set up in the UK or move existing funds to the UK.

We reported over the Summer that limited draft legislation to implement a new asset holding companies regime had been published (see our article here) with more to follow. Much more detailed legislation has now been included in the Finance Bill 2021-22. It is intended that the revised legislation and guidance will be in place by April 2022 and that funds can join the regime from that time.

In order to fall within the new regime, qualifying asset holding companies (QAHCs) must be at least 70% owned by diversely owned funds or by specific types of institutional investors. In such cases, the aim of the regime is that investors in overseas property, certain shares and interests in unit trusts should be treated, so far as possible, as if they held the underlying investments direct. It should be noted that the beneficial tax treatment will not, however, apply to holdings of UK property.

In order to achieve the favourable tax treatment for overseas property, shares and intermediate holding companies, a number of the provisions that would normally apply within the tax legislation will be amended so far as QAHCs are concerned. In particular:

• gains on disposals of certain shares and overseas property by QAHCs will be exempt
• profits of an overseas property business of a QAHC will be exempt where those profits are subject to tax in an overseas jurisdiction
• certain interest payments that would usually be disallowed as distributions will be deductible, so that profit participating loans can be put in place within the structure
• the late paid interest rules, which can apply in some situations, will be switched off, so that interest payments will be relieved in a QAHC on an accruals basis, rather than the paid basis
• interest payments made by a normal company would, potentially, be subject to withholding tax, but the new regime will disapply the obligation to deduct income tax at the basic rate on payments of interest where those payments are made to investors in a QAHC
• if a QAHC repurchases its share capital from an individual, the premium paid will be able to be treated as a capital, rather than an income, distribution
• repurchases by a QAHC of share and loan capital which it had previously issued will be exempt from stamp duty and stamp duty reserve tax
• certain amounts paid to qualifying remittance basis users will be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains.

The current draft legislation now deals with the rules for entry into, and exit out of, the regime. In particular, assets will be treated as having been disposed of and re-acquired at market value on entry into the regime. This could give rise to tax liabilities although relief may be available under the substantial shareholding exemption provisions. In addition, the entry charge does not apply, subject to time limits, to non-resident companies which migrate to the UK specifically to join the regime.

HM Treasury has reacted positively to representations put to them by the BPF and others and have taken many points into account in the draft legislation. The introduction of the QAHCs regime and changes already being made (and proposed) to the REITs rules should make the UK a much more attractive base for the establishment of funds.

Heather is a Partner in our Corporate team.

Disclaimer