Taxation in the UK is definitely not a piece of cake. This article includes three case-studies that demonstrate important rules and requirements that you need to be aware of when moving to and settling in Great Britain.
Case-study 1. How to avoid being classed as tax resident
A Russian national intends to move to the UK on the Tier 1 (Entrepreneur) route with his family – wife and two children that will go to a public school. The wife is the main applicant and the visa is granted in August. The move is scheduled for September.
Target: The husband wants to stay non-resident for UK tax purposes for the current year.
- Because the family set up their home in the UK after the tax year had started (6 April), all family members can split their tax year and become tax residents from the date of first entry on the Entrepreneur visa.
- The wife will be considered tax resident through the Automatic Residence Test by spending more than 183 days in the UK in the tax year.
- By taking the same test, the husband will already have two ties to the UK: a family tie (see point 2 above) and accommodation tie (any accommodation available in the UK for 91 or more consecutive days in the tax year). Two ties mean he can spend up to 120 days in the UK without becoming tax resident.
If he starts working in the UK, even if the employer is in another country, this will add another tie, a work tie, and reduce the number of days he can spend in the UK without becoming a tax resident to 90.
What has been done
A detailed plan is worked out together with the client to control the number of days spent in the UK to prevent him from becoming tax resident.
Because the husband applied for a visa as a dependent and the first visa was granted before 11 January 2018, when a new requirement for PBS dependents came into force, the 180-day requirement doesn’t apply to him. It means that his tax status can be determined without his immigration status affecting it.
However, when the time comes for him to extend his visa in three years, the 180-day rule will apply to him fully and tax planning will be restricted by that.
Case-study 2. Choosing where to pay taxes
A Russian national arrived into the UK in August and started working for a British company from day one. She was on payroll according to local rules and enjoyed a tax-free personal allowance for her income tax. She has an apartment and a house in Russia that she rents out and receives income from.
Target: Assess her tax status and obligations, and whether it makes sense to apply remittance basis when calculating her taxes (claiming the remittance basis means you only pay UK tax on the income or gains you receive in or bring to the UK).
- The client has the right to split the tax year because she has come to the UK to settle. She is considered tax resident from the date of first entry on her visa.
- When doing tax calculations, it is important to include her tax liabilities both in Russia and the UK.
- If the remittance basis is claimed, she will lose her tax-free personal allowance and the UK income tax will have to be recalculated. In this case she cannot bring income received in Russia to the UK tax-free.
- However, if the arising basis is used instead of the remittance, she has no dues on her UK income tax. To calculate her final tax due from the client, we need to calculate UK tax on her total worldwide income and deduct the taxes already paid in the UK and in the countries that signed the double-taxation agreements with the UK (e.g. Russia).
What has been done
Calculations showed that in the tax year when the client moved to the UK she was tax resident in Russia and paid 13% income tax there. Because her earnings were rather high, we’ve opted for the remittance basis of taxation.
Next year, when the client is not a tax resident in Russia any more, she has to pay 30% income tax in Russia. In this case the remittance is no longer valuable; the client is better off declaring her global income and paying UK tax that is the difference between tax liabilities in the UK and taxes already paid in Russia. For example, if the client’s income in Russia is subject to 40% income tax in the UK, but she already paid 30% tax in Russia, it’s 10% left for her to pay in the UK.
Case-study 3. Inheritance tax
A Russian national owns a property in the UK through a BVI offshore company. The flat was purchased in 2014 for £3M. It is not rented out and the client lived there for a year. The flat is subject to the Annual Tax on Enveloped Dwellings amounting to £23,550 in 2017 which the clients pays regularly.
Target: The client wants to gift the flat to his son and granddaughter.
- After we analysed the situation, the client refused to have any complex structures involving insurance, funds, etc. So eventually it was done as a simple transfer of title to his son and granddaughter.
- The granddaughter is under 18, that’s why her father will be Protector of the trust for the 50% of her share in the flat.
- The cost of the flat was evaluated to have increased by only £40,000, and after deduction of all expenses that came with the transfer the tax due amounted to £5,000.
- As the company is closing and the transfer happens in liquidation, and it does not have any debts to third persons, only to the beneficiary, there is no stamp duty payable.
What has been done
We explained to the client that in this scenario he chose the estate might be subject to inheritance tax in case he passes away in the next 7 years after the transfer. However, the tax rate will be gradually decreasing starting from year four.
To provide protection from potential tax payment, we arranged an insurance policy for the client that covers the amount of the inheritance tax that will be decreasing pro rata to the tax itself.
To discuss your requirements, please contact our specialists or call us on +44 (0)203 490 41 21.