Tax Services from Coutts

Over the past few years, a number of high profile cases have drawn attention to the UK’s lack of a statutory test for residency. In the 2011 Budget, the government stated its intention to bring in just such a test, to ascertain whether an individual is resident in the UK for tax purposes. There is currently a second consultation period over a new definition, with any resulting statutory test likely to come into effect from 6 April 2013.

At the moment, if an individual spends 183 days or more in the UK in a tax year, he is automatically considered UK resident (where a ‘day’ is counted if you are present in the UK at midnight). However, where an individual’s days of presence are below the 183 day threshold, they currently have to rely on a mixture of case law and published guidance from HM Revenue & Customs (HMRC).

HMRC’s published guidance, ‘HMRC 6’, lists a number of factors that can be considered when assessing an individual’s residency status, irrespective of the number of days they spend in the UK. These include:

• Family ties – such as having family members you are close to, in the UK.
• Social ties – such as membership of clubs and societies and events that you regularly attend or host.
• Business ties – such as owning or being a Director of a business based in the UK, or having employment, including self-employment, in the UK. Regular employment duties in the UK are a tie and you need to consider the extent, frequency and nature of those duties.
• Property ties – such as a house or apartment that you own or lease, or property held primarily for investment but that also provides you with accommodation when you are in the UK. This includes a house or apartment provided for your use while you are in the UK as part of an employment package.

It has been seen as increasingly difficult for a taxpayer to ‘lose’ their UK residency status and the burden of proof is with the individual to show they have truly ‘left’ the UK and that they should be taxed accordingly.

Currently, UK-resident individuals who are not domiciled in the UK can elect to be taxed on the “Remittance Basis”. This means they can claim not to pay UK tax on their non-UK gains and income unless they remit those gains and/or income to the UK.

Non-UK domiciliaries who have been UK resident for 7 out of the last 9 tax years must pay an annual levy of £30,000 (known as the Remittance Basis Charge (RBC)) if they wish to be taxed in this way. From 6 April 2012, the RBC increased to £50,000 for non-UK domiciled individuals who have been UK resident for 12 out of the last 14 tax years.

There is an exception for individuals whose offshore income and gains left outside the UK are less than £2,000 in the relevant tax year. These individuals can claim the remittance basis without paying the RBC and they can also keep their personal allowances.

In any given year, non-UK domiciled individuals can instead choose to be taxed on the arising basis, such that their worldwide income and gains are subject to UK tax, as for a UK-domiciled and resident individual.

Other measures also announced in the 2011 Budget and which came into effect from 6 April 2012 are:

• the removal of the tax charge on the remittance of overseas income or gains if the income or gains in question are used for commercial investment in UK businesses
• capital gains arising from the withdrawal of funds from foreign currency bank accounts are no longer subject to capital gains tax, nor will any capital losses be allowable losses

The Chancellor’s 2011 Budget announced that the government does not intend to make any further substantive changes to non-UK domiciled individuals’ special tax treatment for the remainder of this parliament. This is welcome news given the significant upheaval in the tax regime for non-UK domiciled individuals in recent years and should allow non-UK domiciliaries to plan their future UK tax exposure with more certainty.

The lifetime limit for Entrepreneurs’ Relief of £10million means that business owners can potentially realise tax savings of up to £1.8million per individual on the sale of a qualifying business, when comparing 10% Capital Gains Tax (CGT) to 28% for a top rate taxpayer.

When contemplating selling a business, it is essential that tax planning is considered early. Although every deal will be different, many of the tax considerations for entrepreneurs looking at a business exit will be similar.

Successive government “crack-downs” on tax avoidance and exploitation of perceived tax “loopholes” has meant that many of the tax planning strategies formerly available to entrepreneurs have disappeared, although there are still some very good basic planning ideas which can be considered, such as:

• Paying a pre-sale dividend to reduce cash balances
• Gifting shares prior to sale to potentially save Inheritance Tax (IHT)
• Reviewing pension funding arrangements whilst there is flexibility before the business is sold
• Possibly reducing overall capital taxes by establishing non-UK residence
• Deferring CGT via an investment into the Enterprise Investment Scheme (EIS)
• Providing for an exemption from CGT altogether on up to £100,000 of gains if the gains are reinvested into a Seed Enterprise Investment Scheme (SEIS) before 5 April 2013

In addition to the above points, the 50% top rate of tax on income in excess of £150,000 can provide another impetus to look at potential tax relief on charitable donations and perhaps setting up a charitable trust in the year of sale. The Government confirmed in May 2012 that the proposed income tax relief cap that was announced in the 2012 Budget and which is due to come into effect from April 2013 will not apply to the tax relief available on giving money to charity.

Entrepreneurs should also be taking advice on their potential IHT liability post-exit. Shares in an unquoted trading company are likely to qualify for 100% Business Property Relief for IHT purposes and so the disposal of a business for cash can result in a significant (and often unexpected) increase in potential IHT exposure.