Expatriate life is an adventure and it can be fragile and unpredictable – even the best-laid plans can be turned on their head in an instant. While most UK non-residents say they will not return to the UK, in reality many do, whether it is for career or personal reasons.
Theo is now in his 50’s has spent over two decades living in Africa but recently moved to Cyprus. He and his wife, have now decided to return to the UK and to become UK resident, effective from the start of the next UK tax year in April 2021.
During Theo’s first decade of residence in the African country, he had formed an intention to remain permanently resident there. After an extensive interview with Theo, we were satisfied that he had indeed shaken off his UK domicile of origin and acquired a new domicile of choice. This was verified by external counsel’s opinion. Theo had then established overseas trusts that provided protection from UK Inheritance Tax in respect of any assets settled on the trusts.
Now that it was evident that Theo and his wife no longer wished to return to the African nation, and notwithstanding their decision to return to the UK, it was apparent that his UK domicile of origin would revert. Prior to Theo leaving Cyprus, it would therefore be necessary to restructure various overseas structures and arrangements before he returned to live in the UK.
At present, Theo is resident but not domiciled in Cyprus, so dividends and other remuneration remitted from his overseas structures can be directly paid to Theo without exposure to local taxes in Cyprus. Theo and his wife have decided to sell their existing buy-to-let UK residential portfolio prior to their return to the UK. The sale will be subject to UK Capital Gains Tax but the gains since 6 April 2015, when new rules were introduced, are minimal so the CGT on any sale in advance of April 2021 will also be minimal.
Theo and his wife do wish to purchase a UK main residence and we have recommended that mortgage finance should be used, that UK wills be updated and potentially new ones arranged. Theo still enjoys excellent health, so life insurance can also be secured to include critical illness, health and combined travel policies
Dividends paid from overseas structures to Theo will, in part, be contributed to a new UK Family Investment Company (FIC). A substantial amount of capital will ultimately be lent to the FIC by Theo, with a lesser amount being contributed as share capital. Theo will initially own all share classes but will gift a specific class of share that will enjoy capital and dividend rights to his three adult children. They will not be able to participate in the voting share capital, nor will they be permitted to become members of the board of directors unless their parents decide to appoint them.
Theo and his wife will retain the voting shares, which will not enjoy dividend and capital rights, since these have already been gifted. If Theo survives seven years from gifting the shares to his children, no UK IHT will charged on his later death. The company will have the capability of repaying the loan capital to Theo to ensure that he and his wife enjoy a good quality of life.
A shareholders’ agreement is included in the planning, such that one or more of the adult children holding the dividend and capital shares will be permitted to replace their parent(s) as directors of the FIC upon the death of the last surviving spouse. This agreement can also dictate how the company should be managed going forward.
Of particular importance is the creation of a UK trust by Sovereign’s UK trust company, which will hold a class of share known as the ‘Golden Share’. This class of share will allow the trustees to exercise discretion on a number of high level decisions, such as to prevent any of the children from disposing of the company, selling corporate assets, undertaking hazardous or improper investments, preventing the company from undertaking a trade, business and profession that could result in harm, disadvantage or loss.
Throughout the duration of Theo’s life, or until such time as either he or his wife decide to relinquish their directorships in favour of other parties, the UK FIC will bring about substantial tax and other advantages, including UK IHT mitigation, whilst Theo and his wife can continue to control the company, transact the business of the company and generate ongoing profits. It also permits them to draw from the company a repayment of loan capital to support their long term retirement.
In addition, Theo will contribute up to £1 million into a Guernsey Qualifying Non-UK Pension Scheme (QNUPS) to generate classic retirement benefits for the rest of his life. Theo may decide not to initiate any drawn down from the QNUPS until much later in life and possibly until he is 75. QNUPS offer more freedom in terms of investments than regular UK Pension Schemes, including the potential to purchase property or other assets whilst potentially providing UK IHT mitigations and other associated benefits.
It is of primary importance that this planning should be implemented in advance of Theo and his wife becoming tax resident in the UK on 6 April 2021 or many of the tax benefits may be lost.
Sovereign (UK) was able to assist Theo with all of the following:
- Updating Theo’s UK will and that of his wife
- Obtaining life and other insurance policies
- Sourcing a UK main residence property for purchase
- Mortgage finance assistance
- Setting up the FIC and providing ongoing administration
- Establishing the UK trust and providing ongoing trustee services
- Provision of Guernsey QNUPS.
Anyone considering a return to the UK from abroad, ether now or in the future, should contact Sovereign.