By Howard Bilton – Chairman and Founder of The Sovereign Group
It is entirely sensible to assume that whatever the situation is now, visitors to the UK may get stuck there.
HMRC have indicated that they will be prepared to treat those who get stuck in the UK because of Coronavirus “sympathetically”. That is nice. But it is not entirely clear what sympathetically means to them. It may well be quite different to what we would think. HMRC have form on this. During the first Iraq war, UK expats living in Kuwait had a choice – leave or die. Naturally many came back home and it was a long time before going back to Kuwait was an option. HMRC were fairly quick to assess them to tax. There was no real sympathy offered then.
Under current law up to 60 days of any stay in the UK can be discounted as exceptional circumstances. HMRC say that exceptional circumstances right now would include: (a) because you are quarantined or advised to self-isolate in the UK because of the virus; (b) you are advised by the UK government not to travel; (c) you are unable to leave the UK because of international borders being closed; (d) you are asked by your employer to come back to the UK temporarily.
That is quite helpful but there are obvious uncertainties. For example, those living in Hong Kong who return to the UK may have to quarantine in the UK and then quarantine on their way back. There is no absolute prohibition on travelling, it just happens to be majorly inconvenient so tempting to stay in the UK rather than suffer the possibility of being incarcerated in a Hong Kong government quarantine facility which is basic and where the room service is non-existent! The situation is in constant flux and likely to remain so. One can well imagine that with all the additional costs the UK government is facing, it is not going to be particularly relaxed about whether or not UK expats pay tax in the UK.
The sensible thing is to plan on the basis that you may get caught in the Uk and take appropriate steps to limit your tax liabilities in case that happens to you.
Crucial to understanding your potential tax liabilities is understanding your domicile. There are steps which can be taken by those who currently have a foreign domicile which are not available to those who are still UK domiciled.
The domicile position seems to be much misunderstood. Most UK expats will remain UK domiciled even if they have been out of the UK for a long time. To lose a UK domicile of origin and obtain a new domicile of choice outside the UK, it is not just necessary to have left the UK for a prolonged period of time. The only legal test of is one of intent. Have you decided that you will remain in your new country of residence permanently? If the answer is yes, it can be reasonably certain that you have obtained a new domicile of choice in your new country of residence. If you have no definite intention of remaining, you will have retained your UK domicile irrespective of how long you have been out of the UK.
Where many get it wrong is that they have left the UK and have no intention of returning there but also have no intention of remaining where they are now indefinitely . Many have other plans for their retirement. Consider a typical example of a long-term expat who has left the UK, worked for ten years in the Middle East, moved to Hong Kong for ten years, moved to Singapore for ten years but has a holiday home in Thailand to which he intends to retire. He (or she) has been out of the UK 30 years but possibly/probably never intended to remain permanently in any of the other destinations. In this case no new domicile has been established. Even if he had established a new domicile it would be lost on leaving to retire in Thailand and he would revert back to his domicile of origin in the UK.
Obviously plans do change so it would have been possible for him to have established a new domicile of choice originally in the Middle East (presuming he intended to stay there permanently or indefinitely ), he would then have lost that new domicile on moving to Hong Kong but could have picked up a new domicile of choice in Hong Kong after which he would still remain deemed domiciled in the UK for three years. . He could then have established a new domicile of choice in Singapore once he had formed the requisite intention In reality probably no new domicile was established in any of these places.
If that same person had left the UK, come to Hong Kong and decided to remain here indefinitely he would have established a new domicile in Hong Kong but would still lose it and revert back to his UK domicile on deciding to retire in Thailand. The point where he established that intent to retire in Thailand may not be entirely clear. Often there is no one revelatory moment when our decision becomes firm. But the law is clear: once a person has established a domicile of choice by intending to remain in their country of residence permanently, it can only be lost when both these conditions are no longer met (i.e. it will remain the person’s domicile of choice whilst it is their main residence even if they no longer intend it to be their permanent home).
You can see the complications.
Getting certainty on domicile is the first and vital step in considering any sort of planning for a UK expat. If you are domiciled in the UK or will be, you will be subject to UK IHT at 40%. The tax can be planned out relatively easily but any planning would be completely different to that if you were not domiciled. Thus the issue is vital.
Those who have acquired a new foreign domicile have opportunities for planning which do not exist for those who remained UK domiciled throughout. This is despite the new rules which came into effect on the 6th April 2017 which now generally deem anybody who was originally domiciled in the UK to be deemed domiciled from the moment they become UK tax resident again. Previously such people could return to the UK for a temporary but lengthy period of time and be taxed the same or similar to foreigners who had moved to the UK temporarily i.e. they would be considered as non-doms and only taxed on income arising in the UK and foreign income remitted to the UK. This very advantageous tax status is generally not available to those who ever had a UK domicile of origin i.e. most UK expats. But there are other planning opportunities.
One of the most powerful planning tools would be the excluded property trust (EPT). This provides a permanent shelter from UK IHT and permanent gross roll-up of income and gains. The EPT should be carefully structured with separate accounts for income and capital. The general rule is that distributions of capital can be made tax free but distributions of income are fully UK taxable. This opportunity is not available to those who have remained domicile throughout not least because the transfer into trust would be taxed at 20% – lifetime IHT. It is still available for expats who have acquired a foreign domicile as long as it is set up before they become deemed UK domiciled again (i.e. when they become resident again). The EPT requires very careful structuring to plan for when they return.
All UK expats should consider rebasing/uplifting the capital cost of assets. This can most easily be done by selling those assets in the tax year prior to becoming UK tax resident. It is still possible to sell assets and then buy them back (the old bed and breakfasting) as long as this is done carefully.
It is sensible to take all possible income i.e. if you own your own business, declare as much dividend as possible before you get to the UK.
Considering any and all board positions is important. Companies which are managed and controlled from the UK will be UK resident even if they are incorporated abroad. It is rarely tax efficient for a UK resident person to be a director of a foreign company.
Life insurance wrappers or bonds can be very effective against UK tax. These are typically sold by the big insurance companies but can generally only hold investments designated by the life company. This is normally limited to a portfolio of funds. A bespoke wrapper can be much cheaper and much more effective and be used to hold private assets such as properties, shares in private companies and, in fact, anything of value which would produce income or capital gains in the future. Care is needed here to ensure that the bond is not treated as highly personalised. The principle is quite simple. Life insurance is given a specific tax regime under which tax is deferred until it pays out. This principle was tested in the House of Lords in the Willoughby case. It remains good today. Thus, income and capital gains on assets held by a life insurance wrapper should not be taxed in the UK until benefits are received. It is most unlikely that any future changes in UK taxation will limit the effectiveness of this form of planning, so it remains extremely effective as long as the costs of setting it up do not outweigh the benefits.
These days the test for UK residence is complicated. The new statutory residence test (SRT) dictates the number of days you may spend in the UK before becoming UK tax resident and depends on a number of different factors which can vary from year to year. It used to be the case that as long as you kept your days under 90 you were relatively safe. That has all now changed so extreme care needs taking and expert advice should be taken. The maximum number of days depends on whether you had been UK resident in one of the three previous tax years. For expats returning it will normally be a maximum of 90 or possibly as high as 120 days.
For those who are in the UK temporarily only but overstay, they may benefit if their normal place of residence is somewhere with whom the UK have signed a tax treaty. It is becoming increasingly common for such persons to be dual tax resident but Article 4 of the typical tax treaty will often give the sole taxing right to one country only. The taxing right is given to the place of closest connection which is decided by where the home is, social and economic ties, the place where you have spent the predominant amount of time and finally nationality. Again, care needs taking but this may be a get out of jail free card where all else fails.
As ever, early planning and good advice is crucial to good outcomes.