This is a question I get asked near enough every day, says Adam Thompson of The Fry Group. As for the answer, that depends on who has asked me and what I know of their circumstances, and for non-UK residents in particular, the advice can be very different.
Why Is Residence So Important?
Fortunately, this is something which is simple to answer. A non-UK resident individual is only subject to UK income tax on their UK source income. Furthermore, a non-UK resident individual is not subject to UK capital gains tax (CGT), even on UK situs assets. There are unfortunately some exceptions to this rule:
· As of 6 April 2015, non-UK resident individuals disposing of UK residential property will be subject to a CGT charge on such disposals, although the chargeable gain is only that which has accrued since 6 April 2015.
· Temporary non-residence - by which I mean any individual who is non-UK resident for less than five years. These individuals will be subject to CGT in the year of their return to the UK on any disposal of a UK situs asset made in the non-resident period.
· UK trading assets.
On To The Tax Planning
There is no magic wand and no real one-size-fits-all tax planning, but there are some general pointers that will apply to the majority of non-resident UK taxpayers, and I have summarised these below.
1. Ensure that you meet the criteria for non-UK tax resident status for a given tax year. Your UK tax residence position has, since April 2013, been determined under the statutory residence test. This is a major change from the old rules, and if you are in any doubt as to your residence position, please seek further guidance.
2. Seek local advice as to your tax liability in your country/countries of residence. Please note that it is possible to be tax resident in more than one country.
3. Ensure that your tax returns in all jurisdictions are prepared in accordance with double taxation treaties to prevent you from being taxed twice on the same income.
4. Hold only minimal cash balances in the UK – particularly if you have UK pensions that utilise your personal allowance. This will ensure that no UK tax is due on your interest income.
5. Consider investing in non-UK shares and unit trusts as this will ensure that no UK tax is due on the dividends or interest received. Please note however that unless you are a higher rate taxpayer UK dividends are essentially tax free. This is not intended to constitute investment advice, and there are potentially negative tax consequences of holding certain offshore unit trusts.
6. Review the allocation of assets between spouses. If one spouse has a large UK pension, it would be sensible to transfer any investments into the other spouse’s name, thus utilising their personal allowance and basic rate tax band. There is never a capital gains tax charge for the transfer of assets between spouses.
7. If you have a UK rental property ensure that you are claiming all available deductions and reliefs. If you have an outstanding mortgage on any other property, consider switching it to the rental property, and that way you can claim tax relief for the mortgage interest.
What Else Should You Be Aware Of?
1. Non-residents as a general rule are not allowed to pay into an ISA. You could find yourself with a large tax liability if you are in breach of this rule.
2. You cannot avoid UK inheritance tax (IHT) simply by being non-UK resident. Your liability to IHT is driven by your domicile. Domicile is a curiously British concept, which is generally taken from your father at birth. So, if you were born to a British father, you are likely to have a UK domicile of origin. While it is possible to change one’s domicile, it is something that requires careful planning, which must be adhered to.
3. A UK domiciled individual is subject to UK IHT on their worldwide estate.
4. A non-UK domiciled individual is subject to UK IHT only on their UK situs assets.
Adam Thompson is Tax Manager, The Fry Group