UK residence and the tax remittance basis charge

simon

Simon Misiewicz

26th August 2020

UK Residency status and tax considerations

Article relevant to the tax year 2020/21 to explore UK residence and the tax remittance basis charge.

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

This article aims to focus on you moving to the United Kingdom. You need to consider when you move to the UK, timing could be critical when it comes to tax planning. Not only do you need to consider the tax implications of moving to the United Kingdom, but, you also need to consider the exit tax charges from yhr country you are leaving. This may be in the form of:

– Income tax due on the earnings to date

– Capital Gains Tax on assets that you decide to sell whilst moving to the UK

You are automatically a UK resident if you

– stay in the UK for 183 days or more b) have a home in the UK c) carries out full-time work within the UK.

You are automatically a non-UK resident if you

– a) spend less than 16 days in the UK or

– b) not a UK resident in the UK for the past three tax years and spend less than 46 days in the UK in that three year period or

– c) work abroad for more than 35 hours per week.

UK Residence and the remittance basis of worldwide income

You have a choice in the UK of how you are taxed. You can be taxed in the UK on worldwide income or just the income that is generated in the UK.

If you decide only to pay tax on the UK income then you will be called a “Remittance user” and may need to pay penalties as follows based on the number of years as a UK resident. If you choose to pay tax on just UK income, then there may be a remittance basis charge, which you will pay

– £30,000 if you’ve been here for at least 7 of the previous 9 tax years

– £60,000 for at least 12 of the last 14 tax years

You will be taxed on your worldwide income once you have been in the UK for 15 years. It may be a good opportunity to leave the UK in the fourteenth year.

Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce it. Download today, save Tax tomorrow.

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Remittance basis and business investment relief

Ordinarily, you would pay income tax on any money you remit to the UK if you are taxed under the remittance basis. However, you can claim “Business Investment Relief” if the following conditions are met according to HMRC:

– The money you bring into the UK is used for trade business purposes. Trade means, according to S989 ITA 2007 and S1119 CTA 2010 say that ‘trade’ includes any ‘venture in the nature of trade’. The courts have not clearly defined whether or not an investment in real estate property is trade or not. HMRC may dispute that money remitted to the UK to invest in property does not constitute as trade. The taxpayer would be in danger of having to pay income tax on the money remitted to the UK if HMRC won the dispute.

– The money is used to buy new or acquire existing shares in a trading company

Qualifying investment to obtain business investment relief

Qualifying investment to obtain business investment relief

A qualifying investment (s809VC ITA2007) can be made by either:

 

– obtaining newly issued shares in, or

– making a loan (secured or unsecured) to a limited company

 

Claims will need to be made on the self-assessments tax returns for the tax years in question where the money is remitted.

Remittance charges to be applied on the qualifying investment

HMRC will apply an income tax on monies remitted charge if:

 

– the relevant person who made the investment disposes of all or part of their investment

– the company in which the investment was made ceases to be eligible:

– trading company

– stakeholder company

– holding company

– hybrid company

– the 5 year start-up rule is breached

– the extraction of value rule is breached

 

the 45 day rules when selling qualifying investments

The person has 45 days to take the money back offshore if they originally remitted the money to the UK for business investment purposes.

The taxable person could reinvest the entire amount of money into another business investment to avoid income tax on the original remitted money.

The disposal proceeds up to amount ‘X’, must be taken offshore or reinvested to successfully carry out the mitigation steps.

If payments are received in instalments, each payment is considered to be a separate disposal, and each will trigger the start of a grace period.

 

Amount X is calculated as:

– the sum initially invested, less

– any part of that sum that has previously been

– treated as remitted to the UK

– sent offshore or invested in another qualifying investment

– used to make a tax deposit on a previous part disposal

 

If the disposal proceeds exceed amount X, the individual has only to take offshore or reinvest amount X.

 

The extraction of value is breached on qualifying business investments.

This rule is breached if the relevant person receives value from a company that is directly or indirectly linked to the investment they make. Extraction of value can be either money or money’s worth received by or for the benefit of any relevant person.

Any money transferred to the taxpayer from the limited company will be deemed a remittance, and a remittance income tax charge will be applied.

It is better to move the money back offshore than retain money held within the limited company within the UK.

Extraction of value where dividends and interest is paid out of the limited company

This means that when money or other property is brought to the UK to make a qualifying investment. This is only if any subsequent payments or benefits made available to the investor represent a commercial return for their investment; or are benefits made available on arm’s length terms. For example;

 

– dividends that are paid out of profits, or

– market-rate wages or

– interest that is charged on a loan of money

 

Any similar investor might reasonably expect to receive would not disqualify the investment from obtaining the relief.

Where benefits are not provided in the ordinary course of business, the investment may be treated as a remittance. For example, a yacht supplied to a relevant person at no charge, by a boat hire company in which they had invested, fails Condition B but one hired out at the full market rate would not.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

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UK residence and inheritance tax (IHT)

You will pay 40% inheritance tax on assets that exceed the lifetime allowance on your death. The IHT lifetime allowance is £325,000 per person buy may increase to £500,000 depending on their home value.

People that live abroad and not UK domiciled will only pay IHT on the UK assets.

From 6 April 2017, you’re UK domiciled if you are resident in the UK for 15 of the 20 years before the relevant year. You can still be treated as UK domiciled even if you’re not resident in the UK at the appropriate time. It is essential that you leave the UK before the 15th anniversary of being resident in the UK to avoid the high IHT charges on worldwide assets.

If you left the UK before 6 April 2017 and didn’t return the new rules don’t apply.

You will pay inheritance tax at the 40% rate if you are deemed to be domiciled in the UK.

For many people that is enough to put them off from living in the UK

Hong Kong and US expats moving to the UK

Hong Kong Expats BNO: You may be interested in services where we help Hong Kongers moving to the UK. There are a number of legal matters and tax issues that you need to consider. We have also written a useful article about people moving from Hong Kong to the UK and getting a VISA.  You may also be interested in our upcoming live events with a panel full of professionals that are willing to take on your questions when moving to the UK from Hong Kong

US Expats in the UK: You may be interested in services where we help Americans move to the UK with tax in mind. There are a number of legal matters and tax issues that you need to consider. We have also written a useful article about people moving from the US to the UK and getting a VISA.

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