Ceasing To Be UK Tax Resident – Don’t Get It Wrong!

Introduction

It is March 2020 and two people are sitting at the departure gate at Heathrow waiting for their delayed flight to the Bahamas. They start a conversation and talk about why they are flying to this Caribbean island. 

Person A, Mrs Exiteer, explains to Person B, that  she had lived in the UK for a long time as a resident “non-dom,” but that changes to the tax rules for longer term residents had meant that she had decided to leave the UK and cease being tax resident; “My friend told me I just had to spend fewer than 90 days each year in the UK.”

Fortunately for Mrs Exiteer, Person B, Mrs Paw, is a tax adviser and explains that the old ‘90 day’ rule does not apply anymore and suggests that she takes a look at the UK statutory residence test – full services for UK resident non domiciled individuals. Details of the UK Resident/Non-resident test can be found in UK Resident/Non-Resident Test.

Background for Mrs Exiteer

Mrs Exiteer moved to the UK in the early 2000s, as a student.  After graduating, she was offered a job in the financial services industry. She has been very successful and accumulated significant personal wealth. 

In 2010, she inherited the shares of a large family business, back home in Dubai, which started to generate a regular dividend income of around £5 million a year. As a UK remittance basis of taxation user, the Dubai dividends have not been taxed in the UK, as Mrs Exiteer never remitted them into the UK. 

However, with the UK non-dom rules changing in 2017 (IN572 Individual Taxation in the UK), remaining in the UK was going to be just too expensive.  She has therefore decided to move to a warm country.  Mrs Exiteer is planning to carry on working for the same employer and, indeed, is likely to be working very hard on the days that she returns to the UK.

She is married. Her husband is British and does not want to spend as much time outside of the UK as his wife. His only source of income is in the UK and he still enjoys his work.  As he is going to stay, they will keep their home and Mrs Exiteer will live there, when she returns to visit him.

What is Mrs Exiteer’s Tax Status and Why?

While waiting for the flight, Mrs Exiteer takes a look at the residence test rules.  She realises that the first two parts of the test, the ‘Automatic Tests’ do not apply to her and reads on to the ‘Sufficient Ties’ section. Mrs Exiteer has four such ties, or connections:

  • Spent more than 90 days in the UK in both of the previous two tax years;
  • Will have available accommodation in the UK;
  • Has a UK tax resident spouse and will continue to do so;
  • Will work in the UK for more than 40 days under the definition of the test.

What Will the Tax Impact Be?

As she has four ties, Mrs Exiteer will be tax resident (for at least the first two years after she leaves) in the UK by spending just 16 days per annum in the UK, far lower than the 90 she had anticipated.

The next time she receives her large dividend, she would still be considered UK tax resident and will suffer UK tax at 38.1%. It may be even worse, if she has not paid this tax on time as she would receive a late payment penalty, which is quite likely because she no longer believed she was UK tax resident and indeed could be liable for penalties under the ‘offshore assets’ rules too.

The problem would become further compounded were Mrs Exiteer to sell her shares in the family business in Dubai for a large gain, while she believed she was not UK resident.

Please note for completeness, that the UK ‘split year rules’ are not being considered, nor are the tax implications of Mrs Exiteer continuing to receive a salary for work she undertakes when in the UK. Dixcart, would of course advise on these, where relevant.  The Bahamas does not have a double tax treaty with the UK, and there is therefore no tie breaker clause to consider in this scenario either.

So, What Could Mrs Exiteer Do?

Can you believe it, the flight is still delayed!

Mrs Exiteer picks up her phone and calls Mr Exiteer. Whilst he loves his job, he now understands that there will be a high tax cost if his wife does not properly exit UK tax residence.  He packs his things and heads to the airport. While on his way, he calls his employer and resigns, and then calls an estate agent to list the home for immediate rental.

The repercussions of the two actions above, would be to reduce the number of UK ties that Mrs Exiteer has, from four to two:

  • 90 days in both of the previous two tax years; and
  • Work tie (assuming she still works, when back in the UK).

Now she would be able to spend up to 90 days in the UK per annum and lose her UK tax residence.

Very lucky!

Whilst everyone else on the flight was cursing the delay, Mrs Exiteer had struck lucky.  However, had Mr and Mrs Exiteer started to plan earlier than at the airport departure lounge, there would have been more options to consider around their employment situation and their home status, and they might have avoided having to take such extreme steps.

How Can Dixcart Help?

Dixcart’steam of lawyers, accountants, immigration and tax professionals would have assisted Mr and Mrs Exiteer with:

  • Pre-departure tax planning;
  • Ongoing tax planning, to ensure that UK tax residence is not accidentally acquired again in the future;
  • Employment law advice for both individuals in relation to their ongoing employment contracts, should they wish to continue to work, as well as related UK tax advice regarding the income being earned;
  • Application for Indefinite Leave to Remain before they leave the UK, so they can be sure that they can return in the future.

Additional Information

If you require additional information on this topic, please contact your usual Dixcart adviser or speak to Peter Robertson in the UK office: advice.uk@dixcart.com.

Dixcart UK, is a combined accounting, legal, tax and immigration firm.  We are well placed to provide these services to international groups and families with members in the UK. The combined expertise that we provide from one building, means that we work efficiently and coordinate a variety of professional advisers, which is key for families and businesses with cross-border activities.

By working as one professional team, the information we obtain from providing a service, can be shared appropriately with other members of the team, so that you do not need to have the same conversation twice!  We are ideally placed to assist in situations as detailed in the case study above. We can provide cost effective professional services for companies and individuals and also offer in-house expertise to provide assistance with more complex legal and tax matters.