Moving abroad to reduce UK tax
Leaving the UK to take up residence abroad can reduce your tax bill considerably but the law in this area can be complicated. Solicitor Geoffrey Todd outlines the legal and practical issues to consider before making a move
I have a number of hotels in the UK, France and Spain and I find I am spending more and more time out of the UK. I have heard about non-domicile rules and not paying UK tax. Is this something I should consider?
Yes; leaving the UK can reduce your UK tax bill considerably, but there are two concepts you need to understand - residence and domicile.
Spending some time out of the UK could make you non-resident but it will take more than that to become non-domiciled. It can get very complicated so expert advice is essential.
Your UK residence status is determined by your physical presence in the UK during a tax year. Although not conclusive, if you go abroad permanently (which means more than just on business trips), you will generally be treated as non-resident in the UK if your visits to the UK after leaving:
- total fewer than 183 days in any tax year, and
- over a four-year period average fewer than 91 days a tax year.
You are resident on any day when you are in the UK at the end of the day (ie, midnight).
Your domicile is the place where you have a permanent home and plan to end your days. You take your father's domicile at birth and in order to acquire a new domicile, you must:
- leave the UK and settle in another country, and
- provide strong evidence that you intend to live there indefinitely.
It is a more demanding test than non-residence and will require a complete break from the UK.
Broadly speaking, if you become non-resident, you will only be subject to UK income tax on what you earn in the UK (so not on your income from your overseas hotels). And you will only be subject to UK capital gains tax on gains made on assets used in the course of a trade in the UK.
It is, however, more difficult to escape UK inheritance tax. To do that, you have to change your domicile, and, if you have lived in the UK for more than 17 years, you will have to be non-resident for at least four years before you get this benefit.
If you manage to become non-domiciled, inheritance tax will be payable only on any assets situated in the UK (such as your UK hotels). If you remain UK domiciled, even if you are non-resident, inheritance tax will be payable on your worldwide assets (although you may be able to obtain specific business reliefs for your hotels).
- Keep a record of your days out of the country and evidence to back this up, such as tickets and receipts.
- Consider whether you can make a complete break from the UK and live out your days elsewhere.
- If not, consider whether you can become non-resident by taking up full-time employment overseas or a separate contract for your overseas work.
Income tax and capital gains tax can be clawed back by the Revenue if you return to the UK within five years.
Check the tax rules in France or Spain as you do not want to jump out of the frying pan and into the fire. Don't try to deceive the Revenue as there are severe penalties - ranging from tax surcharges up to unlimited fines and seven years in prison - and it exchanges information increasingly with overseas authorities.
Geoffrey Todd, partner, private client team, Boodle Hatfield solicitors
020 7629 firstname.lastname@example.org