The UK, and London in particular, is attracting property investors from all over the globe. Bart Peerless, a partner at Charles Russell, discusses the tax complexities facing foreigners wanting to buy a home in the UK.

The UK, and London in particular, is attracting property investors from all over the globe. Bart Peerless, a partner at Charles Russell, discusses the tax complexities facing foreigners wanting to buy a home in the UK.

Benefits of the UK

Relevance of tax status

Favourable tax treatment is one of the important reasons why Russians, and indeed people from all over the world, are choosing to move to the UK.

The main taxes which are relevant to an individual coming to live in the UK are income tax (IT), capital gains tax (CGT) on sales and gifts, and inheritance tax (IHT) on death and some lifetime gifts. Moreover, stamp duty land tax (SDLT) is payable when buying a house in the UK. 

A person’s liability to these taxes (apart from SDLT) depends on their tax status, in particular whether they are resident and/or domiciled in the UK.  Residence depends broadly on first, the number of days spent in the UK in each tax year and secondly, on other connections here, such as owning a home, working here and so forth. Domicile is a more holistic concept, depending on a person’s circumstances “in the round”, including their long term intentions in relation to staying in the UK. (The separate concept of deemed domicile, relevant for IHT only, depends solely on the number of years’  of residence in the UK). A person who is resident and domiciled in the UK is liable to IT and CGT on their worldwide income and gains, and to IHT on their worldwide estate.  However, a resident individual who remains non-domiciled is potentially liable to IT and CGT on the more favourable “remittance basis” and is liable to IHT only on UK-situated assets.

Remittance basis

The crucial point for individuals coming to live in the UK from overseas is that, even if they become UK resident immediately, they might not become domiciled here for many years. Such individuals, are potentially taxable on the more beneficial “remittance basis”  which means that they are taxable on non-UK income and gains only if “remitted” to, i.e. brought into, the UK.

To claim the remittance basis, individuals must make an election in their tax returns and once they have been resident in the UK for seven out of nine tax years they must pay an annual charge of £30,000 (around $47,000) (rising to £50,000 after twelve years’ residence). This charge is payable by each family member who wishes to claim the remittance basis.

Complexities

Although the broad concepts seem simple, inevitably there are a lot of complexities involved in the remittance basis of taxation.

Wide meaning of “remittance”

The term remittance covers a much wider range of situations than the obvious one of sending money from overseas to a bank account in the UK.  For example, there is a remittance if non-UK income or gains are used to repay capital or interest on a non-UK loan used to buy UK property or (subject to certain exceptions) to buy goods overseas which are later brought to the UK.  Despite the benefits of the remittance basis for those claiming it, since 2008 it has become more difficult to avoid taxable remittances to the UK. This is because the Finance Act 2008 amended the meaning of “remittance”, making it much wider. In particular, there is a remittance in relation to a taxpayer not only if the taxpayer himself brings offshore income or gains into the UK, but also if his/her spouse or children or grandchildren aged under 18, or certain trusts or companies of which any of them are beneficiaries/shareholders do so.

Moreover, whereas before 6 April 2008 the offshore income or gain itself had to come into the UK for there to be a remittance, on or after that date it suffices that assets or services derived from the untaxed offshore income or gain are brought into or enjoyed in the UK.

New investment relief

However, some simplification of 2008 changes has been proposed.  For example, in accordance with the UK government’s stated policy of encouraging inward investment into the UK, a new investment relief is available to UK resident, non-domiciliaries. This potentially applies after 5 April 2012 if a non-domiciliary invests in UK private trading companies. If the relief is claimed, then non-UK income and/or gains used to make the investment are treated as not remitted to the UK (if they otherwise would be) provided the investment meets certain requirements.

Further changes; new residence rules

A new UK tax residence test is expected to come into effect from 6 April 2013.  Although the final form of the new test is not yet known, it is expected to be closely based on a government proposal published in June 2011. The advantage of the new test for those arriving in (and leaving) the UK is that it will be much clearer than the current test, which is based on HMRC practice and case-law. Like the existing test, the new test will be based on days spent in the UK and on certain connecting factors, but by contrast to the current situation, these will be clearly specified and defined.

Exit taxes when leaving

By comparison to many other jurisdictions, the UK does not levy a general “exit tax” when a person ceases to be a UK resident.

However, if an individual who has previously been UK resident for four out of seven tax years becomes non-UK resident, then certain disposals and remittances while non-UK resident can later be taxed if the individual returns to the UK within five tax years of the original departure.

Furthermore, any trust set up by an individual after becoming domiciled here remains within the scope of UK IHT, even in respect of non-UK assets and even if the person establishing the trust as well as the beneficiaries subsequently lose any connection with the UK. 

Exit charges are, however, levied on companies and trusts ceasing to be UK tax resident.

Offshore structures

Still have a role to play

For individuals coming to live in the UK, who are not domiciled here, despite the complexities outlined above, offshore structures still have a role to play. 

Holding investments, including UK investments, through a trust can enable UK tax on gains to be deferred until such time as sale proceeds are remitted to the UK (if ever). This contrasts with the situation where UK investments are held direct by the UK resident, non-domiciled taxpayer, when tax is due on disposals on an arising basis.

Moreover, if a non-domiciliary establishes a trust of non-UK assets (which can include shares of a non-UK company holding UK assets) then the trust will not be liable to IHT, even if the beneficiaries of the trust are, or later on become, domiciled in the UK.

The family home

It is not, however, normally recommended that the non-domiciliary’s UK home is held through an offshore structure. There are various income tax reasons for this, and, as from this year’s Budget, there is 15 per cent SDLT charge on such properties worth over £2 million passing into companies, and from April 2013 an annual  charge at a rate to be announced by the government on such properties whilst held in such structures. Furthermore, from April 2013 CGT will be payable on disposals of properties by non-UK resident companies.  At present it is not completely clear whether trusts will be fully caught by the new CGT charge.

Whereas holding a UK home through an offshore trust and company structure used to be an effective way of dealing with the IHT risk of  dying whilst owning UK property, other ways will now have to be found of dealing with such risk.

Immigration

Unless a person has a right of abode in the UK, they will need an appropriate visa before taking up residence. Individuals wishing to acquire British citizenship in the longer term might be able to benefit from recent relaxation of the investor visa rules.  For example, those with at least £10 million free to invest under their control in the UK can in principle apply for settlement in the UK after only two years of residence in the UK. Those with at least £5 million may be eligible to apply for settlement after three years of residence. To acquire citizenship an individual must be resident in the UK for at least five years and must comply with certain requirements as to time spent in the UK, in effect spending at least three-quarters of his/her time in the UK in the five years before applying for naturalisation.

Conclusion

The UK remains an exceptionally attractive place to live and invest – even if the rules are more complex than they appear at first sight.