I am a woman rapidly approaching my 60th birthday. I have taken early retirement from the Civil Service and I live most of the year in Turkey on my partner's boat but do travel back home to Liverpool for long visits to see my family. I have a portfolio of over £100,000 and already receive a widow's pension and a Civil Service early retirement pension.
I am due to start receiving a regular income from an Equitable Life AVC on my 60th birthday. How does the Inland Revenue work out whether I am subject to UK tax and how does this affect how my income is taxed?
An individual's residency status needs to be agreed with the Inland Revenue and has to be determined separately for each tax year. If an individual spends six months or more in the UK in a tax year, they are definitely resident in the UK. Six months are calculated on an hourly basis but the practice is to use 183 days as the measure, excluding arrival and departure days.
Individuals will also be treated as resident if they make habitual and substantial visits to the UK. The Revenue regards visits as:
Habitual if they continue for four consecutive years.
Substantial if they average 91 days a year or more. The average is taken over four years.
If a resident leaves the UK with the intention of returning for substantial visits, they keep a resident status, which is the status of an individual in any one tax year, or ordinarily resident status, which is the status of an individual on a regular basis, that is, year after year.
The Revenue's practice on the date when ordinary residence starts varies with the length and purpose of the visit.
This client was born in the UK with the domicile of origin being the UK. She has not bought a house in Turkey and has not attempted to gain Turkish citizenship. These are just a few of the indicators the Revenue will consider if the client tries to claim a new domicile of choice, as she has not made it obvious that she is to live permanently in Turkey.
Although she may in some years spend very little time in the UK, she is domiciled in the UK and may be deemed ordinarily resident. In this case, she may be subject to the following taxes:
Income tax is charged on worldwide earned and investment income, whether or not such income is brought into the UK.
Capital gains tax is chargeable on the realisation of all capital gains made anywhere in the world.
Inheritance tax is chargeable on gifts of assets anywhere in the world.
If she is deemed non-resident for a particular tax year, she will be subject to the following taxes:
Earned income – there is no UK income tax liability on employment income where duties are performed wholly outside the UK. Earnings for duties in the UK remain taxable unless they are only incidental to the overseas duties.
Overseas investment income – there is no UK income tax liability.
Capital gains tax – will not be paid by those who left the UK after March 17, 1998 and who are outside the UK, that is, not resident or ordinary resident for at least five years.
Inheritance tax – will remain chargeable on gifts of assets anywhere in the world.
The pension income from the state, the civil service final-salary scheme and the AVCs will be taxed as earned income. The tax can be calculated under self-assessment or following completion of a tax return.
The client's portfolio consists of a range of medium-risk collective investment schemes, where possible within a Pep or Isa, which will mean they will remain tax sheltered. No further Isa investments can be made if she is non-resident. The other holdings will be subject to income and capital gains tax at her marginal rate.
As for the Equitable Life AVC pension, the client needs to look at all the options, particularly given the current situation at Equitable. The client was provided with the Civil Service's Equitable Life helpline number to find out more about the options. It could be that she could buy a more appropriate annuity based on her own circumstances.
To ensure all state benefits are being provided, a DSS brochure, Going Abroad and Social Security Benefits (reference GL29) was provided.
Inheritance tax may be paid on death should her assets increase in value. It is vitally important that a valid will is in place, not only to be tax-efficient but also to ensure her personal wishes are carried out.