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Abroad range of taxes

Our panel of experts take a w ide-ranging look at taxing issues for people who move overseas.

When a client decides to move abroad, what taxes could they be liable for in the UK before and after departure? Can these be reduced through tax planning? How long will any tax liabilities in the UK last for after departure?

Osler: Someone who is no longer resident in the UK remains liable to UK income tax on UK-source income. This could include UK bank interest, rental income from a UK property or dividends from UK shares. However, it is possible to register to receive UK bank interest without the deduction of tax at source and there is a mechanism to prevent non-UK residents being liable to higher rates of tax on investment income. All Commonwealth citizens and citizens of the Republic of Ireland are eligible for personal allowances even when not a UK resident.

Keeley: The normal rule is income from UK assets is only taxable after departure. Exemption from capital gains tax is possible only from April 6 of the following year but disposals of assets which are used for a UK trade carried on by the individual remain taxable. However, non-UK-resident status must be main- tained for at least five complete tax years – otherwise capital gains tax will be imposed in the year of return.

Worldwide assets remain liable to inheritance tax unless UK domicile status is abandoned, at which point only UK assets are taxable. This takes at least three years non-UK residence to achieve plus a firm resolve to live in the adoptive country permanently.

Rix: Liability to UK tax largely depends on the individual’s residence and domicile status for tax purposes. If an individual remains a UK resident despite moving abroad they are still liable to tax in the UK on their worldwide income and gains, although relief may be available where the individual also suffers tax in a foreign tax jurisdiction.

If an individual ceases to be UK-resident, they will only be taxed on income which arises in the UK, subject to any double-taxation agreements in force and limits imposed by the UK tax legislation. Income accrued during a period of UK residence but received after UK residence has ceased will generally continue to be taxable in the UK and there is no maximum period for these purposes. Generally, non-UK residents are not subject to UK capital gains tax, even where the property is situated in the UK. The exception is where an individual disposes of an asset which they held as a UK resident during a period when they are deemed to be only temporarily non-resident. Broadly, a temporary non resident is an individual whose period of non-UK residence does not exceed five years.

Is it best for clients to move all their assets outside the UK? How can they lose the liability of their assets to inheritance tax?

Osler: Moving income-producing assets outside the UK can reduce a non-UK resident individual’s exposure to UK income tax, particularly where the individual has other UK sources of income, such as rental income.

In terms of inheritance tax, a UK-domiciled individual continues to be liable to UK inheritance tax on all his world-wide assets, so moving them abroad would not reduce this exposure.

The position changes if the individual becomes domiciled in a new country. In those circumstances, UK inheritance tax only applies to ass- ets situated in the UK. An individual can lose their UK domicile if they form an intention to reside indefinitely in another specific state. Of course, the inheritance or estate taxes of that state also need to be considered.

Keeley: Not necessarily. Remember that the new country of residence may also tax income and gains on a worldwide basis and overseas tax rates may in some cases be similar to or exceed UK tax rates. UK income tax will sometimes be credited against foreign income tax, so retaining UK assets is not always disadvantageous. Nor-mally, UK inheritance tax will remain due on worldwide assets unless the client also loses his UK domicile status. Holding only foreign assets is therefore likely to be a good strategy only if the client intends to cut their ties with the UK permanently.

Rix: Anyone who is deemed to be UK-domiciled is liable to inheritance tax on their worldwide assets, regardless of their residence status for income and capital gains tax purposes. If an individual is UK-domiciled, then merely transferring assets overseas will not reduce their potential liability to UK IHT.

Non-UK-domiciled individuals are only subject to UK IHT on their assets located in the UK, so minimising UK assets will reduce any potential IHT liability.

Note that an individual who is UK-resident for 17 out the last 20 years is deemed to be UK-domiciled for UK IHT purposes. Professional advice should be sought to maximise planning opportunities for non-UK-domiciled individuals.

What tax planning benefits are there from holding assets in an offshore centre once they have left the UK?

Osler: As previously noted, in some circumstances, an individual can reduce his liability to UK income tax by holding assets outside the UK. Moving assets offshore may also enable the individual to stop having to file UK tax returns.

Using offshore structures can assist in enabling an individual to change the situs of an asset, which may be useful for inheritance tax planning. For example, if a UK property is owned via an offshore company then the individual owns an offshore asset (shares) rather than a UK asset (the UK property).

The use of trusts is also a possibility but this is likely to be more effective if the individual has ceased to be a UK domiciliary.

Keeley: It would be possible to avoid UK income tax and, of course, if a foreign domicile status is also acquired, inheritance tax. Capital gains tax would not necessarily be an issue because this tax normally falls away after non-UK residence has been acquired.

However, the tax system in the new country of residence must also be taken into account. Many overseas countries have introduced legis- lation to combat tax avoid- ance and some have targeted offshore centres. A decision should therefore never be taken on the basis of UK tax savings alone.

Rix: As income arising on non-UK assets is generally not subject to UK tax for non-UK residents, there may be some benefit from holding assets in an offshore centre.

However, a UK (or Commonwealth or EEA) national remains eligible for UK personal allowances, which may be sufficient to cover such income. Benefits may arise in the host country location but this is specific to the jurisdiction involved and the individual’s particular circumstances, and professional advice should be sought.

How can people avoid forced heirship rules in European countries? Should they have two wills – one for the UK and one for their new country of residence?

Osler: Forced heirship rules do not necessarily apply to all assets situated in a particular country. For example, in France, the rules apply to land but not shares. In some cases, forced heirship can be circumvented by holding assets through a corporate structure but, beware, this can cause other, more serious, tax problems. Where an individual owns property in a country that does have forced heirship rules, it is usually appropriate to have a separate will dealing with the administration of these assets.

Keeley: There is no hard and fast rule about this. The correct solution will depend upon the nature of the assets in question and the legal system of the adoptive country.

Please note that forced heirship rules can sometimes override the intentions set out in a will. This may mean that other planning vehicles, for example a trust, or possibly a foundation, may be necessary. It is also recommended that planning should be considered carefully beforehand, otherwise, opportunities may be lost.

Rix: Having wills in each jurisdiction where an individual has assets is advisable as, typically, each country will apply their legislation to assets located in their country. Generally, the terms of a will drawn up in one country will not override the other country’s regulations applicable to assets situated in that country, although these will provide an indication of the ind- ividual’s wishes.

How can residents avoid having to pay tax twice – both in their new country of residence and in the UK?

Osler: The UK has an extensive network of double-tax treaties. These set out which country has a right to tax income and gains depending on which country the source derives from and which country the individual is resident in. For example, it may state that a gain arising on an asset situated in one country is only taxable in that country.

An individual can find himself or herself resident in more than one country in any tax year and the treaties also set out rules to determine which country he should be treated as resident in.

Despite the treaty, it may still be possible that income is taxable both in the country of residence and the country from which the source is derived. In this case, it is usual that the tax paid in the source country is given a credit against the tax in the residence country but this does need careful attention.

Keeley: Advice must be taken in both countries, preferably before a decision to change tax residence has been taken. Double-tax treaties will sometimes alleviate this problem but anomalies can arise. It is dangerous to assume that a tax treaty will always come to the rescue. Overseas jurisdictions may classify income and the person or entity entitled to that income in different ways. The interaction of UK and foreign inheritance taxes is another potential risk area.

Rix: The UK has an extensive array of double-taxation treaties with other countries. The purpose of these treaties is to avoid income or gains being taxed more than once. The relevant treaty will determine which country has the right to tax the income in question and what mechanism for relief is available where income is taxable in both locations.

In the UK, this will generally either be an exemption, that is, the income will not be taxed in the UK, or the foreign tax can be taken as a credit against UK taxes. The credit mechanism effectively results in the income being taxed at the higher of the UK or overseas applicable tax rates. Where the country involved does not have a tax treaty, a credit for the overseas taxes may be taken under UK domestic tax legislation.

What other tax issues should clients be aware of before moving abroad?

Osler: An individual is not subject to UK capital gains tax if they are not resident and not ordinarily resident in the UK. However, if an individual sells an asset that he or she owned before becoming non-resident and subsequently returns to the UK within five years, then the gain could become subject to UK capital gains tax. Also, the date that a person ceases to be resident will affect his or her liability to UK taxes. That date is not always obvious, particularly if someone gradually increases their presence in another country over a period of time. This may be an area where professional advice is needed.

Keeley: Wealth taxes may apply. Property taxes may also be charged at rates which may exceed UK stamp duty land tax rates. Local income and other taxes, imposed at a state or federal level are sometimes imposed in addition to national taxes and can vary considerably within a single national boundary.

Social security contributions – another fiscal cost – should be considered and frequently exceed UK rates. Clients who establish overseas businesses may have to consider local VAT and purchase tax. Finally, some countries have exit taxes due upon leaving the jurisdiction and this may occasionally affect clients moving between overseas countries.

Rix: While allegedly not a tax, liability to UK national insurance contributions should be considered. Where the individual retains their UK employment status after leaving the UK, for example, they are temporarily seconded to an overseas subsidiary, it is possible that liability to UK NICs may continue. For countries in the European Economic Area or countries with a social security agreement with the UK, the liability will depend on the length of the stay abroad or the terms of the agreement.

Where the destination country is not in the EEA or does not have an agreement with the UK, this will normally be limited to 52 weeks but local social security liabilities may also arise during this period. Where this is not the case, liability to social security in the destination country will be determined under that country’s legislation but, in general, liability will be determined by reference to an individual’s residence status, which can be a different definition from residence for tax purposes, and where they perform their duties or provide services.

Two general warnings – taking up a new job abroad rather than a secondment usually ends the liability to pay UK NICs and the rules may apply differently for non-UK individuals. Where liability to pay UK NICs ceases, entitlement to certain UK social security benefits can be maintained through the payment of voluntary NI contributions.

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