The UK tax year ends on 5 April. Now is a good time for individuals to review their tax position to ensure their affairs are structured as efficiently as possible. This is particularly true for non-UK domiciled individuals who live, are thinking of coming to or investing in the UK.
The number of days a person spends in the UK can determine their tax residence under the statutory residence test (“SRT”). Whatever planning they are looking to do, pre-arrival or exiting planning or considering how to deal with deemed domicile position, days spent in the UK days are important for the SRT.
Days spent in the UK will not count for the purposes of the SRT in ‘exceptional circumstances’. HM Revenue & Customs have released guidance noting that the pandemic may impact people’s ability to move freely. It will therefore consider disregarding days spent in the UK, under the ‘exceptional circumstances’ rule. This does not give people free reign to spend more an extra 60 days in the UK. The individual circumstance will be considered and only 60 days can be disregarded.
Individuals who are planning on becoming UK resident in the next tax year
Residence and tax planning
Individuals are generally tax resident for a whole tax year (subject to specific circumstances when the split year treatment can apply). Even if an individual comes halfway through the year (say October 2020) and then becomes UK tax resident, they would be treated as UK tax resident from and including 6 April 2020. This means that UK tax will apply to income and gains that arise for the period 6 April 2020 to 5 April 2021 inclusive.
Expert advice on when someone will become UK tax resident and planning before coming to the UK is important to ensure tax efficiency.
Remittance basis planning
Non-UK domiciled individuals can claim generous tax treatment, the remittance basis.
UK tax applies to UK assets whether a person is UK resident or not, however, the remittance basis means that non-domiciled but UK resident person will not be taxed on their worldwide income and gains on an arising basis. Instead, UK tax will only apply to income and gains on non-UK assets:
- to the extent that they arise during their period of residence in the UK; and
- are remitted to the UK.
To make the remittance work, assets need to be structured carefully before a non-UK domiciled person becomes UK resident. Once they become UK resident, the opportunity is lost.
Deemed domicile planning
When a non-UK domiciled individual has been UK resident for 15 out of the last 20 tax years, they acquire deemed domiciled status in the UK for tax purposes. For example, if a non-domiciled individual became UK resident in the tax year beginning 6 April 2005, and continued to be UK tax resident, they will become deemed domiciled on 6 April 2020. An individual may become deemed domiciled sooner, if they have spent some time in the UK but had gaps of less than 6 complete tax years.
Before becoming deemed domiciled, a non-UK domiciled individual is only subject to inheritance tax on UK assets and they can claim the remittance basis. Once they are deemed domiciled, they will be subject to inheritance tax on their worldwide assets and the UK will tax worldwide income and gains. This will be significant for individuals with substantial assets outside the UK. Deemed domicile planning can help mitigate the effects of becoming deemed domiciled in the UK.
In particular, trustees of non-UK trusts should think carefully about planning. UK resident settlors should seek advice in relation to loans to non-UK trusts where they are a beneficiary so as not to be caught by recent changes to the taxation of non-UK domiciled individuals.
Changes in the new tax year
Capital gains tax filing
Capital gains tax (“CGT”) on the sale of a UK residential property is currently recorded on an individual’s personal tax return and payable on 31 January following the end of the tax year. So any CGT due on a disposal made on 6 April 2018 would only need to be paid on 31 January 2020.
From the new tax year, CGT return will need to be made and the tax paid within 30 days of completion.
Changes to principal private residence changes
There is a relief from CGT where a property was someone’s main residence. Where it stops being a person’s main residence, the last 18 months of ownership are also treated as qualifying for principle private residence. This final period is now reducing to 9 months (note that before 2014 this period was 3 years!).
If you require advice, please contact Hilesh Chavda.