Tax Residence and Domicile

The complicated rules that determine the geographical limits of UK tax contain traps for the unwary but can offer opportunity as well.

Tax Residence & Domicile

The scope of UK tax is limited by territorial constraints. Establishing with clarity (and planning around) an individual’s tax residence and domicile can be a cornerstone of tax-efficient wealth management.

The rules are complex and despite significant changes over recent years, some grey areas remain.

An example of planning we have implemented

Scenario

A client had incorporated a property rental business in 2017. He was now planning on setting up home in Portugal. This was likely to be permanent move from the UK, but he did want to return to the UK from time to time. At the time of his departure from the UK, the company had built up significant reserves from rental income and property sales.

The tax planning opportunity

Very broadly, UK taxes on income extend to the worldwide income of a person resident in the UK. A non-UK resident is taxable on UK-source income. Double tax arrangements between the UK and other territories can add another layer of analysis. Similarly, an individual who is domiciled (or ‘deemed domiciled’) in the UK is subject to Inheritance Tax (IHT) on their worldwide assets. Only UK situs assets are subject to UK IHT for a non-domiciled individual.

The result

With a detailed analysis of the client’s circumstances, we were able to advise him on the timing of his departure from the UK – and on the necessary administrative processes – to ensure that he ceased to be UK resident from a certain date. By registering for Portuguese Non-Habitual Residence status, he was able to secure a temporary exemption from local tax on dividend income. He was then able to draw reserves from his property company tax-free saving several hundreds of thousands of pounds.

By analysing his remaining ties with the UK (in terms of accommodation and social arrangements) and advising on suitable steps, we were able to ensure that he will be able to make significant return visits to the UK without that threatening his non-UK tax status.

He can now put in a non-UK holding company for his UK property company. That is divesting from residential property into other investments and the effect will be that the value will then fall outside UK IHT.

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