Out of Africa: Part One – Planning your move from South Africa to the UK
As we see an increasing number of individuals and their families leaving South Africa to move to the UK, it is important to be aware of the UK tax position when organising such a move.
Becoming UK tax resident
The UK tax year runs from 6 April to the following 5 April. Generally you are treated as UK resident for the whole tax year, even if you arrive part way through the year (unless certain conditions for “split year treatment” are met). An individual’s residence in the UK is determined by the Statutory Residence Test (the “SRT”). There are three tests within the SRT where you determine first if you are automatically non-resident, then if you are automatically UK resident and finally, if neither, if you are UK resident under the sufficient ties test. These are summarised broadly below, but professional advice should always be taken to check how the tests apply to your specific circumstances.
- Automatic non-residence
You will be treated as automatically non-UK resident if you:
- spend less than 46 days in the UK (but this day threshold reduces to 16 days if you were resident in the UK in one or more of the previous 3 tax years); or
- work full-time overseas (which requires certain conditions to be met), spend less than 91 days in the UK and work more than 3 hours a day for less than 31 days in the UK.
- Automatic UK residence
If you are not automatically non-resident, you will be automatically UK resident if you:
- spend at least 183 days in the UK in the tax year;
- have a home in the UK at which you spend at least 30 days in total during the tax year and, either no home overseas, or a home overseas at which you spend less than 30 days in total during that tax year (provided certain conditions are met); or
- work full-time in the UK for a period of 365 days or more, all or part of which fall within the tax year under consideration and certain other conditions are met.
- Sufficient ties
If you are neither automatically non-UK resident nor automatically UK resident under the above tests, your residence status will be determined by reference to your ties to the UK and the number of days you spend here. The ties are as follows:
- family tie – if your spouse/civil partner/minor child are UK resident in the tax year (there are provisions dealing with the situation where a minor child attends boarding school in the UK);
- accommodation tie – if you have accommodation available to you for a continuous period of at least 91 days and spend at least 1 night there during the tax year (this can catch properties you do not have a legal right to occupy as well as relatives’ homes if certain conditions are met);
- work tie – if there are at least 40 days in the tax year on which you do more than 3 hours’ work in the UK and you could fall into this trap, for example, if you answer work emails throughout the day and do not have evidence to show that you did less than 3 hours work a day in total;
- 90 day tie – if you have spent more than 90 days in the UK in either of the previous 2 tax years; and
- country tie – this tie is relevant if you have been UK resident in one of the previous 3 tax years and it will be met if you spend more days or as many days in the UK in the tax year than in any other country.
The more ties you have, the fewer the days you need to spend here to become UK resident. For example, if you have not been UK resident in one of the previous 3 tax years and you have 4 ties, you will be UK resident if you spend more than 45 days in the UK while if you only have 2 ties, you would be UK resident if you spend over 120 days in the UK. The day count thresholds reduce in the case of prior UK residence in one of the previous 3 tax years.
If you have spent time in the UK before moving over, e.g. with work, visiting existing family or friends in the UK or just setting up your move to the UK, you need to be aware that you may already satisfy the 90 day tie, the work tie and potentially the accommodation tie depending on your circumstances. You therefore need to take care with your day counts prior to moving over in case there is a risk that you could become UK tax resident earlier than planned.
Remittance basis of taxation
Non-UK domiciled individuals who are UK resident can benefit from a tax regime known as the “remittance basis”. This is claimed in your UK tax return and enables you to shelter offshore income and gains from UK tax provided such income and gains are kept offshore and are not remitted to (or enjoyed in) the UK. The concept of remittance is very wide and can catch, for example, offshore income or gains being used for the benefit of a minor child in the UK (e.g. paying school fees). Great care therefore needs to be taken to avoid inadvertent remittances.
There is no charge to elect for the remittance basis to apply for the first 7 years of UK residence, but an annual charge of £30,000 applies once you have been resident for at least 7 of the previous 9 tax years, rising to £60,000 once you have been UK resident for at least 12 of the previous 14 tax years. It can no longer be claimed once you have been UK resident for 15 of the previous 20 tax years when you become “deemed domiciled” and liable to UK tax on worldwide income and gains and to inheritance tax on worldwide assets.
It is widely expected that the remittance basis regime will be changed following the next general election if the Labour party are elected.
Planning for becoming UK resident: the importance of “clean capital”
Key to planning for UK residence is to have a “clean capital” pot to fund UK living expenses in order to avoid having to remit offshore income and gains to the UK. This involves identifying how much clean capital will be necessary to fund UK expenditure once you become UK resident, what assets can be used to form this clean capital and ensuring that it does not become tainted with income or gains arising after you commence UK residence.
Non-UK income and gains realised in the tax year before you become UK tax resident will generally be clean capital and can therefore be brought into the UK tax free after you become UK tax resident. Additional clean capital can be generated, for example, from selling assets or receiving trust distributions before you become UK tax resident (and ideally in the UK tax year before you commence UK residence). Setting up segregated non-UK bank accounts is vital to ensure that clean capital is not tainted and that bank interest on the clean capital account goes into a separate income account. Care also needs to be taken with credit cards used for UK expenditure and what account is used to pay off the credit card balances. This will enable you to compute any UK tax liability more easily if funds are then brought to the UK. Capital can also be brought to the UK in priority to income, if you wished, as it is taxed at lower rates.
If you hold investment portfolios outside the UK, it is also important for guidelines to be given to your investment managers to avoid inadvertent UK tax charges arising. Certain investments should be avoided altogether when you become UK tax resident, e.g. shares in UK companies, if you wanted to benefit from the remittance basis.
Purchasing UK residential property
When you move to the UK, you may wish to purchase a home to live in either before arrival or after you become UK resident. Advance consideration should be given to the funding of such a property, particularly if a charge on offshore income/gains remitted to the UK is to be avoided once you are UK resident.
It is typical to fund part of any such purchase with a mortgage, which reduces the value of the property liable to UK inheritance tax (charged at a rate of 40% on death with an exemption where it passes to a surviving spouse/civil partner). In addition to a charge over the property, the bank may require collateral for the mortgage over offshore investment accounts/assets. Such collateral can lead to inheritance tax exposure in respect of those accounts/assets offered as security as well as remittance issues for UK residents where the accounts comprise offshore income and gains. A careful review of the loan documentation is therefore critical.
Understanding the multi-faceted UK tax regime is vital before becoming UK resident. Depending on your circumstances, it may be important to time your commencement of UK residence with wider planning such as creating a clean capital pot. Consequently, obtaining professional advice should be taken in plenty of time to assess what steps should be taken prior to arrival.