Out of Africa: Part Two – Planning your move from South Africa to the UK
In this article Julie Howard looks at how an individual will be taxed once they are living in the UK on an ongoing basis.
This article is the second in a series, the first (here) focused on pre-arrival tax planning for individuals planning a move to the UK from Africa. These articles have been prompted by the trend we have seen of clients emigrating to the UK from countries in Africa, in particular South Africa. The UK remains an attractive country to move to owing to its education system, prime London real estate and rule of law.
Living in the UK as a UK resident non-domiciled taxpayer
A UK resident non-domiciled individual can claim the remittance basis of taxation. 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 the UK.
Once you become UK resident you will be liable to the following taxes:
- income tax at 20% to 45% on UK source income (e.g. UK rental/employment income, UK bank interest) and on offshore income to the extent this is remitted to the UK (assuming you claim the remittance basis – if not you will be liable to tax on worldwide income); and
- capital gains tax at 18% to 28% on gains relating to residential property and at 10% to 20% on all other gains, but again only to the extent these relate to UK source gains if you are a remittance basis user (otherwise on worldwide gains).
UK inheritance tax at 40% on death will apply to UK situated assets, just as it does when you are non-UK resident. Once you have been UK resident for 15 of the previous 20 tax years, you will no longer be able to claim the remittance basis and you will become deemed domiciled for UK tax purposes. This means that you will become liable to pay UK income tax and capital gains tax on worldwide income and gains and inheritance tax will apply to your worldwide assets (unless you have not previously claimed the remittance basis).
If you are planning to claim the remittance basis once you become UK resident, it is very important to have segregated accounts and ideally a pot of clean capital to fund UK expenditure, as explained in the first article in this series. The concept of “remittance” is very wide and care should be taken to ensure that taxable income and gains are not brought into the UK inadvertently. If, for example, you use a credit card in the UK, which is funded from an overseas bank account containing income and gains realised after you become UK resident, there will be a taxable remittance. Payments of offshore income and gains for goods or services enjoyed in the UK by certain persons connected with you can also be caught. These connected persons would include your spouse and minor children and grandchildren as well as certain companies connected with you.
While there is no charge to elect for the remittance basis to apply for the first 7 years of UK residence, 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 is possible to opt in and out of claiming the remittance basis charge if, for example, in some years insufficient overseas income/gains are generated to warrant paying the charge, e.g. broadly, you would have to have over £65,000 of overseas income to justify paying the £30,000 charge and over £130,000 of overseas income for the £60,000 charge.
It is expected that following the next general election in 2024 the government will change the remittance basis regime. We do not yet know what form the new regime could take, but it looks likely that there may be more encouragement to invest offshore wealth in the UK (the current remittance basis regime discourages individuals from bringing wealth into the UK) and that an individual’s worldwide assets, income and gains may be brought within the scope of UK tax after a shorter period of UK residence than is currently the case.
African clients we deal with often have existing offshore trusts in place. If not, before becoming deemed domiciled for UK tax purposes, thought can be given to setting up an offshore trust to hold overseas assets. Provided the trust does not hold UK situs assets directly or UK residential property indirectly, there should be no inheritance tax charges during the lifetime of the trust.
Generally the settlor (the person who establishes the trust) and any beneficiaries will be liable to UK income and capital gains tax to the extent distributions and benefits they receive are matched with income and gains that have been generated within the trust (known as “tax pools”). However, if they claim the remittance basis and keep distributions and benefits offshore, no UK tax should arise.
It is important that the trustee maintains adequate records of the income and gains that are generated within the trust where there are UK resident beneficiaries, who may need to report the distributions and benefits they receive. This is particularly relevant in the case of pre-existing family trusts where limited records may exist of the income and gains tax pools within the trust. This can pose a challenge where a beneficiary has a reporting obligation because they have remitted a distribution to the UK or received a benefit in the UK, such as an interest-free loan or the rent-free use of a UK property. By way of example, the taxable benefit of an interest free loan is the amount of interest at the official rate of interest (currently 2.25%) that the trustee has foregone and this is taxable to the extent it is matched with the income and gains tax pools. Where a distribution or benefit is matched with income, income tax at up to 45% will apply depending on the beneficiary’s marginal tax rate. If the distribution is matched with gains, the tax rate can be as high as 32% if there is a delay of 6 years or more between the gain being realised by the trust and being matched against a distribution to a UK resident beneficiary.
Maintaining business interests outside the UK
Individuals moving to the UK from Africa are often entrepreneurs with businesses in Africa or they may have interests in family owned businesses there. It is likely that they may wish to remain involved in these after they become UK resident and typically will continue to travel back to Africa in order to continue their roles in these businesses . However, care needs to be taken to avoid bringing overseas companies within the UK corporation tax net. This would be the case if a company is being “centrally managed and controlled” from the UK. If so, the company could become liable to UK corporation tax at up to 25% on profits and to an exit charge on a deemed disposal of assets if the tax residence is moved offshore again in the future.
Determining if a company is being centrally managed and controlled from the UK is a question of fact, judged over a period of time. Ideally it is better not to have any UK directors and care should also be taken that UK resident individuals who are not directors do not give directions to the overseas board of directors, which then merely “rubber stamps” those directions (such individuals are known as “shadow directors”). Strategic decisions about the company, e.g. about the acquisition or disposal of assets or employment of key personnel, should be taken by the directors at board meetings held outside the UK. It is very important to maintain records to show where decisions about the company are being made, to record the minutes of board meetings and to demonstrate that central management and control is taking place in the company’s jurisdiction of tax residence.
With professional advice, it is possible to optimise your UK tax position once you have moved to the UK. Particular care needs to be taken to ensure that offshore income and gains are not inadvertently remitted to the UK by remittance basis users and to understand any potential UK tax exposure and reporting obligations relating to distributions or benefits received from offshore trusts. It is still possible to remain involved in companies in Africa or elsewhere, provided that board meetings are held outside the UK, you do not join these by telephone or video and that you are not involved in making strategic decisions about the company from the UK.