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Statutory residence test and ATED

Coming to the UK? Plan before you do!

Despite significant taxation changes in recent years the UK remains very attractive for overseas individuals looking to relocate permanently or temporarily. However, careful planning is vital before an individual arrives in the UK in order to maximise the number of available tax advantages. Tax treatment in the UK will depend upon the individual's residence (for income tax and capital gains tax: "IT" and "CGT") and domicile (primarily for inheritance tax ("IHT")).

On 6 April 2013 the UK adopted a statutory residence test (day counting and/or connecting factors and overseas work) making for more accurate planning for the individual arriving and leaving the UK. IHT applies to a UK domiciled individual's worldwide assets but excludes his non-UK assets if he is not UK domiciled. However, an individual becomes 'deemed domiciled' in the UK when he has been UK resident for at least 17 out of the last 20 tax years so after just over 15 calendar years he could be 'caught' by these rules (he will remain deemed domiciled for 3 years after leaving the UK). As a result of double taxation treaties with India, Pakistan, France and Italy, the deemed domicile rules do not apply to individuals domiciled in those jurisdictions (treaties with other jurisdictions offer varying relieving provisions).

A UK resident non-domiciled individual can avoid being taxed on his overseas income and gains if they are not brought into the UK by electing to have them taxed on the "remittance basis". To claim the remittance basis after 7 years of UK residency, an annual charge of £30,000 is imposed which increases to £50,000 after 12 years.

Annual Tax on Enveloped Dwellings ("ATED")

If the individual moving to the UK wishes to purchase a UK residential property, he needs to consider how that purchase will be funded and owned. The recently introduced Annual Tax on Enveloped Dwellings ("ATED") charge applies where UK or non-UK "non-natural persons" hold UK residential property with a value in excess of £2m. For 2013/14, the charge is calculated on a sliding scale ranging from £15,000 for properties worth between £2m and £5m up to £140,000 for those in excess of £20m. In addition, where ATED applies, a new CGT charge of 28% will be levied on disposals by both UK and non-UK non-natural persons relating to any gain accruing after 6 April 2013 subject to a limited form of tapering relief. As a result of these new charges, many individuals opt to hold the property personally. The added advantage for UK residents is that any future disposal of their home will usually be exempt from CGT under the 'principal private residence relief' (for non-residents, the Chancellor announced in his 2013 autumn statement that CGT will be introduced on 'future' gains).

Steps before arriving in the UK

The individual should consider:

1. his domicile and residence status (is any 'dovetailing' needed with his home country?).
2. realising any large capital gains in the tax year before he becomes UK resident.
3. organising his bank accounts before he becomes UK resident to separate out any clean capital and arrange for any interest it earns to be credited directly to a separate account to prevent any mixing of funds.
4. how will he fund himself in the UK? Spend UK source income first as it will always subject to UK IT and take any additional funds from clean capital (including most loans, gifts, inheritances).
5. setting up an offshore trust of non-UK assets to ring-fence them from IHT if he becomes UK domiciled/deemed domiciled in the future. The trust may be a useful shelter for gains though UK resident beneficiaries may be subject to a CGT charge if they receive any benefit.
6. whether he needs an English will.

This article originally appeared in the India Investment Journal in April 2014. More information on our Tax and Advisory specialists can be found here

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