Current UK
tax rates (6/4/04 – 5/4/05)
Income tax:
40% over, broadly, £36,000, with various
lower bands thereunder.
Capital Gains Tax:
40% (generally) although reduced to 10% for certain
business assets (if held for two years), and 24%
for non-business assets owned for 10 years.
Inheritance Tax:
40% over £263,000.
The distinction in the tax treatment of a visitor
or resident in the UK depends on the concepts
of residence and domicile as outlined below:
Note that “domicile”
is very different in the UK and US, specifically
the UK concept of a person’s “domicile
of origin”. UK residence is an actual
test, based on the number of days a year spent
in the UK. |
|
What should you do before arriving
in the UK?
- Open two new accounts with an overseas bank, ideally
in a tax year before becoming UK resident. This could
be a US bank if US advisers deem it appropriate, or
one in the Channel Islands or a Caribbean country
with a favourable tax regime. One account will be
a “capital” account and the other will
be an “income” account. Both can be interestbearing,
but interest arising on the capital account must be
paid directly into the income account. Cash to meet
your UK needs should be transferred to the capital
account before arrival in the UK. The funds should
be in Sterling to avoid realising taxable gains on
the conversion of the foreign currency. Even once
UK resident, a non-UK domiciliary will be able to
bring money out of the capital account into the UK
without incurring any UK tax liability. The funds
in the income account should not be remitted to the
UK once UK resident, but can be spent while outside
the UK without any UK tax charge, provided that a
non-UK domicile is retained.
- Decide whether you intend to settle permanently
in the UK, thereby acquiring a UK domicile of choice.
It is essential that US advice is taken regarding
expatriation to ensure “dovetailing” with
the UK rules on domicile. A non-UK domicile is extremely
advantageous for UK tax planning. Ideally, you should
maintain as many links as possible with the US, including
a home there and your US citizenship. You should have
a Will governed by the law of your State, including
a domicile statement in any UK Will (for example over
UK property) and perhaps sign a separate statement
relating to your UK tax affairs. The Inland Revenue
may issue a specific domicile question (known as a
DOM1) to complete and it is essential that professional
advice is taken on this.
- Purchasing a UK property could affect your UK residency
status. Stamp duty land tax will be payable on the
purchase, at up to 4% depending on the value of the
property purchased. The taxable value of a UK property
for Inheritance Tax purposes can be reduced by an
offshore mortgage. We do not recommend a person owning
a property through a company, unless these arrangements
are appropriate for their laws at home. UK legislation
taxes employees on the use of a company’s assets,
and the Inland Revenue has indicated that from April
2004 they will view (and tax) any person occupying
a property in this way as a shadow director and so
a charge to income tax will arise under the benefits-in-kind
legislation. The only way to avoid this charge is
for the occupier to pay a full market rent for the
use of the house, but this may cost more than the
income tax liability. There may be corporation tax
issues on the receipt of rents by the company.
Even if the company is offshore, if the occupier is
involved in the decision-making process regarding
the property, the company may be viewed as being “managed
and controlled” in the UK and a liability to
UK corporation tax on its income and gains arise.
- Arrange for cheques/credit cards with UK banks
to be issued. Credit cards can be settled either from
an offshore capital account or from any UK account.
A taxable remittance could arise if, for example,
goods were paid for in the UK with a cheque drawn
on a foreign bank account containing income/gains
or if paid by credit card and the bill subsequently
settled by funds representing income or gains realised
abroad.
- In due course, your salary or cash may be invested.
If the investments are in UK companies (even if through
a nominee agreement), you will be subject to UK tax
on gains and income. If assets remain offshore, the
non-UK domiciled holder will only be taxed to the
extent gains or income are remitted to the UK. The
US tax rate for gains from nonbusiness assets is attractive:
we recommend that such assets are not held in the
UK to minimise the UK tax exposure.
- If you purchase a UK property, an English Will
is recommended. UK Probate Registries may not recognise
a foreign Will, or it may not include appropriate
powers to administer and manage the property on an
untimely death. Otherwise, a UK Will is not essential
unless there are significant other assets located
in the UK. Any UK Will should contain a statement
regarding the domicile of the testator.
- If you plan to stay for a significant period of
time, offshore settlements are useful to hold funds
and/or any UK house. This, at present, confers ongoing
tax benefits on non-UK domiciliaries, and offers protection
from future inheritance tax charges on the underlying
assets. For example, US grantor trusts allow investment
in UK assets and tax-free remittances of capital gains
into the UK for non-domiciliaries.
This article does not cover any US tax issues, which
will clearly need to be considered in depth prior to
any departure from the US, and on an ongoing basis,
to ensure the two regimes “dovetail” in
the most efficient manner. There are treaties that minimise
double taxation. Each person’s circumstances are
different, so it is important to seek bespoke advice
in the US and the UK, ideally well in advance of the
proposed date of arrival in the UK. The Inland Revenue
is currently reviewing the taxation of non-domiciliaries
and use of offshore trusts, so the currently-favourable
rules may change in the future.
For more information, contact:
Fiona Graham, Solicitor,
Boodle Hatfield
Tel: +44 (0) 20 7629 7411
Website: www.boodlehatfield.com
|
