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Taxes in UK: case studies with answers to key questions

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Tax rules and regulations can puzzle both common people and experienced businessmen even in their own country, let alone a foreign country. In our previous publications we have already covered key terms and concepts of taxation in the UK for those who move here. However, it has mainly been theory. Here we will give you a few case studies from our experience of dealing with various clients and scenarios.

Case study №1

How not to become tax resident in the UK?

Background information: A family plans relocating to the UK under the Representative of an Overseas Business route – a husband, a wife and a young son that they want to enrol in a private school. The wife is the main applicant. They got their visas in July and aim at moving to the UK in August.

The task was to make sure the husband does not become UK tax resident in the current tax year.

The main applicant, the wife, will spend over 183 days in England on her Representative visa before the end of the tax period (5 April). She will be automatically considered tax resident in the UK through an automatic tax residence test.

The husband might also become tax resident here because he will have 2 ties to the country through the Sufficient Ties test:

  • 1 family tie because his wife is tax resident
  • 1 accommodation tie through a purchased or rented property available to him for over 91 consecutive days

As the husband has never been UK tax resident, by proving to have 2 ties to the country he cannot stay in England for more than 120 days. If the he chooses not to be 100% dependent on his wife and decides to find a job in the UK, irrespective where his employer is actually located, he will have a work tie on top of the other 2 thus reducing his amount of time here to 90 days.

Immigration and tax statuses in the United Kingdom are completely different things. In this particular case, the husband has arrived here as a dependant family member. Fortunately for him, he got his first visa before 11 January 2018 and could benefit from the previous rules for dependants; he could be absent from the country for no more than 180 days in each 12-month period. Since 11 January 2018 new rules apply to dependants and they cannot leave the UK for over 180 days in total in any 12-month period.

We have worked with the client to prepare a plan for him where he would comply with the permitted number of absences while keeping his tax non-resident status. However, in three years, when time comes to extend the visa, the client would need to plan his tax status with the new rules in mind in order to avoid any potential immigration issues.

Case study №2

Where to pay tax on income received abroad?

Background information: A client moves to the UK to work as a highly qualified specialist in an British company. Her salary in the UK includes £11,500 of untaxed personal allowance. She also has a commercial property abroad that she rents out and gets monthly rental income.

The task is to check whether it is beneficial for the client to use the special remittance basis of taxation based on her tax status and sources of income. Remittance can be claimed by UK non-dom tax residents in order to be able to pay taxes only on the income received in or transmitted to the United Kingdom.

  1. First, we determine a period when the client becomes UK tax resident. Because she moved to England to work and live here permanently, the legislation in force can consider her tax resident since she first entered the country on her current visa.
  2. In order to choose the best basis of taxation, we compare the client’s tax liabilities in the UK and abroad factoring in all allowances and reliefs.

Remittance means that her tax liabilities in the UK will be recalculated upwards because she automatically loses the right to the £11,500 of personal allowance. She will need to pay tax on that too. The allowance is only possible if we use the arising basis of taxation and keep things as they are without recalculations.

We make sure the client understands that even if she uses remittance and pays taxes only on her UK income, she has to be careful about what she does with her rental income received abroad, because if she transfers it to the UK, it will be also subject to UK tax.

  1. Finally, we do simple calculations and compare these two totals:
  • Taxes that the client would need to pay in the United Kingdom on the worldwide income – UK salary and rental income abroad – if taxed on the arising basis of taxation with applied personal allowance;
  • Taxes that the client would need to pay, if taxed on the remittance basis, in the UK (salary) and abroad (rental income).

In the tax year in question, when the client moves to the UK, she stays tax resident in her country of origin and must pay income tax there, say 15%. Because the rental income is a significant amount to pay income tax on, it is decided that the client is better off if she uses remittance.

Next tax year is a completely different thing. The client is no longer tax resident abroad and must now pay 30% income tax there. Calculations clearly show that it is more viable to use arising basis instead of the remittance. The client declares all her worldwide income to the UK authorities and pays the difference between what she’s already paid to the British Crown and what’s been paid to tax authorities abroad.

Case study №3

How to pay less tax in the UK when transferring property to children?

Background information: In 2014, a middle-aged client buys property in London for £3,000,000 through an offshore company registered in the Caribbean. The client lives there himself and does not rent it. Every year he pays the Annual Tax of Enveloped Dwellings which in 2017 was £23,550.

The client wants to transfer the flat to his son and grandson minimising tax liabilities for all parties.

  1. The options with funds and other instruments were brushed away as unnecessarily complicated. It was decided to go for a simple transfer in favour of the client’s son and grandson.
  2. Because the grandson is still a minor, his father (the client’s son) becomes a trustee in his child’s favour for 50% of the value of the flat.
  3. Since when the flat was bought its market value has increased by £40,000; it means that after deducting all the expenses related to the purchase and title transfer the client must pay a tax of £5,000.
  4. No stamp duty needs to be paid because the offshore company that owned the flat is closed and the flat is transferred to the son and grandson upon liquidation. The company has liabilities to the owner but not to third parties.

The UK tax laws say that if the client dies within 7 years of the transfer of title, a gift is not considered a gift but inheritance. The inheritance tax will be 40% of the value of the estate if he dies within 3 years after title transfer. Starting from the fourth year it will be taxed on a sliding scale of 8% a year.

Years between gift and deathIHT rate
Less than 3 years40%
3 to 4 years32%
4 to 5 years24%
5 to 6 years16%
6 to 7 years8%
More than 7 years0%

To protect the client’s family from potential expenses, his life is insured for the amount comparable to the inheritance tax sum that will be also reduced proportionally to that sum.

In this article, we have looked at three case studies for tax optimisation in the UK. Our lawyers have been dealing with such cases and more complex tasks for many years in the areas of immigration, tax optimisation, relocation and business management in United Kingdom. Our legal team will be happy to provide expert and qualified advice in solving any of your issues.

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