The IBSA Podcasts
IBSA podcasts contain information from a global community of entrepreneurs and professional advisors dealing with international business structuring and regulatory compliance.
Hosted by Roy Saunders, who has over 50 years’ experience within the financial sector, these podcasts delve into enlightening conversations with a wide range of leading professionals aiming to demystify the complex world of business and provide invaluable insights to help listeners deal with various complex technical matters to best support their business and clients.
Disclaimer: We believe the information in this podcast to be correct at the time of recording. The information given is relevant at the time in line with governmental legislations. Competent counsel in the jurisdiction(s) whose laws are involved should be consulted. The podcast is made available by the IBSA for educational purposes only and to provide general information. The information should not be used or relied upon as a substitute for competent legal advice from a licensed professional in your jurisdiction.
The IBSA Podcasts
Unlocking the Secrets of UK Residency and Tax with Dmitry Zapol
Embark on a financial odyssey with the sage guidance of Dmitry Zapol, International Tax Advisor of IFS Consultants, as we unravel the intricacies of cross-border tax planning for US to UK movers. You're promised a treasure trove of strategies, from crafting clean capital to leveraging the non-dom rules. Dmitry's expertise shines as he dissects the optimal moments to arrange your tax affairs, the peculiarities of the UK's tax residency, and how foreign trusts are interpreted under British tax law. This session arms you with the knowledge to manage trust incomes and circumvent excessive taxation, ensuring that your transatlantic transition is as smooth as silk and financially sound.
Prepare to steer through the labyrinth of UK tax residency with precision, especially pertinent for those plotting to sell their enterprise and set sail for British shores. Our discourse navigates the momentous impact of tax years misalignment, the day count system, and the vital evidence required to confirm non-residency, shielding you from the prying eyes of tax authorities. Within this chapter, you'll gain insights into how to reside in the UK without falling into the tax resident net, and the intricacies of extending your permissible days. With Dmitry as our compass, we chart a course that helps you maintain your financial course without inadvertently inviting a tax tempest.
This podcast explores a fictitious case study centred around an entrepreneur’s ambition to develop a task management software company. Click here to read the case study in full.
Dmitry will be examining this in greater detail at our upcoming conference in May. Click here for full details of the conference and to book your ticket.
Hello and welcome to this IBSA podcast on the topic of cross-border tax planning, including pre-immigration structures and rules regarding expatriation from the UK.
Speaker 1:My name is Roy Saunders, founder and chairman of the IBSA, the International Business Structuring Association, which is a multidisciplinary global association of entrepreneurs and their professional advisors, dedicated to sharing their expertise with each other within a great networking platform. Today, I'm joined by Dmitri Zappol of IFS Consultants, and I'm changing my identity to become NICLUS, the entrepreneur behind my fictitious case study, which formed the framework of our autumn workshops and which will feature in the forthcoming annual IBSA conference. I would direct our listeners to read the case study on the IBSA website under the conference page at the IBSAorg, to fully understand what we will be discussing today. So, dmitri, as you know, as NICLUS, I'm planning to leave the US and coming to the UK with my wife and family for a limited period, before eventually selling my task management software company and returning to my native Austria. So I'd like to ask some questions which may help me understand my situation a little bit better. First of all, I'm in the US. Is there any benefit to be had from the timing differences between the US and the UK tax years?
Speaker 2:Good morning NICLUS. Good to see you here. The US tax year ends on 31st of December it is running alongside the calendar year Whereas UK tax year starts on the 6th of April of the following calendar year. This means that there's a gap of four months between the end of the US tax year and the start of the UK tax year. If you time it right and if you do not become tax resident anywhere else in the meantime, and also provided that you're no longer US tax resident in the following tax year, you can achieve a temporary status of non-residents in this gap that I mentioned earlier. This gives you enough time to realize income, capital gains and essentially create clean capital. This could be done by selling your assets or receiving some salaries or getting paid interest dividend, etc. You should really treasure this time and use it to your advantage to create clean capital to fund your life in the UK before you arrive here.
Speaker 1:Terrific, so I could transfer money perhaps to a trust. But in fact I have a trust. I created the trust in 2005 and I wonder how the income and the gains in the trust after my arrival in the UK will be treated for UK tax purposes.
Speaker 2:This is a very interesting question. First of all, because you settled the assets on trust and if you and your wife are not expressly excluded from such trust, it is a set law interested trust. This means that income arising in the trust is attributed to you when you are UK tax resident and there are special rules regarding capital gains. On the other hand, following the 2017 amendments to the non-dom regime, such trust would be considered a protected settlement. This is because you settled it before you became UK domiciled.
Speaker 2:This means that as long as no income or gains are leaving the trust, they will not be attributed to you and you do not need to pay tax on them. Of course, however, if you are in the UK and you're choosing to be taxed on remittance basis, as long as you are making no distributions which are remitted in the UK, you will not be paying tax on such distributions. Finally, if you are in the UK, you are UK tax resident, you're not electing to be taxed on remittance basis and you are receiving a payment from such trust, you will be subject to taxed, first on income and then on capital gains. The level of tax will depend on the amounts of income and gains in the trust which will be matched with every payment that is being made to you.
Speaker 1:So I know that I've been reading a lot about non-dom rules and how they're likely to change, but as a resident non-dom which I will be after my arrival, under the current rules I'll come and admit money to the UK without being taxed, without creating that tax liability that you mentioned.
Speaker 2:Earlier, we talked about creating your clean capital. Clean capital essentially includes funds which are not subject to tax when received by you when you are UK tax resident. This is why it is important to earn income and capital gains in the period of non-UK residents. Then, of course, if you are UK resident but are receiving payment for your work which was performed before you became UK tax resident, of course it is not subject to tax. Then there are less obvious ways of receiving payments. For example, if you inherit something, you're not paying tax on such funds. If you receive a gift, you're not paying tax on such funds. But, realistically speaking, if you're not to come to inherit something from your rich uncle, or if you don't have any rich relatives who are going to give you funds, you may not have enough money to fund your life in the UK. You mentioned that you have a trust.
Speaker 2:As I said earlier, if you take a distribution from the trust, you will most likely have to pay tax on it, but you could, in principle, borrow from the trust.
Speaker 2:Such borrowing at first glance would not create tax liability. However, of course, we're talking about a loan which should be commercial and which should be repaid in the end, and of course you must pay interest to the trust Now. Such interest should be at the official rates, which is, I would say, about two or 3% right now, and it must be paid annually and it should not be rolled up. If you choose not to pay interest, then you will be taxed on the benefit, which is equivalent to the amount of then paid interest, which will be matched with your income or capital gains within the trust. Finally, there's a bizarre situation where if you do not pay interest to the trust, you will just be taxed on the benefit, but if you do pay interest to the trust, not only you have to find the funds to pay the interest, but because the interest is coming from the UK to the trust and the trust is still interested, you must pay tax on that interest which the trust receives from you. So please choose your financing arrangements wisely.
Speaker 1:Okay, well, that's very interesting. Well, in fact, talking about financing arrangements, I'm planned to buy a house in the UK, near London, and I would like to arrange a mortgage on the house. How can I finance both the down payment, if you like, but service, particularly servicing the principal and the interest on the mortgage?
Speaker 2:There are a few things to consider. To begin with, If you are receiving a mortgage from a non-UK bank, you should consider UK withholding tax on such payments, because under UK tax rules you must withhold 20% tax unless you are paying interest to a treaty country. So make sure you don't need to gross up the payments or choose a bank which is in the treaty state. Next, if you are receiving the mortgage to buy a UK property and it will be secured by such UK property, then you have no issue. It will be just a mortgage on commercial rate. But, as you said earlier, you need money to finance the down payment and the question is what would you give as collateral?
Speaker 2:The UK rules say that you can only use as a collateral for a down payment either your clean capital or assets that were bought with your clean capital. In practical terms, this means that, for example, if you bought a property in Austria or in the US way before you are coming to the UK, you can use this property to finance the loan for the down payment. But if you are in the UK, you receive foreign dividends and with this foreign dividends you buy some securities and then you use these securities to provide as a collateral for your loan, Then of course the amount of such securities or the amount of funds used to buy such securities will be considered remitted in the UK.
Speaker 1:Okay, no, I understand that. So I guess I'm exposed to UK inheritance tax on that house. But also I've got shares in Tapp limited, my UK company. How do I mitigate my tax liability, my inheritance tax liability, if I were to die whilst I was resident still in the UK?
Speaker 2:UK inheritance tax rules operate not by reference to your residence status, but by reference to your domicile status. I think it's safe to assume that your domicile outside the UK for tax purposes. In this case you are only subject to inheritance tax in respect of your assets situated in the UK. Your home, of course, is perhaps one of your most significant assets, so if you die, it will be subject to inheritance tax. But there are a few exemptions. First of all, are you married, nicholas? Yes, I am with my little friend, so go on.
Speaker 2:If you are married, under spouse exemption, your house will pass to your wife without any tax subject to you, of course, having a will, because without a will it could be a bit more complex. Then, of course, the commercial mortgage outstanding remains a liability. It's interesting, though, that if you take out a loan from your trust to buy the house, the rules become extremely complex, and even though the loan from the trust to purchase the house would create a liability, the trust would still be liable to short inheritance tax provisions. Now, with respect to your company, I'm assuming it is not a listed company and it is an actively trading company. In this case, as long as it is not an investment company, it would qualify for the business property relief and basically subject to certain conditions, such as ownership for over one year, etc. It would not be subject to tax. It would pass down to your children if you wish so to and, of course, if your wife inherits it, there will be no tax whatsoever under the spouse exemption.
Speaker 1:Okay, do I understand that? Talking about the company TAP Limited? I'm planning to sell this before I return to Austria, so I'd like to understand what my capital gains tax liability is and how I can reduce this.
Speaker 2:If you just go ahead and sell it, you will pay 20% capital gains tax. Now, of course, there are talks well, there have been talks about raising the amount of capital gains tax, but it's not in the works as far as I'm aware. If you are an employee or a director of your company and if you own the shares for at least two years, then you qualify for the business assets disposal relief. This means that the first one million of your gain on disposal of such company is subject to tax at 10%. Now, if you and your wife both own shares and you fulfill these conditions in fact you can appoint a non-executive director, a director and employee, a secretary, whoever then of course you have two million subject to tax at 10%. Finally, if by the time you're not a UK tax resident and you sell the company's shares, I don't think the company will be involved in property transactions, will it, roy? No, not at all. It will be a proper trading company, and this is as long as you're not a UK tax resident, then when you're selling the company, you're not subject to tax at all.
Speaker 2:There are a few caveats, of course. There are so-called temporary non-residents rules. They mean that if you lived in the UK before you depart for more than four years, then you must stay away from the UK for five full years unless you want to pay tax when you return. And of course you need to consider tax wherever you are tax resident at the moment of sale because you may have to pay tax there. This is where the point of tax years mismatch may come in handy. The UK tax year ends in April. Now if you move to another country say you go back to Austria where your tax year begins next January you'll have this gap between April and the 31st of December. Why don't you travel around Europe, go to Spain, go to Italy, spend a bit of time around the world and then come to Austria? If you sell your company between April and December, then you'll pay zero tax in the UK and you will not pay any tax wherever you will be resident, because you may avoid residence altogether.
Speaker 1:What are the different factors that I have to consider to be non-resident of the UK, assuming that I still have my home here and maybe Maria is still here as well with the children?
Speaker 2:Unlike a few other countries, such as the US, for example, ireland or Germany, you do not need to be resident somewhere else after you leave the UK, nor should you pay any taxes when you are away by reference to income against realized after your departure in the UK. The UK operates simply by counting the number of days you will be spending in the UK after your departure, and this is it. I would say that you are safe, or you are likely to be safe, if you spend fewer than 46 midnight in the UK. There are ways of bringing 46, or rather 45 minutes, up to 90 midnight, but in this case you must be employed on a full-time basis abroad if you want to come to the UK regularly. After some time this number grows, maybe 220 days and even perhaps 282.
Speaker 2:But there's one important caveat which I must tell you about. You've mentioned that you will keep a home in the UK, and we're not talking about just a property where your stuff will be kept. We're talking about your proper family home where your life will reside If you leave the UK and you do not establish a home abroad, and by home I mean properly home with your things, with your stuff, which you call your home where you spend at least 30 days during the year, the revenue will say that you will not have acquired a home abroad and because you have kept at home in the UK, they will do you get a resident, so please be careful about it.
Speaker 1:So I mean part of the thought process is maybe, and particularly because I'm travelling around the world doing my business, maybe I shouldn't become UK tax resident when my wife and children become tax resident here in the UK, how do I make sure, from the number of days that you're talking about, that I am not going to become resident in the UK if I spend fewer than a certain number of days in the UK?
Speaker 2:The fact is that we need to consider include having accommodation in the UK doing work here, if your wife and all your children are UK tax resident, and the number of days that you spend in the UK in the previous years and also if you were tax resident in the three years before. So it is a lot to take in. I said earlier that the safe number is fewer than 46 midnight and sometimes you can bring it up to 90, but you have to be very careful.
Speaker 1:So up to 90 days I haven't been in the UK the previous years, obviously when I alive. So that's not a problem. But having my wife and children here, having my home here and having some work here as well, that's the problem. How many? Supposing I just do a little bit of work here during the year, but very little because I still have my US company, then what's the situation there? Do I have to declare how many days I've been in the UK working?
Speaker 2:That's a very interesting question you're asking. Often I have clients coming to the UK who are either employed by a foreign company or if they are directors of a foreign company and there are two levels of how work can affect your tax residence. First is the so called full time work in the UK test. It's where you are basically doing at least 35 hours of work per year over the 12 month period. Or if you have the work time where you are spending, if you have 40 work days during the year, each work day being three days of three hours of work per day. So it's quite convoluted.
Speaker 2:I would say also what? What does sometimes see clients do? They say I'm not employed, I'm not getting paid by my foreign company, I'm just doing stuff here. But obviously they are receiving payment not in the form of salary from a foreign company but in the form of dividends. The UK residence test says that even if you're not paid for what you're doing, but if you were paid for what you were doing and if it will be considered your salary whatever you're doing, then of course you were working. So the good rule of thumb is definitely fall below the full time work standard. Full time work is set 35 hours on average per week and you can also work up to 40 work day in the UK without triggering the work time.
Speaker 1:OK, well, thanks very much, and I think that the burden of proof, I guess, is on me rather than on the revenue.
Speaker 2:Oh, absolutely. If the inspector assumes that you're working and they can easily assume it by looking at your LinkedIn profile or looking at some corporate registers they may allege that you're working and then you have to disprove it. There is no golden standard of the revenue will look at everything. They will look at your records, at your calls, at your emails. So if you are trying to stay, be stay below the three hour limit for the work day, as I said before, make sure that it's definitely below three hours. But if you're working more than three hours, then you may just as well spend 10 hours that they work, because this will be full work day for the work time.
Speaker 1:OK, well, thank you very much, that's. That's very interesting. You've given me a lot to think about. I'm sure Nicholas would be extremely grateful for these insights and he may have some more questions for all of us when we meet on the 23rd of May at the IBSA annual conference. The details of the IBSA annual conference is the 10th anniversary of the IBSA this year on our website at the IBSA dot all. So again, thank you very much to meet you. It was really good. I'm going to change back again from Nicholas to Roy Saunders now and I'll conclude this podcast by thanking you again, and thank you everybody for listening.
Speaker 2:Thank you very much, roy. Have a good day.