This is the first of two postings on the international aspects of my field of law. The second, which I'll post later today, deals with England-&-Wales people who leave, or buy a second home abroad. This posting deals with non-England-&-Wales people who arrive, or buy a home here.
I like to start writing about legal problems by presenting a common misconception. So often, someone’s problem is not the one they think they have, and the solution is not the one they thought they needed.
In this case, I want to start by discussing “domicile”, which is the connecting factor for English succession law. (A “connecting factor” is the thing which connects a person to a system of rules: for example, I am not subject to any of the laws of China because I have no connecting factor. As a “resident” of England I am subject to its income tax rules. If I were a “citizen” of the United States I would suffer federal estate tax on my death. If my “nationality” was Spanish I could leave my worldwide assets under a Spanish will. In each of the preceding sentences the item in quotation marks is the connecting factor.)
One common misconception, in my experience, is that overseas clients, and often their advisers, are aware of a set of English rules called the “deemed domicile rules” – and in particular the rule which says that you are treated as domiciled in England after 17 years of tax-residence – and therefore assume that it requires a long period of residence in England to become domiciled here: that you cannot become domiciled on day one.
This thinking is wrong. The deemed domicile rules exist only to catch some people in the tax net who would otherwise escape it. It is far more important to look at the actual domicile rules first. This is especially important because domicile, as well as being the connecting factor to England’s succession law, is also the connecting factor to our inheritance tax. (Stated very briefly, a non-domiciliary who dies only pays inheritance tax on assets situated in the UK, while a domiciliary who dies pays inheritance tax on the entire worldwide estate.)
You become domiciled through (i) physical presence here, with (ii) an intention to remain permanently. As you can see, those two criteria could be fulfilled the day you get off the plane.
It follows that if you are a potential long-term immigrant, there are two things to deal with, before arrival:
The first is to establish whether you will be domiciled in England from the outset. It is usually tax-advantageous not to be domiciled. If you are to be “non-dom”, to use the common abbreviation, where is your domicile? What ties are you maintaining with that domicile? What are your plans to leave England? What evidence have you got to prove these things?
The second is to divest yourself of non-UK situated assets before you become domiciled, or deemed domiciled, in England. This process can involve making gifts within the family, but more usually involves the creation of trusts, offshore, of a kind which will retain their UK-tax-free status even if their settlor (the person who created them) becomes UK domiciled later.
Domicile is not the connecting factor for all purposes. Sometimes mere presence or activity in England brings you within the scope of some of our laws (just as I would become subject to the criminal laws of China if I visited, even if I was only a tourist). Unlike inheritance tax, the connecting factor for income tax is “residence”. Residence is far more easily established than domicile. Living and working here for six months can be enough to make you tax-resident, for example.
It is therefore possible to be resident but not domiciled (“res-non-dom”) and traditionally that has been considered a charmed tax status: the UK tax residence probably (although not necessarily) preventing the res-non-dom from being taxed as a resident of anywhere else, but non-UK assets (often themselves, ideally, situated in offshore tax havens) only being taxed on the “remittance basis” – in effect, only on the income actually brought into the UK.
Unfortunately, as a result of some changes in recent years, the remittance basis is now only available in three circumstances, and all other res-non-doms are taxed on the “arising basis” – that is, effectively, on all their worldwide income (just like an English person):
1. during the first (approx.) 7 years of residence;
2. where the unremitted foreign income is less than £2,000 a year; or
3. where the taxpayer pays a £30,000p.a. “Remittance Basis Charge”. Paying this charge is entirely optional, so the decision whether to pay it turns on the level of unremitted foreign income. If the tax on that would be more than £30,000 then the charge is worth paying, otherwise it is not.
A final point about connecting factors is that they can lead to clashes with the laws of other nations. Let’s go back to our example of the Spanish national who can leave his worldwide estate by a Spanish will because in Spain “nationality” is the connecting factor. Suppose this man owns a house and a bank account in England. Do they pass under the Spanish will? Not necessarily. In England, “situs” (i.e. “where is the asset situated?”) is the connecting factor when it comes to land and buildings. So, Spanish and English law are already in conflict. As for the bank account, the connecting factor is “domicile”, which for all we know could be Spain or England or some third country. This generates another important “action point” for the client moving to the UK: to take advice on succession and estate planning, and to get wills (and trusts, if needed) in place in all relevant jurisdictions.
No comments:
Post a Comment