I am delighted to announce Martin Rimmer has joined the Singapore office as a Tax Manager, having spent twelve years with The Fry Group in the UK.
Martin is a specialist in expatriate tax issues including residence, domicile, tax mitigation and tax planning. He is in constant contact with HM Revenue and Customs (formerly the Inland Revenue) to keep up-to-date with the latest in tax legislation and interpretation.
All the best to Martin in his new role.
David
In the March 2011 budget, the UK Government announced its intention to formulate a legal definition of residence. The aim was to create a framework which could be easily used to help people decide with certainty whether they are resident in the UK or not.
Last Friday the Government issued a Consultation Paper outlining their thoughts. The consultation period runs for 12 weeks and The Fry Group will be participating. After the consultation ends, legislation will be enacted to bring new rules into force on 6th April 2012.
This note will be of interest to any British expatriate anywhere in the world. Please make it a priority to pass this note on to friends and colleagues, and to recommend that they subscribe to our eBulletins. We will report on developments as they happen.
The consultation document shows that the government has a good appreciation of the difficulties people have faced when trying to establish whether they are resident in the UK or not.
The main highlights of the proposals are that:
- Residence status will be decided on an annual basis, with each year being viewed in isolation from the previous year
- It will be harder to break residence for UK tax purposes than it will be to become resident
- The 91 day average test will be scrapped, the 183 day rule will remain
- Up to three separate tests will be used to determine whether a person is resident or not, and the maximum number of days a person may spend in the UK each year. Each test has separate conditions.
Working full time overseas?
At first glance, the rules seem more of less unchanged for those leaving the UK for full-time overseas employment, apart from a complication if more than 20 days work is carried out in the UK during the tax year in question. This will be a tremendous relief to many thousands of expatriates. However, those who claim non-resident status whilst undertaking ‘substantive’ employment in the UK and who have other connecting factors are likely to be the most at risk. Here we think primarily of those who have regular duties in the UK, such as airline pilots and those with responsibilities entailing frequent business travel to the UK.
Leaving the UK for other reasons?
For those who leave the UK for other reasons the rules are quite restrictive and an exit from the UK would need to be planned very carefully. For example, in certain circumstances leaving the UK for anything less than full-time overseas employment and spending more than 10 days in the UK in the year of departure will mean an individual is still resident in the UK for tax purposes for that year.
Retired overseas?
For those who are already safely non-resident and are not working full-time, advice will be needed as to the strength of connections to the UK and the maximum amount of time which can be spent in the UK each year. An annual review will almost certainly be needed. For the British expatriate who lives abroad and has only modest connections to the UK, the proposals look to be good news. For those not working full time abroad, whose families remain in the UK, whose main home may be in the UK and who are keen to spend as much time in the UK as possible, the proposals are very much more concerning.
Ultimately it is a question of how carefully each person plans their overseas life. The Government appears focused on using the new guidelines to capture those who are trying to claim non-resident status whilst everything in the way they live their life points in the opposite direction. This principle has also been the focus of most recent case law decisions on residence – so in a sense the proposals offer no significant surprises.
Finally, please remember that this eBulletin presents a simple summary of the Government’s proposals. The final rules are likely to be somewhat different. Therefore, it is important to keep in touch with us and to seek personalised advice as to how they might impact you.
Please contact martin.rimmer@thefrygroup.co.uk if you would like to be kept informed of how these changes could impact you or if you would like to subscribe to future editions of this eBulletin.
We are expecting the Revenue to issue their consultation document on Residence next week.
It is likely to bring significant change with wide ranging implications for British Expatriates.
We will be producing a comprehensive paper on the subject and will position ourselves as a knowledge leader on the subject in South East Asia.
Please get in touch at david.pugh@thefrygroupsg.com
David
At the UK Budget on 23rd March 2011, it was announced that the Government is to consider introducing a statutory residence test.
This test, which would come into force in April 2012, should provide a legal framework by which taxpayers can determine whether they are resident in the UK or not.
Press speculation about this topic is sure to be widespread. The Revenue’s attitude on residence rules has become increasingly stringent in recent years, and the legislators have a tricky job on their hands to try to ensure the test is reasonable and useable. Hopefully a sensible solution can be found which satisfies the need of taxpayers, advisers and business for clarity on the one hand, and the Exchequer’s need for tax revenue today and tomorrow, on the other.
Whilst crystal ball gazing can always be hazardous, I would expect that certain elements will form part of the text:
(i) Days of presence in the UK – not just in the most recent tax year but perhaps over a period of years. In the last few years Parliament has debated the virtues or otherwise of the Irish and US day counting systems and it is questionable whether the current 91 day average rule will survive. That said, a count of the number of days an individual is in the UK is a measurable and provable fact and so I would be astonished if there wasn’t some kind of test along these lines.
(ii) Separate and different sets of conditions may well apply to those who leave the UK to work full-time and those who do not. Any terms should confirm the level of attachment a person in either category may have to the UK to be able to maintain their non-resident status. It is likely that items to be taken into account would include the availability of accommodation in the UK (which was in statute law until 6 April 1993) and in the host country, the location of immediate family members, the question of whether a person is resident in their host country for tax purposes, and where the duties of any employment are undertaken.
(iii) Some form of requirement for registration and deregistration for tax purposes in the UK might be introduced – i.e. an administrative step to prove that a person has left the UK or has returned. This is already a feature of many European tax systems.
There is a further facet to this. Will the new residence test help those people who are UK resident presently to break residence in the future? Or will it merely be a guidance mechanism to help non-residents stay non-resident, or to capture the unwary non-resident? It is too early to say for sure. However, it is unlikely that the new test will be entirely satisfactory to everyone. There will be winners and losers and inevitably there will be devil in the detail which will complicate any interpretation.
As with so much government legislation, time will tell. On a positive note The Fry Group expects to be fully involved in the government’s consultation process. After dealing with clients and residence issues for many years we are well placed to try to ensure that the test provides a sensible, useful framework for determining residence status.
If you have a concern about residence, and your exposure to UK tax whilst living overseas please get in touch
Regards
Martin Rimmer
Please forward email queries to:
ashley.jones@thefrygroupsg.com
The UK Budget was delivered last week. For an overview of the main points of George Osborne’s first Budget please click here:
http://www.thefrygroup.co.uk/assets/assets/Budget%20Summary%202011.pdf
Although this year’s Budget was ‘fiscally neutral’ there were some important announcements. The most significant of these included:
• The 50% income tax rate is to be temporary
• A lower rate of Inheritance Tax will apply for those leaving at least 10% of their estate to a UK registered charity
• Enterprise investment schemes (EISs) and venture capital trusts (VCTs) will be reformed, with an increase in the rate of tax relief on EIS investments from 20% to 30% from April 2011
• A statutory residence may be introduced from 6th April 2012
If you have any tax or financial queries which you would like to discuss please contact your usual Executive.
Alternatively, please get in touch with the Singapore office.
Martin
Greetings from humid Singapore where, late last night, I spent a few moments looking through the budget announcements. We’ll be sending a commentary around in the next couple of days, which is produced externally. This won’t focus on expat matters, so a few thoughts here on the issues relevant to expats. Also, I will be writing an eBulletin along these lines shortly.
Statutory Residence Test
The government has announced that it will begin a period of consultation with a view to bringing a formal test for residence into law with effect from 6 April 2012. At the moment, the ‘law’ on residence is not clear enough and is shrouded by case law and Revenue practice. A SRT will bring a measure of clarity I hope, though it isn’t clear quite what form this will take. I suspect that it will be a test based on a day count, probably covering a number of years. But whether it would apply to someone who is trying to break residence, or just to those who already are non-resident, isn’t clear.
Fry’s intend to participate in the consultation.
Inheritance Tax Reduction
For deaths occuring on/after 6 April 2012 a lower rate of IHT will apply where at least 10% of the estate is given to a UK registered charity. The rate charged on the remaining 90% or less, is 36%.
Personal Allowances
Increased to GBP 7475 with effect from 6 April 2011, and to GBP 8105 from 6 April 2012. The basic rate threshold with drop to GBP 35000 on 6 April 2011, and further to GBP 34,370 on 6 April 2012.
Corporation Tax
Those clients who trade through a UK trading company will enjoy a 2% reduction in Corporation Tax with effect from 1 April 2011.
Income Tax and National insurance
The government will be entering into a consultation during the course of this year to look at the feasibility of merging Income tax and national insurance. No details have been given yet, but I suspect that it will apply only to UK employment income. After all, it would be totally unfair to pop the basic rate to 32% (which is the combined IT/NI rate today) and apply that to the rental income or pension of a non-resident. Watch this space.
Enterprise Initiative Scheme
Available for non-residents if they have taxable income. The rate of income tax relief on subscriptions will go up from 20% – 30% from 6 April 2011. From 6 April 2012 the maximum subscribable amount will go up to GBP1m from GBP 500k.
Non-Dom Remittance Basis changes
A few things to report here, which are relevant to any non-dom clients moving back to the UK:
(a) Remittances are not taxable if they are to be used for commercial investment in the UK (whether this would apply to VCT/EIS schemes I have no idea).
(b) They have promised some further simplification of the rules in the next few months. No idea what that means.
(c) A new Remittance Basis Charge of GBP 50,000 would apply for non-dom remittance basis users after 12 years in the UK, such that the cost of using the remittance basis is:
- Years 1-7 : loss of tax allowances
- Years 8-12 : loss of tax allowances and GBP 30,000 annual charge
- Years 13 – : loss of tax allowances and GBP 50,000 annual charge
Scrapping Compulsory Annuitisation
With effect from 6 April 2011, compulsory annuitisation at the age of 75 is being scrapped.
Pension Changes
The annual allowance falls from GBP 255,000 to GBP 50,000 on 6 April 2011.
Junior ISA
A new ISA for kids who have no child trust fund will come into effect later this year, and will be available for qualifying children who are UK resident. The first schemes should come to market in the Autumn – not relevant for expats I wouldn’t have thought, but the finer detail has yet to be published.
Entrepreneurs Relief for CGT
CGT is charged at 10% on qualifying disposals (business, shares in unquoted companies – where the person is liable to CGT of-course) if entrepreneurs relief applies. The lifetime allowance for this purpose will rise ot GBP 10m on 6 April 2011.
The annual exemption will rise to GBP 10,600 from GBP 10.200 on 6 April 2011.
ISAs
The ISA allowance will rise to GBP 10.680 on 6 April 2011 – only for UK residents, or non-resident crown servants.
Please contact me if you have any questions or would like more information.
Martin
From Martin Rimmer, Head of International Tax at The Fry Group.
If you ever thought that the UK tax system is complicated, that has now been confirmed by a study conducted by Credit Action. This 11 page document lists the 45 tax changes that will kick in from April 2011 and, as you might suppose, the balance of the changes will increase the tax liability on UK tax payers. Very simplistically, if you earn £35,000 a year or less, you’ll probably be better off. What’s very clear is the UK’s highest earners — those who pay higher-rate tax or soon will do — are going to be far, far worse off!
You can see the full document here and, more than ever before, if you have any sort of involvement with UK tax or anticipate moving to the UK in the near future, you should seek expert tax advice. Within The Fry Group, we have that expertise and, for UK tax guidance, please contact our UK Tax Manager, Martin Rimmer (martin.rimmer@thefrygroup.co.uk). We don’t charge for an initial consultation and will quote for any personalised tax advice that you may need.
The government confirmed on Thursday there will be no requirement to buy an annuity at any age, and the new rules are effective from 6th April 2011 You can see further information through the following link to FT Adviser.
If you would like to discuss what this might mean for your retirement income and tax planning, please contact the office : info@thefrygroupsg.com.
For British expatriates, there are three main taxes to be aware of. They are:
(i) Income tax;
(ii) Capital gains tax; and
(iii) Inheritance tax.
Of these, the one that seems to cause the most confusion (and unnecessary tax bills) is inheritance tax (or IHT).
Who is Liable to Inheritance Tax?
Many people are unsure if the UK IHT rules apply to them. The key to understanding whether you are liable to IHT is the concept of domicile. Domicile is important for IHT, as for individuals domiciled in England and Wales, Scotland or Northern Ireland, the taxable estate comprises their global assets. For individuals domiciled elsewhere their taxable estate is limited to assets held in the UK.
Domicile
So what is domicile? At its simplest, the closest concept is one of “homeland” although assessing your domicile will require a detailed examination of your background circumstances. At birth you acquire a domicile of origin from your father, or if at the date of your birth your father has died/you were born out of wedlock, from your mother.
Once you have achieved the age of majority, you can establish a domicile of choice in another state. To do this you must be able to demonstrate that you have severed all connections with your “homeland” and established permanent ties in your chosen state.
A domicile of origin is very hard to displace and if after establishing a domicile of choice in one state you move to another, your domicile of origin will revive and stay in place until you have gone through the process of establishing a fresh domicile of choice.
It is also important to remember that upon emigrating from the UK an individual would be deemed to remain domiciled in the UK for three tax years after departure irrespective of their actions and intentions.
Similarly, a foreign national entering the UK would be deemed to be domiciled here, after being resident for tax purposes in the UK for more than 16 out of the previous 20 tax years. If, therefore, your domicile is about to change, this is a significant point in your IHT planning. It is not safe, despite the frequent references to the “17 out of 20” rule, to act in the17th year.
If married couples have different domiciles the usual inter-spouse/registered civil partner transfer rules (outlined later) are also affected. As a result care must be exercised when transferring assets from a UK domiciled spouse/registered civil partner to a foreign domiciled spouse/registered civil partner or vice-versa.
The Tax Burden
A potential charge to tax arises when an individual gifts away assets, often on death but also during their lifetime.
Attitudes to IHT vary. Some of us feel that, having given the children a good start in life, the priority is to retain all the remaining assets; if IHT is paid when one dies, so what? Others see little point in saving Income Tax and Capital Gains Tax during their lifetime, if the net result is to increase the assets subject to 40% IHT when they die. For such people, there is much that can be done to reduce or even eliminate IHT altogether.
| Inheritance Tax Rate (w.e.f. 6.4.09) | |
| On the first £325,000 | Nil |
| On the excess over £325,000 | 40% |
Most homeowners are automatically inside the IHT net even before taking into account the value of their investments. For an unmarried individual with a valuable property and/or substantial investments, the burden is obviously considerable:-
| Example : Estate of £1m with no IHT planning | |
| On the first £325,000 | Nil |
| On the next £675,000 | £270,000 |
So having identified who is liable to Inheritance Tax and at what rate we must now look at how we can plan to minimise or eliminate any tax bill.
Inheritance Tax Planning Flowchart
Rather than simply list the different tax planning options available, some of which will be unsuitable for many individuals, we have developed a user friendly guide incorporating flow charts. These will indicate which flowchart is appropriate for you and by following these through and answering the questions, you will reach a box with either a number or a series of letters in it. Each letter corresponds to an IHT planning solution that you could consider.
A copy our guide is available on request by clicking here.
We are aiming to hold a series of presentations/workshops over the coming months to properly educate overseas retirees of their options in respect of UK pension income. If you would be interested in attending one of these talks, please register with Serina via Serina.Quek@thefrygroupsg.com and we can keep you posted as to dates and times. In the meantime, a summary of the key issues is provided below.
Tax Efficient Retirement Income
For those Expatriates remaining abroad into retirement, one of the main complications of receiving pension income overseas is that UK Income Tax will be deducted at source, unless action is taken.
In a worrying trend within the industry, however, the default answer of many advisers is to transfer ones pension benefits to a QROPS (Qualifying Recognised Overseas Pension Schemes). Although still relatively new legislation, this is a vehicle that most expatriates seem to have come across although, from our experience, with varying degrees of advice (and misadvice?)
Although QROPS is undoubtedly a powerful tool, they are generally more expensive than equivalent UK based pensions and so, we think, it is imperative that a full and proper review of ones pension benefits should be conducted to consider all of the ways in which it may be possible to reduce or eliminate UK income Tax from pension payments.
The three main methods are as follows:
(1) Double Taxation Agreements (DTAs)
First and foremost, does a DTA exist between the UK and your country of residence in retirement? Most DTAs provide for tax only in the country of residence – that is clearly beneficial if tax rates in the country you are resident are lower than the UK.
There are various countries in an around Asia where simply relying on a DTA can exempt some or all of a UK pension from tax.
(2) Foreign Service Relief
It is possible for UK pensions to be exempted from UK tax if a substantial portion (preferably all) of the employment to which the pension relates was performed overseas.
Through this route, there is no reliance on the pot luck of DTAs and, instead, by making a simple application to Her Majesties Revenue and Customs (HMRC), the pension can be paid gross by right.
(3) QROPS (Qualifying Recognised Overseas Pension Scheme)
Last, but not least, if relief is not possible through either a DTA or foreign service relief and you are attracted to the other features and options available through QROPS, that may be the way to go.
QROPS is an overseas self-invested personal pension plan. These pension vehicles enable UK registered pension plans/schemes to be transferred to overseas jurisdictions as long as it has received HMRC approval.
And the benefits of QROPS? So long as the funds have come from a UK registered pension, the pensioner is non-UK resident then there will be no Income Tax deducted from any on-going pension payments.
Although tax is often a major consideration, it is not necessarily the be all and end all. For example, depending on where the pension is being transferred from, and whether the pension is Final Salary or Money Purchase, other considerations ought to include:
• Fund performance comparison?
• Charges?
• Flexibility?
• Death benefits?
• Guarantees?
• What other ancillary benefits does the ceding scheme have that may be lost if transferred to a QROPS?
Clearly, this is a very complex area and the depth and quality of advice provided is key to the equation. QROPS shouldn’t always be the answer.
To help individuals better understand their options, we operate a Pensions Assessment Service® which is not a “product” but rather a consultancy service to help properly assess an individual’s pension arrangements and, ultimately, to determine which of the many options may suit best. In many cases, this may be a combination of advice from our Tax Company as well as considering financial planning solutions.