November 23, 2016

Overview

The new UK Chancellor, Philip Hammond, gave his first Autumn Statement on 23 November 2016. As expected, the government confirmed that the reforms to the taxation of non-UK domiciled individuals and UK residential property will go ahead from 6 April 2017.

Details

The key points are as follows:

• From April 2017, non-domiciled individuals will be deemed UK-domiciled for tax purposes if they have been UK resident for 15 out of the past 20 years, or if they were born in the UK with a UK domicile of origin. As such, an individual who is “deemed domicile” in the UK will be subject to tax on their worldwide income and liable to UK inheritance tax on their global estate.
• Draft legislation will be published on 5 December 2016 and therefore this leaves a very short time frame for impacted individuals to take action to mitigate the impact of the new rules.
• As previously announced, the government has reiterated that non-domiciled individuals who have a non-resident trust established before they are deemed domiciled (under the 15/20 year rule) should not be taxed on income and gains arising outside the UK and retained in the trust. Therefore, settlors of non-resident trusts should urgently review existing structures before 5 December 2016.
• Non-domiciled individuals who own UK residential property through an offshore structure should also seek urgent advice and restructure prior to April 2017 to reduce any inheritance tax exposure. Unfortunately, no relief from CGT or stamp duty for non-doms who “deenvelope” their UK property will be available.
• The government will change the rules for the Business Investment Relief scheme from April 2017 to make it easier for non-domiciled individuals to bring money into the UK to invest in UK businesses. Non-domiciled individuals who may be affected by the proposed reforms should seek tax advice as soon as possible to ensure they have sufficient time to plan before the changes take effect in April 2017.

Please visit https://csttax.com/en-gb/ for more.

Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication

Many Australian companies expand into the UK without a full understanding of the tax issues and advantages of effective tax and finance structuring between the Australian and UK operations.

Here are some of the issues and factors to consider:

– Choosing the right business structure
– Taxation of profits
– Profit repatriation
– Residency issues
– Transfer pricing and thin capitalisation
– CGT concessions.

Choosing the right business structure

Generally speaking, there are two main ways an overseas company can establish business operations in the UK:

1. Incorporating a private limited company, or
2. Setting up a branch (referred to as a UK “permanent establishment”).

What are the pros and cons of each?

A company has the benefit of being a separate legal entity. This means that the Australian head company, generally, cannot be held liable for the debts accruing to the UK subsidiary.

A permanent establishment is when the business is carried on via a fixed site or office. It can include an agent who is authorised to do business on behalf of the overseas parent.

The right business structure for your operations will depend on tax considerations, the proposed activities of the UK business and financing considerations.

Taxation of profits

Both business structures above are subject to UK tax on profits at the current UK corporate tax rate of 20%. It is proposed to fall to 17% by 2020.

Under Australian tax law, any profits of the UK branch are generally not taxable in Australia under the Branch Profits Exemption.

Repatriation of profits

Generally, the repatriation of profits (via dividends) from a UK company to the Australian head company can be done in a tax-efficient manner. Generally, there is no withholding tax on dividends from the UK. Furthermore, where the Australian company has a greater than 10% voting shareholding in the UK entity, the dividend is generally not taxable to the Australian company in Australia.

In relation to the UK branch, generally inter-office remittances between the UK and Australia are not taxable.

Residency and decision-making

An Australian head-quartered company decides to incorporate a UK company. All the Directors of the UK company live in Australia, and key decisions in respect of the UK company are also made in the Australian board meetings. In this situation, there is a risk that the ATO may deem the UK company to be tax resident in Australia, rather than the UK. To help mitigate the risk of potentially being subject to tax in Australia (as well as the UK), it is important to consider appointing UK directors and ensure board meetings and key decisions are made outside of Australia.

Transfer pricing and thin capitalisation

Transactions between Australia and the UK will be subject to transfer pricing rules of both countries. Apart from the purchase and sale of goods, transactions covered include financial transactions (including loans), transfers of rights and licences and letting of property. It is important that advice is obtained from both a UK and Australian tax perspective.

Furthermore, the UK thin capitalisation provisions operate to ensure the UK entity does not claim interest deductions where the UK operations have excessive debt above the safe harbour limit. Advice should be obtained prior to funding the UK operations to ensure the financing is optimal from both an Australian and UK tax perspective.

UK CGT concessions – entrepreneur’s relief

The UK also offers generous CGT concessions, including “entrepreneur’s relief” in respect of “qualifying business disposals”. Gains qualifying for entrepreneur’s relief are subject to a reduced rate of CGT at 10%. It is crucial that advice is received at the time of structuring the UK business to ensure that the concessional rate of CGT will be available.

Please visit https://csttax.com/en-gb/ for more information.

Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication

Australian expats living and working in the UK that are considered “non-domiciled” have significant tax advantages compared to UK domiciled individuals.

A UK resident and domiciled individual will be subject to UK tax on both their UK and foreign income. In contrast, a UK resident but non-domiciled individual may elect to be taxed on their foreign income only to the extent that income is remitted into the UK.

How is a person’s domicile determined?

This is often a complex area of law. However, generally your domicile is determined according to the domicile of your father at your birth.

Everyone starts with a “domicile of origin”, and if your parents were married, this will be the domicile of your father.

A person may acquire a “domicile by choice” in another country if they decide to move permanently to a different country.

However, from April 2017, new rules are to be introduced that will result in an individual to be “deemed UK domicile” for all UK taxes if:

• They are UK resident and non-domiciled for more than 15 out of the past 20 tax years; or
• They were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).

Current Rules

Income tax and CGT

A UK resident non-dom currently has a significant tax advantage over a UK domiciled individual in that they may elect to use the remittance basis of taxation in respect of foreign income and gains such that foreign gains (e.g. a disposal of an Australian property) will only be subject to UK tax to the extent such income and gains are actually remitted (brought into) into the UK. However, the following points should be noted:

• The remittance basis will apply automatically for foreign income less than £2,000;

• If unremitted foreign income or gains exceed £2,000 and you elect to use the remittance basis, you will lose your entitlement to your UK tax-free personal allowance and CGT annual exempt amount;

• There is no charge on claiming the remittance basis in the first six years. Once you have become UK resident for 7 out of 9 years, you will be required to pay the Remittance Charge of £30,000 to use the remittance basis. The charge increases thereafter, and the cost may then outweigh the savings.

Whether it is beneficial to claim the remittance basis will depend on the amount of your foreign income and availability of foreign tax credits (noting the loss of the personal allowance and the Remittance Charge payable after year 7).

A “remittance” is interpreted widely by HMRC to include:

• Physical cash brought into the UK;
• Electronic bank transfers;
• The use of foreign credit cards in the UK;
• Purchase of assets in the UK; and
• Remittances of income by family members.

There is a complicated definition of “clean capital” which may be remitted tax-free into the UK. Extreme care should be taken when remitting capital from an overseas “mixed fund” bank account (containing clean capital and income) into the UK as this may trigger a taxable remittance. This area is highly complex and we recommend advice be obtained prior to remitting such funds.

We note that if you have interest bearing accounts in Australia or overseas, you may wish to consider closing these accounts down once in the UK, or having the interest paid into another non-UK account so that you can remit the underlying capital into the UK free of UK tax.

Inheritance tax

Currently, non-domiciled individuals are exempt from inheritance tax on non-UK assets.

However, a non-dom is considered “deemed domicile” for UK inheritance tax purposes if they are tax resident in the UK for 17 out of 20 years and therefore are potentially subject to UK inheritance tax on their worldwide estate.

Previously, it was relatively easy for non-doms to shelter UK assets from UK inheritance tax by holding them through an offshore structure, such as an offshore company, as only assets held directly are included. However, from April 2017, this position will change (refer below for more details).

New “deemed domicile” rules

There are three significant changes proposed from 6 April 2017 which will impact UK non-doms:

• Non-domiciled individuals will be considered “deemed domiciled” for income tax, CGT and inheritance tax purposes once they have been UK resident for 15 out of 20 years;

• Residential property situated in the UK will be subject to inheritance tax if held through an offshore structure such as a trust or company; and

• Any individual born in the UK will be treated as domiciled in the UK if they are UK resident, even if they have left the UK and acquired another domicile of choice.

There are various planning opportunities available for individuals that are to become deemed domicile from next April to mitigate the impact of these changes, however it is critical that action is taken now. Potential planning opportunities include:

• Inheritance tax and offshore trusts: Offshore trusts that are set up by an individual who is non-domiciled should remain outside the scope of UK inheritance tax even after that individual becomes deemed domiciled. Therefore, an individual who does not have a UK domicile of origin, but will become deemed domicile under the 15/20 year rule may consider transferring property to a trust prior to April.

• Rebasing for CGT: Offshore assets of individuals who become deemed domicile may be rebased so that only gains accruing after April 2017 will be subject to CGT.

• Cleansing relief: Individuals will have a one-year window to rearrange their mixed funds and separate them into clean capital, foreign gains and foreign income. This will allow clean capital to be remitted into the UK tax-free.

Further details on the proposed changes can be found here:

https://www.gov.uk/government/consultations/reforms-to-the-taxation-of-non-domiciles/reforms-to-the-taxation-of-non-domiciles

Visit www.csttax-co-uk.csttaxmultidev.wpengine.com for more information, or speak to your adviser today.

Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication

The pound’s value has dropped dramatically in recent times, and many foreign investors and expats in the UK are scurrying to buy UK property at unprecedented discounts.

If you, too, are looking to buy UK property, here are five tax and broader commercial, UK and overseas, considerations.

Remember, this article does not take into account your personal circumstances, and it’s important to speak to your tax advisor for specific advice.

1. Secure property financing as soon as possible to avoid later frustrations

If you’re a non-UK resident, it may be more difficult to obtain financing as many UK banks are under increasing regulatory obligations.

Several UK and overseas banks, however, are still lending to overseas investors, and the right relationships are essential to securing finance and determining a suitable lending structure.

2. Should I buy the property as an individual or through a company?

Whether it is best to purchase the property as an individual or a company structure will depend largely on two factors:

1. Whether you intend to live in the property, or rent it out
2. Your profile as an investor (such as your income, asset base, etc.)

Whether you acquire the property as an individual, or through a company, non-resident capital gains tax (‘NRCGT’) will apply to the sale of a UK property if you’re a non-resident.

However, the rate of CGT due will vary depending on whether you use to property to live in yourself (‘owner-occupied’), or to rent (‘buy-to-let’) and if the property is acquired by you individually or through a company. NRCGT will apply to all residential property, however, irrespective of whether it is rented or owner-occupied.

It should also be considered whether Principal Private Residence Relief (‘PPR Relief’) may be available to exempt or reduce any capital gain on sale.

Finally, your choice of structure will also impact the rental income tax paid.

3. Stamp Duty has increased for owners of more than one residential property

Stamp Duty Land Tax (‘SDLT’) is a compulsory tax payable on acquisition of a UK property, ranging between 0% and 12% of the total purchase price, if it is your first residential property.

If, however, you already own another residential property, new rules were introduced in April 2016 whereby a ‘higher’ rate of SDLT will apply:

Applies to properties purchased under individual structures.

There are difference SDLT rates for property purchased via a company, and there are also instances where tax relief may apply for properties held in certain structures – speak to your personal tax advisor to discuss your individual circumstances.

4. Don’t let inheritance tax take more than your life away

When the owner of a UK property (over a certain value) passes away, the value of the property may be subject to up to 40% tax. This applies whether the owner of the property was based in the UK or overseas.

Furthermore, from 6 April 2017, UK residential property owned indirectly through a company or trust will also be subject to UK inheritance tax.

There are ways to potentially mitigate the impact of inheritance tax, including loans, life insurance and efficient estate planning.

5. You may also be subject to tax from your home country

The tax implications from your home country (for example, Australia, United States, Singapore etc.) will need to be considered when structuring the property acquisition.

For example, an Australian resident will be subject to tax on their worldwide income and assets. Compare this to a Hong Kong resident who will generally only be subject to income sourced within Hong Kong.

Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication