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How to live the dream tax efficiently

By RJP LLP on 1 October 2018

Many of us dream of a better life, one where the sun always shines, and we have more free time and more disposable income. It’s a compelling thought and the reason there is always a steady stream of people looking to move from the UK, to countries with a more favourable tax regime, not to mention a better climate. Unsurprisingly, some of the most popular destinations are Australia, USA, Canada and the UAE.

However as with many dreams, the reality can be somewhat different. It serves as a useful reminder of why it’s never a good idea to make decisions simply because of the chance to save tax. This is because many people who have moved to a lower tax jurisdiction can subsequently find that actually, their living costs have increased. Having to spend more on daily expenditure very quickly eats into any tax savings that might be available. As a result, a large number of people who do leave end up returning to the UK, sometimes significantly worse off. In addition, favourable tax laws can always change, so what might seem a positive policy can quickly become a costly burden.

The capital gains tax surcharge introduced for expats who had bought property in France is a classic example of how things can quickly sour. Dubai is a popular destination for ex-pats, who are lured by the sunshine and lower taxes. But ask anyone who lives there permanently and they will explain that costs of housing, healthcare and schooling are significantly higher than they would be in the UK.

In spite of this, there are still a large number of high net worth individuals (HNWIs) who decide to make the move. The UK is one of the countries that records a high ‘wealth outflow’ together with China, India and Turkey. According to recent research, 95,000 people in the HNWI category left the UK in 2017; a 14% increase on 2016 and a 30% increase on 2015. We believe that some of the top tax reasons why people choose to leave the UK are:

  • Complexity of the UK non-domicile taxation regime;
  • High property taxes e.g. stamp duty surcharge on additional property purchases;
  • Concerns over the implications of Brexit.

If your mind is made up, and even if your move is not driven by tax, it is worth understanding how the UK tax rules for ex pats work. The position is far more complex since the introduction of the statutory residence test in  April 2013, although it is easier to gain certainty than it was before they were introduced. For instance, if someone spends 183 days in the UK in a tax year, they will still be classified as resident here, but depending on the number of ‘ties’ they have to the UK, they can be classified as UK resident even if they spend significantly less days in the UK. Ties to the UK include having a spouse or minor children living in the UK, having accommodation available for use here, working here for 40 days, having been resident here for either of the previous two tax years, or spending more days in the UK than in any other single country. If you have the maximum number of ties to the UK, it is possible to be treated as UK resident by spending only 17 days in the UK in a tax year!

If you find yourself being treated as UK resident, you will be liable to UK income tax on your worldwide income. This income may of course also suffer tax in another jurisdiction, in  which case you may be able to claim double tax relief, but you will still find yourself paying the highest rate of tax in the jurisdictions involved.

Living overseas can of course be a fantastic life experience, and may not be driven by tax, however If you are considering a move abroad, for whatever reason, it’s worth discussing the tax implications well in advance, to ensure you understand whether you might have unforeseen liabilities in the future.

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Many of us dream of a better life, one where the sun always shines, and we have more free time and more disposable income. It’s a compelling thought and the reason there is always a steady stream of people looking to move from the UK, to countries with a more favourable tax regime, not to mention a better climate. Unsurprisingly, some of the most popular destinations are Australia, USA, Canada and the UAE.

However as with many dreams, the reality can be somewhat different. It serves as a useful reminder of why it’s never a good idea to make decisions simply because of the chance to save tax. This is because many people who have moved to a lower tax jurisdiction can subsequently find that actually, their living costs have increased. Having to spend more on daily expenditure very quickly eats into any tax savings that might be available. As a result, a large number of people who do leave end up returning to the UK, sometimes significantly worse off. In addition, favourable tax laws can always change, so what might seem a positive policy can quickly become a costly burden.

The capital gains tax surcharge introduced for expats who had bought property in France is a classic example of how things can quickly sour. Dubai is a popular destination for ex-pats, who are lured by the sunshine and lower taxes. But ask anyone who lives there permanently and they will explain that costs of housing, healthcare and schooling are significantly higher than they would be in the UK.

In spite of this, there are still a large number of high net worth individuals (HNWIs) who decide to make the move. The UK is one of the countries that records a high ‘wealth outflow’ together with China, India and Turkey. According to recent research, 95,000 people in the HNWI category left the UK in 2017; a 14% increase on 2016 and a 30% increase on 2015. We believe that some of the top tax reasons why people choose to leave the UK are:

  • Complexity of the UK non-domicile taxation regime;
  • High property taxes e.g. stamp duty surcharge on additional property purchases;
  • Concerns over the implications of Brexit.

If your mind is made up, and even if your move is not driven by tax, it is worth understanding how the UK tax rules for ex pats work. The position is far more complex since the introduction of the statutory residence test in  April 2013, although it is easier to gain certainty than it was before they were introduced. For instance, if someone spends 183 days in the UK in a tax year, they will still be classified as resident here, but depending on the number of ‘ties’ they have to the UK, they can be classified as UK resident even if they spend significantly less days in the UK. Ties to the UK include having a spouse or minor children living in the UK, having accommodation available for use here, working here for 40 days, having been resident here for either of the previous two tax years, or spending more days in the UK than in any other single country. If you have the maximum number of ties to the UK, it is possible to be treated as UK resident by spending only 17 days in the UK in a tax year!

If you find yourself being treated as UK resident, you will be liable to UK income tax on your worldwide income. This income may of course also suffer tax in another jurisdiction, in  which case you may be able to claim double tax relief, but you will still find yourself paying the highest rate of tax in the jurisdictions involved.

Living overseas can of course be a fantastic life experience, and may not be driven by tax, however If you are considering a move abroad, for whatever reason, it’s worth discussing the tax implications well in advance, to ensure you understand whether you might have unforeseen liabilities in the future.