There are many things people move to Britain for – good schools, a buoyant property market, a stable legal system and, of course, a favourable tax system for non-domiciliaries.
Broadly speaking, it is possible to become UK tax resident and only pay tax on income and assets generated within the UK, so long as foreign assets are not ‘remitted’ to the UK.
There are some traps, however. The UK has a clear (albeit complex) statutory residence test, meaning that individuals who come to the UK can be reasonably certain at what point they become UK tax resident. Individuals, understandably, tend to focus on these rules.
But it is not enough to focus on whether a particular person is tax resident or not. If they are trustee of a family or charitable trust, for example, then their assumption of UK residence may change the ‘residence’ of the trust – meaning that all of the trust’s income and gains may be subject to UK tax. And the UK may not treat a foreign charitable trust as charitable for UK tax purposes.
There are also some banana skins where individuals who come to the UK continue to exercise control or influence over a foreign company. This might be the case, for example, where they are directors of a family investment or trading company. Even if they are not directors, they may be used to influencing the decisions of the company from behind the scenes. From a UK tax point of view, this is a minefield.
As a rule of thumb, it is essential that foreign companies are properly run by a solid, independent board of directors. And it is essential that corporate decisions are not taken in the UK. If they are, then the profits of the foreign company may be subject to UK tax.
The UK’s revenue authority, HMRC, has been successful in attacking a foreign company’s residence in a number of recent high-profile cases: the risks are now higher than ever.
This may sound obvious, but given how easy it is to conduct business from a portable email address or mobile phone, it is necessary to exercise extreme self-discipline to avoid the temptation to work from the UK. In practice, very careful protocols should be put in place, and monitored, to ensure that the foreign company does not accidentally become UK tax resident.
The position is even harder for people who run businesses in their own name as sole traders, rather than through a company. Any work that they do in the UK will result in their worldwide trading profits being taxable in the UK, without the favourable remittance basis of taxation.
The UK looks set to remain a very favourable tax jurisdiction for people who want to establish personal tax residence here. But the moral of the story is that it is not enough to think about a person’s own tax position. The related tax position of family trusts, companies and businesses must be considered too – before the person arrives in the UK.