Favourable tax treatment is one of the reasons why Russians, and indeed people from all over the world, are choosing to move to the UK, says Bart Peerless of Charles Russell
THE UK IS one of the most sought after expat destinations, especially for wealthy people with the number of investor visas on the rise. The investor visa allows high net worth individuals to invest and settle in the UK after two or three years – depending on the amount invested – and are sometimes seen as a fast track process for wealthy foreign nationals to acquire British citizenship. The number of investor visas granted increased from 43 in 2008 to 320 last year. The largest number of investor visas was issued to Russian nationals at 27 per cent followed by Chinese investors at 15 per cent since it was introduced in 2008.
The nationality of the applicants for investor visas reflects those who are buying prime property in London. Many of these Russians will put their children through school in the UK and will use the investor visa mechanism as a means of acquiring British citizenship for those children once they reach their majority.
The main taxes relevant to individuals coming to live in the UK are income tax (IT), capital gains tax (CGT) and inheritance tax (IHT). Stamp duty land tax (SDLT) is payable when buying a house in the UK.
A person’s liability to these taxes (apart from SDLT) depends on their tax status and whether they are resident and/or domiciled in the UK. Residence depends broadly on the number of days spent in the UK in each tax year and on other connections here, such as owning a home and working here. Domicile is a more holistic concept, depending on a person’s circumstances including their long term intentions in relation to staying in the UK. A person who is resident and domiciled in the UK is liable to IT and CGT on their worldwide income and gains and to IHT on their worldwide estate. A resident individual who remains non-domiciled is potentially liable to IT and CGT on the more favourable ‘remittance basis’ and is liable to IHT only on UK situated assets.
Foreign nationals may become UK residents immediately, but might not become domiciled here for many years. Such individuals, are potentially taxable on the more beneficial “remittance basis” which means they are taxable on non-UK income and gains only if ‘remitted’, ie brought into, the UK.
Although the concepts seem simple the remittance basis of taxation can be complex. The term covers a wider range of situations than the obvious one of sending money from overseas to a UK bank account. There is a remittance if non-UK income or gains are used to repay capital or interest on a non-UK loan used to buy UK property or to buy goods overseas which are later brought to the UK.
The Finance Act 2008 amended the meaning of “remittance”, making it more difficult to avoid taxable remittances to the UK. In particular there is a remittance in relation to a taxpayer if he/she brings off-shore income or gains into the UK, but also if his/her spouse, children or grandchildren aged under 18, or certain trusts or companies of which any of them are beneficiaries/shareholders do so.
Before 6 April 2008 the offshore income or gain had to come into the UK for there to be a remittance, on or after that date it suffices that assets or services derived from the untaxed offshore income or gain are brought into or enjoyed in the UK.
New investment relief
Simplification of 2008 changes has been proposed. For example, in accordance with the UK Government’s stated policy of encouraging inward investment into the UK, a new investment relief is available to UK resident, non-domiciliaries. This potentially applies after 5 April 2012 if a non-domiciliary invests in UK private trading companies. If the relief is claimed, non-UK income and/or gains used to make the investment are treated as not remitted to the UK (if they otherwise would be) provided the investment meets certain requirements.
Further changes; new residence rules
A new UK tax residence test is expected to come into effect from 6 April 2013 to be based on a Government proposal initially published in June 2011. The new test will be much clearer than the current one and although it will still be based on days spent in the UK and on other factors these will be clearly defined.
Exit taxes when leaving
Unlike other jurisdictions, the UK does not levy an “exit tax” when a person ceases to be a UK resident.
However, if an individual who has previously been UK resident for 4 out of 7 tax years becomes non-UK resident, then certain disposals and remittances while non-UK resident can later be taxed if the individual returns to the UK within 5 tax years of the original departure.
Any trust set up by an individual after becoming domiciled here remains within the scope of UK IHT, even in respect of non-UK assets and if the person establishing the trust as well as the beneficiaries subsequently lose connection with the UK.
Exit charges are however levied on companies and trusts ceasing to be a UK tax resident.
Offshore structures still have a role to play
For individuals coming to live in the UK, who are not domiciled here, despite the complexities outlined offshore structures still have a role to play.
Holding investments, including UK investments, through a trust can enable UK tax on gains to be deferred until such time as sale proceeds are remitted to the UK. This contrasts with the situation where UK investments are held direct by the UK resident, non-domiciled taxpayer, when tax is due on disposals on an arising basis.
If a non-domiciliary establishes a trust of non-UK assets (which can include shares of a non-UK company holding UK assets) then the trust will not be liable to IHT, even if the beneficiaries of the trust are, or become, domiciled in the UK.
The family home
It is not normally recommended that the non-domiciliary’s UK home is held through an offshore company . There are various income tax reasons for this, and, as from this year’s Budget, there is 15 per cent SDLT charge on such properties worth over £2m passing into companies, and from April 2013 an annual charge at a rate to be announced by the Government on such properties whilst held in such structures. From April 2013 CGT will be payable on disposals of properties by non-UK resident companies. it is not completely clear whether trusts will be fully caught by the new CGT charge.
For decades the UK has welcomed Russian nationals and their often substantial wealth and London is often referred to fondly as Londongrad or Moscow-on-the-Thames with over 300,000 Russians thought to call the capital city home.
It’s not just the London real estate market which is benefiting from the influx of wealthy Russian buyers. Keen to fully embrace quintessential British life, Russian nationals are now looking further afield to the Home Counties for their next purchases with Surrey being a key target to the overseas buyers who accounted for 55 per cent of total sales in the first quarter of 2012.
The UK remains an exceptionally attractive place to live and invest – even if the rules are more complex than they appear at first sight.
Bart Peerless is a partner at Charles Russell LLP