What is Income Tax for Expats?

Even if you leave the UK and move abroad, you may still be liable to UK income tax. It is therefore important to understand if and when any UK tax liability arises, and how this may affect you.

The following guide looks at income tax for expats, and what you need to know about UK income tax if you are living abroad.

Income Tax for Expats : Why is my residence status important?

UK residents normally pay UK tax on all their income, whether it is from the UK or anywhere else in the world, although there are special rules for UK residents who are non-domiciled in the UK, ie; whose permanent home is abroad.

As a non-resident you will only be liable to pay UK income tax on income arising in the UK, and not on any foreign income.

Income can include things like profits from a trade or vocation carried on in the UK, your share of profits from a UK partnership, UK pension income, any rental income on UK property, or interest on savings held in the UK.

For income tax purposes, your status will be determined using what’s known as the ‘statutory residence test’. This comprises three components: the automatic UK test, the automatic overseas test and the sufficient ties test.

Income Tax for Expats : What is the automatic UK test?

For many expats, living outside the UK all year round, determining your residence status will be relatively easy.

For those of you splitting your time between a home in the UK and a home abroad, whether you are classed as resident or non-resident will depend on how many days you spend in the UK during any given tax year.

Under the statutory residence test you will be automatically classed as UK resident if either of the following apply:

  • You have spent 183 or more days in the UK in the tax year, or
  • Your only or main home is in the UK and you have spent at least 30 days there during the tax year. You must have owned, rented or lived in that home for at least 91 days in total.

Calculating how many days you are deemed to have spent in the UK can become complicated and advice should be sought in the event of any uncertainty.

Income Tax for Expats : What is the automatic overseas test?

You will be automatically classed as non-UK resident if either:

  • You were resident in the UK for 1 or more of the 3 tax years preceding the tax year, and you have spent fewer than 16 days in the UK in the tax year.
  • You haven’t been resident in the UK for any of the 3 tax years preceding the tax year, and you have spent fewer than 46 days in the UK in the tax year.
  • You have worked abroad full-time over the course of the tax year and have spent fewer than 91 days in the UK, of which no more than 30 were spent working.

Again, calculating whether or not you are classed as working overseas full-time can be complex, and professional advice should be sought.

Income Tax for Expats : What is the sufficient ties test?

If you do not meet any of the automatic UK or overseas tests, you will need to use what’s known as the ‘sufficient ties test’ to determine your UK residence status for any given tax year.

This will require you to consider your connections or ‘ties’ to the UK, and whether these, taken together with the number of days you have spent in the UK, are sufficient for you to be considered UK resident.

This will include, for example, family, accommodation and work ties.

Income Tax for Expats: What is split year treatment?

If you move between the UK and overseas during the course of a tax year, your tax liability may be split into two separate parts, ie; resident and non-resident.

Subject to meeting the relevant criteria, this means that you will be liable to income tax as a UK resident for the time you were living in the UK and vice versa. This is known as ‘split-year treatment’.

Note that your residence status can easily change from one tax year to the next. You should therefore always check your status if your situation changes, or seek professional advice, for example, if you spend more or less time in the UK.

Income Tax for Expats: What is my personal allowance?

Typically, UK income tax payers are eligible for a personal allowance on their income tax. This means that tax is only paid on any income above that threshold.

You will be entitled to a personal allowance of tax-free UK income each year if you are a British or EEA citizen. You might also be entitled to the personal allowance if it is included in any double-taxation agreement between the UK and the country in which you live.

The personal allowance currently stands at £11,850 for the tax year 2018/19, and is due to increase to £12,500 for the year 2019/20.

In the event that you are not entitled to any personal allowance, you will be liable to pay tax on all your chargeable income.

Income Tax for Expats: What is the rate of income tax?

Non-UK residents are taxed at the same rates as UK residents. Accordingly, any income over and above the personal allowance will be taxed at the prevailing rate(s) for the relevant tax year.

Subject to whether or not your income exceeds the basic rate threshold, you will either pay tax at the basic and/or higher rate. These currently stand at:

  • 20% – for a taxable income bracket of up £34,500
  • 40% – for a taxable income bracket between £34,501 and £150,000.
  • 45% – for taxable income over £150,000.

The basic rate limit will be increased to £37,500 for 2019 to 2020. As a result, taking into account the increased personal allowance of £12,500, the higher rate threshold for 2019/20 will be £50,000.

Income Tax for Expats: What is a double taxation agreement?

You may be taxed on your UK income by the country in which you are resident, as well as by the UK.

However, if the country in which you are resident has a ‘double-taxation agreement’ with the UK, you can claim relief to avoid being taxed twice.

Where there is a double taxation agreement in place, this will specify which of the two countries you pay tax in, the country in which you apply for relief, and how much tax relief you are entitled to.

Depending on the terms of the agreement, you can apply for either a partial or full relief before you have been taxed, or a refund after you have been taxed.

Income Tax for Expats: How do I declare my income to HMRC?

You will need to submit a self-assessment tax return form to HMRC where you are a UK non-resident but still liable to pay income tax.

However, you do not need to report your income to HMRC if you have already claimed tax relief under a double-taxation agreement.

If you are non-UK resident you will not be able to use HMRC’s online services to submit your self-assessment form, rather you will need to send a hard copy via post, get help from a professional such as a tax adviser, or purchase the relevant software from a commercial supplier.

The deadline for postal submissions is the 31st October, where any delay can result in a financial penalty.

Income Tax for Expats: Will any period of temporary non-residence affect my liability?

If you return to the UK after a period of temporary non-residence, you may still be liable to UK income tax for that period of absence.

In broad terms, you may be regarded as temporarily non-resident if your period of non-residence is for less than 5 years. For these special rules not to apply, your period of non-residence must exceed 5 years.

These rules are designed to prevent individuals from avoiding UK income tax by becoming UK non-resident for a short period.

Income Tax for Expats: Key takeaway

The rules relating to income tax for expats can be complex, not least relating to calculating the number of days you are deemed to have spent in the UK and whether or not you work full time overseas.

Moreover, you may also be liable for tax in the country in which you reside. This is when it can get really complicated, notwithstanding that some relief may be available under a double taxation agreement.

It is therefore always advisable to seek professional advice and assistance from an accountant or other tax specialist.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

What are the current Capital Gains Tax Rates?

With ongoing changes to legislation, staying informed on the current capital gains tax rates can be a complicated process for any tax payer. Is it any wonder that there are continual requests to simplify tax law?

So how does the government decide which capital gains tax rate applies to you? There are four main considerations to bear in mind:

  • What category of asset has been disposed of?
  • Has the disposal led to a gain?
  • What is the financial value of that gain?
  • What is the personal tax position of the individual who made the disposal?

Category of disposed asset

The kind of assets that may lead to capital gains tax if disposed include, but are not limited to:

  • residential property that is not your main home, for instance, a holiday let or a house that you rent out to tenants
  • any shares you hold which are not connected to an ISA
  • business assets, such as shares in a business or items that you own which are used in a business
  • personal possessions with a value of over £6,000 but not private cars

If you dispose of an asset that is chargeable under capital gains tax, you must work out whether this resulted in a gain. Remember that a disposal is not necessarily a sale. It could be a transfer or a gift.

Capital gains tax generally doesn’t come into play in the sale of a home, where the property is your main place of residence. Any gain made on such a sale would be exempt from capital gains tax.

If you dispose of any other UK property, however, capital gains tax generally will apply at an 8% surcharge on the usual rate.

Did the disposal result in a gain?

Capital gains tax is charged on gains over your annual tax-free allowance each year, which in 2017/18 was a maximum of £5,650 for trusts and £11,300 for individuals.

Where an asset is sold, subtract from the sale price both the purchase price and any money spent on the asset during your ownership. This calculation will tell you whether the sale resulted in a gain.

Where an asset is transferred for a nil amount, for instance, a gift to a grandchild by way of a trust, this disposal will be treated as if the market value had been received. There may, however, be certain reliefs applicable in such a situation that may reduce the amount of capital gains tax incurred.

Allowable costs may also come into play depending on the category of asset, for instance, reducing capital gains tax in the case of a property disposal by including the value of legal fees in the calculation of the gain.

How does your personal tax position affect the capital gains tax rates you pay?

The first consideration is what income tax band you fall into. Higher rate tax payers incur a 20% capital gains tax rate, whereas basic rate tax payers are liable for the standard 10% capital gains tax rate.

Basic rate tax payers continue to pay 10% capital gains tax until their income and gains together amount to more than £33,500. At this point, their tax rate will change to 20%.

Where the capital gain is related to the disposal of property, there is an 8% surcharge on top of your capital gains tax rate (20% increasing to 28%, for instance), unless the property is your main home.

Where an interest in a business is sold, be that part or the whole of a company or shares in that company, and the resulting gain is eligible for Entrepreneurs’ Relief, a tax rate of 10% will apply.

Due to the role that income tax plays in deciding capital gains tax rates, it is always advised that you consider your wider tax situation and that of your family members. Looking at the bigger picture and planning ahead may allow you to reduce your capital gains tax liability, for instance, by moving income between family members, or splitting gains between tax years, within the current tax legislation.

Any disposal that results in a gain must be reported to HMRC as part of your annual self-assessment tax return, although you may wish to report the disposal straightaway.

Capital gains tax rates reliefs

There are a number of reliefs available against capital gains tax. Taking professional advice will assist in ensuring that you are not only informed of any relevant relief but also take advantage of the right reliefs for your tax situation.

Such reliefs include:

Entrepreneurs’ relief

Where a gain is eligible, Entrepreneurs’ relief sets the chargeable rate at 10%. This is especially helpful where you are a higher rate tax payer.

This type of relief is most commonly used for the sale of company shares. In such a case, eligibility requires that the shareholder disposing of shares must have been an employee or office holder of the company for a minimum of one year prior to the disposal, and that the activities of the company must largely be trading unless it is a holding company for such.

Entrepreneurs’ relief can also be used for the disposal of:

  • a company, or part of a company
  • securities
  • assets lent to the company
  • assets held in a trust

There is a lifetime limit of £10 million.

Investors’ relief

Investor’s relief sets the capital gains tax rate at 10% and applies to investment in unquoted companies where the investor has no direct involvement during the period of holding shares.

You must have held the shares for a minimum of three years, and not before 16 March 2016.

There is a lifetime limit of £10 million.

Business asset roll over relief

Using this form of relief may allow you to delay the payment of capital gains tax after the disposal of certain types of business asset, as long as you buy replacements within three years.

Gift hold over relief

Using this type of relief may remove capital gains tax liability where a business asset is given way. The liability then passes to the person who received the asset, should they make a gain on selling the item.

Eligibility requires that:

  • both you and the other party agree to this arrangement
  • the asset was used by you in your business
  • you are a sole trader or a partner in your business

Should there be any unused allowable losses in previous years, these can be brought forward to the current year to reduce capital gains tax liability.

Gift hold over relief may also be applicable for the transfer of assets into a trust.

Incorporation relief

This type of relief may be used to delay payment of capital gains tax when a business is incorporated.

Eligibility includes that you are part of a business partnership or a sole trader, and that the business and its assets are transferred in return for company shares.

Loss relief

Loss relief can be used to reduce a capital gains tax liability by offsetting a capital loss against any taxable gains.
Any losses in a tax year may be carried forward to offset future taxable gains.

However, if you make a claim under the capital allowance scheme, this amount must be deducted from any loss you wish to offset against gains.

Disincorporation relief

Where a business changes from a limited company to a sole trader or partnership, disincorporation relief may be available.

Where company assets are transferred to shareholders or persons otherwise connected with the business, this will usually incur a capital gains tax liability for that individual should they later dispose of that asset.

Disincorporation relief may be used to reduce the value of any transferred assets.

Private residence relief

The sale or otherwise disposal of an individual’s home is usually exempt from capital gains tax.

However, where any part of the home has been used for the sole purpose of business, you may be required to pay capital gains tax on that section of the property.

Enterprise Investment Schemes

Any gains resulting from an Enterprise Investment Scheme are exempt from capital gains tax after a period of three years.

During the first three years, however, it may be possible to defer, reduce or completely remove any capital gains tax liability thought the use of deferral or disposal reliefs.

Who is affected by capital gains tax rates?

If you are self-employed, a sole trader or a business partner, it is important that you remain aware of current capital gains tax rates and your resulting tax liability.

Non doms, non-residents and expatriates should also ensure that they are fully aware of the capital gains tax rates, especially after recent changes in relevant tax legislation.

Limited companies, by comparison, are not subject to capital gains tax but instead pay corporation tax.

Capital gains tax rates – summing it up

By taking into account the many reliefs and exemptions available, it is possible to plan ahead and manage any capital gains tax liability within the wider scope of your personal finances.

What is Capital Gains Tax on a Buy to Let Property?

An increasingly popular investment is that of buy to let property, with some individuals building a portfolio of rental properties over time. However, like any form of income, there will be various tax implications to bear in mind, including that of capital gains tax.

Buy to let property is generally seen as a medium to long term investment, building on the initial cost of purchase, legal fees and refurbishment to enjoy a regular and decent return over time.

When it comes to disposing of a buy to let property, however, whether by sale or transfer into a company, any resulting gain will generally incur a capital gains tax liability.

Changes to UK tax legislation in recent years have affected the tax situation regarding rental properties. For instance, the phasing out of offset mortgage relief for high earners has increasingly led to the transfer of buy to let property into a limited company as a means to cut levels of tax payable. Such a transfer may still incur a capital gains liability and there are likely to be other tax implications too.

Do you owe capital gains tax on your buy to let property?

When a buy to let property is sold, capital gains tax becomes payable if the property is sold for more than it was purchased for and there is a resulting gain after allowable costs have been deducted.

Such allowable costs include:

  • Solicitor’s fees
  • Estate agency fees
  • Stamp duty
  • Advertising costs
  • Improvements to the property for the purpose of raising its value
  • Losses made on the sale of buy to let properties in previous years

Capital gains tax has applied to both UK resident and non resident individuals owning rental property since April 2015, when the relevant tax legislation was altered to include non residents within the reach of UK capital gains tax on the sale of a rental property. However, this is only for gains received since April 2015. Where a rental property was owned prior to that date, the amount subject to capital gains tax must be calculated for both prior to and after April 2015.

Any property that is not a main residence, that is, the owner’s main home, is subject to capital gains tax. Besides buy to let property, this could include holiday lets, business premises, land, inherited property, or second homes.

Under Private Residence Relief, the sale of your main home does not trigger capital gains tax, as long as:

  • you own one home only, which you have occupied during the period of ownership
  • no portion of your home has been rented out, with the exception of taking on a single lodger
  • no portion of your home has been used for business purposes only
  • the grounds, including any buildings sited in the grounds, are under 5,000 square metres
  • the property was not purchased with the intention of making a gain from its sale

How changes in legislation have affected buy to let owners

The capital gains tax rates relating to gains made from the disposal of assets was lowered in April 2016 to 10% for basic rate taxpayers and 20% for higher rate taxpayers. Unfortunately, this change did not roll over to gains made from the disposal of property that is not your main home, and the corresponding capital gains tax rates remained at 18% for basic rate taxpayers and 28% for higher rate taxpayer, in effect imposing an 8% capital gains surcharge on UK landlords.

All UK taxpayers are provided with a tax-free allowance each year which is taken into consideration before calculating profits for the purpose of capital gains tax. This capital gains tax-free allowance as at February 2019 is £11,700, with the plan to increase this to £12,000 from April 2019. This allowance is per individual.

What this means in the case of the sale of a buy to let property is that this allowance, currently £11,700, is deducted from any profits made on the sale before capital gains tax is calculated.

Where the buy to let property has multiple owners, each corresponding owner may claim their tax-free allowance against profits made from the sale.

Of course, capital gains tax and the tax-free allowance are not the only tax implications on the sale of a buy to let property, so it is always advised to take professional advice to ensure that all available reliefs and financial liabilities have been taken into account.

How to reduce capital gains tax payable on the sale of a buy to let property

It may be possible to reduce or defer payment of capital gains tax when you dispose of a buy to let property, by using one of the following options:

Private Residence Relief

The disposal of a private residence, in essence your main home, is usually exempt from capital gains tax. Where you plan to sell a buy to let property, you may be able to take advantage of Private Residence Relief by if you have used the property as your main home during the time the period of ownership.

To take advantage of Private Residence Relief, you must prove that the property has served as your main home for at least part of the time that you have owned it. There is no minimum residence time requirement. It may therefore be possible to claim Private Residence Relief based on the fact that the final eighteen months of ownership do not qualify for capital gains tax. This could mean a claim for full or partial relief.

Increasingly, HMRC are more stringent in their examination of Private Residence Relief claims and any evidence that you provide to prove that the property is your main home must be thorough and extensive, including:

  • council tax statements
  • utility bills
  • entry on the voting register
  • registration at your local doctor’s surgery
  • DVLA documents to show that your car is registered at your address
  • telephone and internet bills to prove dates of residence

Private Letting Relief

To be eligible for Private Letting Relief:

  • you must be eligible for Private Residence Relief, even if only for part of the period of ownership
  • the property has, in part or fully, been a residential rental
  • there has been a chargeable gain from renting out the property

Private Letting Relief is an individual relief, therefore available to each of a property’s owners. It is calculated as the lowest amount of either £40,000, the amount of Private Residence Relief allowed, or the chargeable gain from renting out the property.

2019 changes to capital gains tax on buy to let property

The way in which capital gains on the disposal of buy to let property are reported and the corresponding payment is made are due to change from April 2019.

Capital gains are currently registered as part of a taxpayer’s self assessment tax return, and payment must be made by the 31st January after the tax year the gain relates to.

The change in April 2019 will mean that both the reporting of the gain, and the corresponding payment, must be made within 30 days of the completion of the sale.

These changes, however, will not affect any house-seller who benefits from Private Residence Relief.

What is the Inheritance Tax on Property?

Inheritance tax relates to the estate left by a person when they die. This could be the amount of money they have, property they own or any other assets that belong to them. Gifts made during that person’s lifetime may also be affected by inheritance tax. There is generally no inheritance tax on property passed by the deceased to their spouse or civil partner where the property is their main place of residence, i.e. their home.

The executors or personal representatives of the deceased’s estate will be responsible for:

  • administering the deceased’s estate
  • calculating the amount of inheritance tax to be paid
  • paying any inheritance tax due, either from capital held by the estate or by the sale of estate-held assets
    only once payment of inheritance tax and any other taxes has been made, distributing the estate to beneficiaries in accordance with the will, or under the laws of intestacy where there is no will in place

The usual schedule for payment of inheritance tax is the last day of the month which is six months after the death of the deceased. Any outstanding amount that remains after that date will incur interest, payable to HMRC, of 3.25%.

Inheritance tax on gifts made less than seven years before death

Gifts made by the deceased may be subject to inheritance tax on property where less than seven years passes between the gift being made and the deceased’s death, and the value of the gift exceeds the annual exemptions. In this situation, inheritance tax is payable by the person who received the gift, but only where the value of the gift is above the nil rate which stands as at February 2019 at £325,000.

Where the gift was made over 3 years prior to death, taper relief may be available. The level of taper relief rises (and the corresponding tax payable decreases) along with the number of years between the gift and death, as follows:

  • Less than 3 years – 40% tax due
  • 3 to 4 years – 32% tax due
  • 4 to 5 years – 24% tax due
  • 5 to 6 years – 16% tax due
  • 6 to 7 years – 8% tax due

Gifts with reservation

Where an individual gifts their home so that they may avoid care home fees but continues to reside in that property, this is generally known as a gift with reservation. This means that although they have given the property away, they still receive some benefit from that property.

In the case of a gift with reservation, the property is deemed to still be within that person’s estate for the purpose of inheritance tax. The exception to this rule would be where the person making the gift paid market value rent to live there.

Where the gift is only of a share in the property, and the property therefore has joint owners of the donor and the person the gift was made to, the gift with reservation rule may be relaxed as long as both owners share the running costs of the property.

An exception to the gift with reservation rule is where a property is gifted and the donor uses the property for short periods of time only, such as:

  • social visits
  • short stays up to two weeks in a year in the absence of the new owner
  • short stays up to four weeks in a year while the new owner is present
  • to convalesce
  • to babysit

How to calculate inheritance tax on property

Where the total value of the deceased’s estate and any gifts made by them less than seven years before their death is above the nil rate band, inheritance tax will be chargeable at a rate of 40%.

Where the deceased is survived by their spouse or civil partner, any unused portion of the deceased’s nil rate band may be transferred to the surviving partner’s nil rate band. This means the surviving spouse or partner may potentially have a double nil rate band of £650,000 at the point of their death.

Under a Deed of Variation, beneficiaries of a deceased’s estate, either where there is a will or the where the rules of intestacy apply, may agree to distribution of assets in a manner which reduces the amount of inheritance tax payable. Where a Deed of Variation is instigated, it must be signed by all affected beneficiaries to demonstrate their agreement to the variation.

The Deed of Variation must be completed no later than two years after the death of the deceased and bear a signed statement of the variation.

A Deed of Variation can similarly be used where the deceased has transferred assets into a trust to be distributed to beneficiaries, and must again be completed within two years of the death.

Lifetime transfers

Generally, a lifetime gift will not incur inheritance tax straightaway, but an inheritance tax liability may be triggered if the donor dies less than seven years later.

The exceptions to this rule are transfers to and from trusts, transfers to companies, and transfers made by close companies, which are subject to inheritance tax at a rate of 20% when they are in excess of the nil rate band and made less than seven years before the death of the deceased.

Agricultural relief

This type of relief makes it possible to pass on agricultural property without incurring inheritance tax, either as a lifetime gift or on death.

Qualifying agricultural property must be located in the UK, Isle of Man, Channel Islands or an EEA country, and used mainly for the purpose of growing crops or rearing animals, for instance, a stud farm, harvestable coppice, or farm cottage.

The following are not eligible for agricultural relief:

  • farm machinery and equipment
  • harvested crops
  • livestock
  • derelict buildings
  • property that has already been sold

Any farm buildings must be of an appropriate size, nature and condition for use in a farming context.

Relief is calculated on the agricultural value of any property, that is, on the basis of the property’s use in an agricultural context. The value of any existing mortgage will reduce the value of the property eligible for relief.
A farm cottage or farmhouse will only be eligible for agricultural relief when occupied by persons who work in a farming role, are retired from farming work, or are the spouse or civil partner of a deceased farm worker. Any occupant must be a tenant in connection with their present or past employment, or a protected tenant who has statutory rights.

Where the property was occupied and controlled by the deceased owner, their spouse or civil partner, or a company, it must have been used for agricultural purposes for at least two years immediately before the death of the deceased and the property’s subsequent transfer. Where the property was occupied by someone else, the period of agricultural use extends to seven years.

Agricultural relief of 100% is only available where:

  • the deceased owner farmed the land themselves, or
  • the land was used by another person via a short term grazing licence, or
  • the property was rented out on or since 1 September 1995, or
  • the deceased owned the property since 10 March 1981 and rented it out, the property qualified for relief under
  • the old estate duty rules, and the owner had no right to vacant possession between that date and their death.

Unless any of the above apply, the rate of agricultural relief is 50%.

Residence nil rate band

Where property is passed to a direct descendant, it may be possible to apply the residence nil rate band. A direct descendant could be a child, grandchild, stepchild, adopted child, foster child, ward, or the spouse, civil partner, widow, or widower of a child or grandchild.

The residence nil rate band was introduced in April 2017 as an additional relief which raises the inheritance tax threshold under certain circumstances.

As at February 2019, the residence nil rate band is £125,000. In April 2019, this will rise to £150,000.

Properties that qualify for residence nil rate band are required to have been the main residence of the deceased at some point during the period of ownership. Where the property was owned but never occupied by the owner, it does not qualify for the residence nil rate band.

Where the deceased had numerous residences, the residence nil rate band may only be applied to one of them.
Where the value of the entire estate, including property, amounts to more than £2 million, there is a reduction to the residence nil rate band of £1 for each £2 over £2 million.

Where the deceased leaves their estate to their spouse or civil partner, the spouse exemption removes any inheritance tax liability, as long as the surviving spouse or civil partner has UK domicile status. Any portion of the deceased’s nil rate band that is unused may be transferred to the surviving partner’s nil rate band.

Residence nil rate band downsizing provisions

The process of downsizing, buying a smaller home, is becoming more and more popular for older individuals as their need for space becomes less, perhaps when sons and daughters move out to buy their own homes, or to reduce costs. The downsizing provisions take this into account by restoring the partial or full benefit of any lost residence nil rate band.

The downsizing provisions apply when an individual dies after 5 April 2017, having sold their home or downsized to a property of less value on 8 July 2015 or after.

Where the downsized property and other estate-held assets are passed to children or grandchildren of the deceased, an additional nil rate band will generally be available at whichever is the lower value of the residence nil rate band or the value of other inherited assets.

Where downsizing did not result in the purchase of a new home, the downsizing provisions may still apply where estate-held assets in lieu of the property are left to children or grandchildren.

Payment of inheritance tax on property in instalments

Payment of inheritance tax in instalments may be possible over a period of up to 10 years where the executors or personal representatives of the deceased request to do so on the IHT400 inheritance tax account form.

The initial 10% instalment is payable six months after the end of the month of the death. Following instalments are paid on the anniversary of the first payment until the account is cleared. Any outstanding amount will incur an interest charge of 3.25%.

Should the inherited property be sold, the inheritance tax liability, including any interest incurred, must be paid off at that point.

Why Now is the Best Time to Do Your Will and Estate Planning

Making sure that your assets – property, belongings and capital – are protected by your will and estate planning can become a complicated process when tackling the many and varied tax laws regarding the issue of inheritance, especially where your estate features a diverse portfolio of assets such as property, shares and savings.

Whilst the first and most obvious step in this process is to write up a will, there is much more to the process of estate planning than just this alone.

Putting measures in place to control what happens to your estate once you are gone and to ensure that any assets are handled in the most tax efficient manner possible for your beneficiaries is a key part of the process.

Moreover, changes in your personal circumstances, such as the birth of a child or starting a business, can mean that the objectives of your estate planning may develop over time, requiring that your will is adapted and checked for relevance to your needs.

So what are the main reasons for ongoing reviews of your will and estate planning?

Your personal circumstances change

Your will states how you wish your estate to be handled and distributed at the time of your death, but of course it can only be based on your current wishes and plans. What happens if your personal circumstances change?

There are many ways your life situation could change, for instance:

  • You become a parent or a grandparent.
  • You buy property, to live in or to rent out.
  • You marry, or divorce.
  • A relative leaves an inheritance to you.
  • You retire.
  • You become bankrupt.
  • You move abroad.

Any of these above could have an impact on your will and how your estate will be handled after your death, including the issue of taxation.

Keeping track of such changes by regularly reviewing your will and estate planning objectives will ensure that any life changes have been accounted for.

The tax rules changes

The UK tax system rules are constantly being altered, which in turn has implications for your will and estate planning, whether that be:

  • an updated tax rate
  • a change in the rules for tax relief eligibility
  • an alteration to your tax code
  • a new opportunity to claim tax exemption
  • changes to other areas of legislation that affect the handling of your estate

For instance, the residence nil rate band, introduced in 2017, made it possible for property passed to direct descendants of the deceased to carry an extra exemption from inheritance tax, as long as the property was the deceased’s main residence or they occupied the property at some point during the period of ownership.

The residence nil rate band was originally set at £100,000 in 2017 but since then has increased by £25,000 each year. This increasing residence nil rate band is one of the factors that could be considered as part of your estate planning.

This is just one instance of changes to tax legislation that could affect your will and estate planning. Carrying out a regular review of your estate in the light of changes in tax legislation will guide any corresponding changes in your will.

You have non dom status or live overseas

Most expats and non dom individuals become accustomed to dealing with their complicated tax situation, handling both the tax systems and legislation of the UK and their home country, and applying this to their estate.

The detail of your domicile, whether that be a domicile of origin (linked to the details of your birth), dependency (the domicile of your parent, for instance) or choice (when you leave the UK and choose to take up the domicile of your new home country), is a critical deciding factor in how your estate will be treated after your death. Should your residence status change over the course of your life, there will be definite implications for your will.

When it comes to planning ahead for inheritance tax, an expat’s liability will be based on certain factors including:

  • the length of time they have lived overseas
  • the location of their estate assets – in the UK or overseas
  • whether these assets are categorised as excluded property

Inheritance tax is not incurred on excluded property which includes certain property located overseas and FOTRA government securities (free of tax to residents abroad).

Where the estate of a deceased foreign domiciliary is exempt for the purposes of inheritance tax, there will be no need to report the inheritance to HMRC. This is reliant, however, on:

  • the deceased having died overseas
  • that at no time did they hold UK domicile status
  • UK assets being inherited in accordance with a will or passed to a surviving spouse or civil partner are in the form of shares or capital with a value below £150,000 at the time of death

As at February 2019, the estate of a non dom individual who lives overseas and died there will only incur UK inheritance tax on UK assets, including money held in a UK bank account.

Therefore, money held in overseas bank accounts and overseas pensions will not incur inheritance tax.

However, where a non dom individual was resident in the UK for 15 of the previous 20 years or their main place of residence was in the UK for any part of the three years leading up to their death, they will be deemed UK domicile, and inheritance tax would become liable on overseas assets as well as UK assets.

Domicile therefore becomes a serious consideration when reviewing your will and estate planning.

You are a business owner

The factor of business ownership complicates the process of estate planning, for instance, working out the best way to leave your business to a family member, but also offers a number of tax advantages and reliefs.

Business Relief may reduce the value of chargeable assets at the time of death and lifetime gifts at the time of transfer in relation to inheritance tax, offering 50% or 100% relief under certain conditions. Qualifying assets include property and buildings, machinery and unlisted shares.

Business relief can only be claimed on a business or asset owned by the deceased for a minimum of two years before their death.

It may be worth examining the potential for inheritance tax liability and business relief when looking to sell shares in your business. Under business relief, shares may offer relief of up to 100%, whereas capital in your bank account from the sale of shares will not. Such consideration may well lead to a decision not to sell the shares or new investigations into how to reinvest that capital.

Setting up a business trust can be an effective way to ensure your that business is passed on to the next generation in the most tax effective way.

Planning ahead vs. firefighting

Taking a proactive approach to your will and estate planning, with an eye on any change to your personal circumstances or tax legislation, raises the likelihood that your wishes will be adhered to and your beneficiaries provided for in the event of your death.

For instance, making a gift need not have an inheritance tax repercussion if it happens over seven years before your death.

Furthermore, regularly reviewing your will and estate planning objectives reduces the possibility of disputes and challenges at the point of probate, and the related stress and upset, and ensures that you maintain control over how your estate is distributed after your death.

What are Capital Allowances?

So what are capital allowances, and how exact do they affect UK businesses?

When a business purchases certain qualifying assets, a capital allowance can be claimed against those assets, reducing taxable profits.

Capital allowances are offered by the UK government to encourage business investment.

However, to benefit fully from capital allowances and any other tax relief in relation to the purchase of assets, it is always recommended that the rules and requirements for making a claim are investigated, for instance:

  • What assets are eligible?
  • How are different categories of asset treated?
  • How to make a claim.

The rules that define capital allowance claims are drawn from the relevant tax legislation and legal case law. Any tax payer wishing to make a capital allowance claim must interpret these rules in the knowledge that the claim will then be processed by HMRC with their own understanding of the rules.

Capital allowances are generally available to limited companies, property companies, the self- employed, partnerships, overseas investors and private individuals, although true eligibility will always be decided by individual circumstances, for instance, whether cash basis accounting is used.

Qualifying assets

So what are capital allowances qualifying assets?

To qualify for a capital allowances claim, the asset in question must be owned. Leased and hired assets may not be claimed for.

Only certain types of asset qualify for a capital allowance claim and while there is no complete or exhaustive list of what may be claimed, the general categories include:

Plant and machinery

Plant and machinery are one of the most common types of asset claimed for under capital allowances but not always the easiest to understand.

This category covers:

  • items purchased to be used in the business, including equipment, machinery and business vehicles
  • the cost of alterations to a building so that new plant and machinery may be installed
  • the cost of demolishing existing plant and machinery
  • integral features (e.g. lifts, air conditioning systems, electrical systems) and certain fixtures (e.g. fitted kitchens and fire alarm systems)

Although alterations and demolition may qualify under capital allowances, repairs do not.

Items that are not considered plant and machinery for the purpose of capital allowance claims include leased or rented items, buildings (and the related doors, gates, gas systems and mains water systems), land and structures such as bridges or roads, and business entertainment items.

Businesses are often unaware of what is categorised as plant and machinery for the purpose of capital allowance claims, especially in the case of integral features and fixtures, and may therefore miss out on the full tax benefit available.

Research and development

Under this category, research and development carried out by a business in relation to their trade may be eligible for a capital allowance claim of 100%.

Expenditure on the provision of facilities for the purpose of research and development may also be eligible for a capital allowance claim.

Patents and know-how

Qualifying expenditure on patents and intellectual property relating to industrial techniques and processes may currently be claimed under capital allowance at 25%.

Mineral extraction and dredging

Qualifying expenditure on either of these processes may be claimed under capital allowance at 25%.

What are capital allowances rates?

Capital allowance rates vary depending on the category of asset and the circumstances of purchase, so it is essential that the taxpayer is fully aware of the correct rate to apply. The onus is always on the taxpayer to correctly calculate any capital allowances claim and therefore avoid coming under the scrutiny of HMRC.

The general capital allowance rates include:

Annual investment allowance (AIA)

Under the AIA, 100% may be claimed against the purchase of any qualifying asset up to a total amount of £1 million in any tax year.

You may not claim for cars, assets you already owned for non business use before using them within the business, or gifts made to the taxpayer or the business. However, these may be claimed under a writing down allowance.

First year allowance (FYA)

FYA is used to claim for 100% of the cost of a qualifying asset during the first year of its purchase.
You may not claim for gifts made to the taxpayer or the business, assets already owned before use in the business, assets that were not new before use in the business, assets bought for the purpose of renting out, or assets bought for use in a residential rental property.

Writing down allowance (WDA)

Where a capital allowance claim is over the AIA limit, it may be possible to claim for this excess amount through WDA.

The related assets are grouped into pools, depending on the category of assets.

The pool rates are:

  • main pool – 18%
  • special rate pool – 8%
  • single asset pool – 18% or 8% depending on the asset

Small pool write-off

Where your total capital allowance claim is in excess of the AIA limit and the value of a pool, before WDA, is less than £1,000 for a tax year, it may be advisable to make a Small Pools allowance claim. The balance of the small pool is then written off.

Enhanced capital allowances

This is a form of FYA for energy and water efficient equipment. Under this allowance, you may claim 100% relief for:

  • certain low CO2 emission cars
  • energy saving equipment on DECC energy technology product list
  • water saving equipment on DEFRA water efficient technologies product list
  • gas refuelling station plant and machinery
  • new zero emission goods vehicles
  • gas, biogas and hydrogen refuelling equipment

A capital allowances claim is made as part of your annual tax return, and generally is not subject to a time limit where the assets remain in your ownership.

However, making a capital allowances claim in the first year of purchase offers the benefit of the 100% annual investment allowance up to the £1 million yearly limit or the 100% first year allowance.

Should a capital allowances claim be made after the first year of purchase, the writing down allowance, with its reduced claim rates, will come into play.

What are capital allowances for claims on cars?

For the purpose of capital allowance claims, the definition of a car is that it is largely used privately, that it is suitable to be used privately, and that it was not manufactured to be used to transport goods.

Capital allowance claims for cars cannot be made under the annual investment allowance. The relevant capital allowance rate will depend on the year of purchase and CO2 emissions.

Cars purchased since April 2015

  • New and unused, CO2 emissions 75g/km or less – FYA 100%
  • New and unused, electric car – FYA 100%
  • New and unused, CO2 emissions between 75g/km and 130g/km – main rate allowance (MRA) 18%
  • Second hand, CO2 emissions 130g/km or less – MRA 18%
  • Second hand, electric car – MRA 18%
  • New or second hand, CO2 emissions above 130g/km – special rate allowance (SRA) 8%

Cars purchased between April 2013 and April 2015

  • New and unused, CO2 emissions 95g/km or less – FYA 100%
  • New and unused, CO2 emissions between 95g/km and 130g/km – MRA 18%
  • Second hand, CO2 emissions 130g/km or less – MRA 18%
  • Second hand, electric car – MRA 18%
  • New or second hand, CO2 emissions above 130g/km – SRA 8%

Capital allowance claims rates for cars purchased before April 2013 can be found on the HMRC website.

The Benefits of an International Tax Review

For businesses who trade and operate in more than one country, the value of carrying out an international tax review cannot be denied, bringing together the complexities of:

  • international tax legislation, including ongoing changes
  • developments within your business and future planning
  • commercial and political changes worldwide

International tax legislation

Any company who operates across international borders must maintain an up-to-date knowledge of the tax regime in any country they conduct business in as worldwide tax authorities become increasingly stringent in their attitude towards ensuring tax law compliance.

The ongoing discussion of exactly how internationally trading big business is taxed has made regular appearances in the news over the last few years, with organisations such as Amazon, Apple and Google featuring heavily. More and more, international authorities seek to change their legislation and handling of cross border businesses to ensure the expected tax contributions are made and tax avoidance is alleviated.
While these well-known business brands are the most noticeable in the public eye and an obvious target for international authorities, any company dealing across borders must keep up to date on the resulting tax regime changes, how these will affect their business, and what changes the company is required to make to their operations to maintain tax law compliance.

It is therefore recommended to carry out regular reviews of your business, certainly on an annual basis, to ensure that your company does not come under the scrutiny of international tax authorities.

While keeping track of tax legislation in one’s own country can be a complicated matter, especially in the light on ongoing updates to tax law, carrying out the same evaluation for tax legislation across all the other countries your company does business in can massively increase the complexity of the task.

For instance, the tax implications for any business operating across borders could merit consideration of indirect taxation, transfer pricing, base erosion and profit shifting, or outsourcing.

Carrying out a regular international tax review allows a business to gain a clearer picture on:

  • tax benefits, incentives and reliefs available in different countries
  • the implications of capital movement, within areas of the business and across borders
  • changes in tax legislation, whether in the business’ home country or a foreign country that the business deals with
  • possible clashes between the requirements of tax regimes in different countries
  • future tax planning aims and requirements
  • business goals

Tax legislation doesn’t only apply where a business has a physical base in a country, of course. Any business operation within a country’s borders will activate taxation. This is one more reason to remain vigilant about your company’s international tax position and liabilities.

The tax function

Increasingly, the tax function in any business is becoming more complex and involved, growing to include consideration of the increasingly complicated tax laws, changes to legislation, and the ongoing monitoring required to achieve and maintain compliance.

In the context of international business, the tax function must ensure that not only is the company meeting their home tax liabilities, but also tax liabilities to international authorities, and that payment is made during the correct time period for each country.

One answer to this growing complexity for many businesses operating across borders is to centralise the tax function. Regional finance managers report to a centralised finance director at the business’ headquarters, so for instance, where a business HQ is based in the UK but the company also operates in Spain and the Netherlands, the finance managers at the Spanish and Dutch bases would report to the UK.

Whether a business operating across borders takes on a centralised tax function or not, it is imperative that all positions within the overall tax function are:

  • clearly defined – knowing exactly which role is responsible for what task
    informed –
  • on the relevant areas of home and international tax legislation and any changes to that legislation
  • on the interplay between the roles, including lines of communication and reporting
  • on changes to the tax function itself
  • on developments within the business and international links, and any tax-related implications

For any business operating internationally, the role of the tax function must look towards global compliance and not simply the tax situation at home.

Business objectives

The need for the tax function to grow beyond the standard accounting role, especially in the case of cross border businesses, has a positive implication in the ability to inform business objectives.

Tax planning cannot be entered into on a stand-alone basis. It must always be approached with business objectives in mind.

Developing an understanding of how the business is to be developed will lay the path for future tax plans, for instance:

  • Does the business wish to expand into a new country? What are the tax implications for that move?
  • Is there likely to be a change in tax legislation, at home, internationally or globally?
  • Does the business wish to expand into new sites? Will this require the purchase of property and if so, could this be alleviated financially through available tax relief?
  • Does the business wish to enter into a merger, or acquire another business? What implication will this have for the business’ tax position?

A key part of considering any business move, be that expansion, merger or moving into a new area of industry, is to take advantage of professional advice so that you can consider the tax implications of any change to your business, discover which available tax reliefs and legislation can assist the process, manage any risk to your tax position, and find out how best to achieve and maintain tax efficiency.

Carrying out an international tax review, when informed by professional tax advice and an awareness of your current business operation, can highlight whether your tax position is helping your business to achieve its future commercial objectives.

With this knowledge, a business can identify where change is needed and clarify where the business sees itself in the future.

Technology in relation to international tax

Technology is evolving at a speed to match, if not overtake, changes in the tax function and legislation and must therefore be an ongoing consideration for any business.

So what role can technology play in handling international tax, and what are the main considerations to bear in mind?

Firstly, there is the raw data itself. How is the required data sourced, stored and processed?

How can technology assist the accounting and tax handling processes? Are these two processes, and the relevant technology, working together smoothly?

Once the need for technology or automation in a certain process has been identified, which can be a challenge in itself, what technological solutions are available, and which of these are affordable?

Operating across borders, in numerous countries, is likely to require the need to work to different critical dates when it comes to taxation. Any accounting and taxation process must therefore be flexible enough to handle such variances.

Wherever technology is utilised for accounting and taxation purposes, it will be necessary to train the relevant personnel or attract individuals who already have the related knowledge and expertise. Either of these options has financial implications for the business.

The question of technology can again be addressed as part of an international tax review.

Taxes for Expats: A Guide

Many British expats mistakenly believe that once they have left the UK to live overseas, they are no longer subject to UK tax, but the situation isn’t as clear cut or straightforward as that. An expat living abroad is still liable to pay taxes on any UK income they receive.

Any obligation to pay UK tax will be mainly decided by a person’s residence and domicile status, that is, whether they hold the status of resident and where their permanent place of dwelling is located.

The starting point for deciding whether you have an ongoing liability to pay UK taxes, especially if you maintain ties with the UK, is to decide whether you are a non resident for tax purposes, and when this happened.

For the purpose of taxation, an individual may be treated as a resident in more than one country in accordance with each country’s domestic tax laws. Where there is a double taxation agreement (DTA) between the UK and the other country, this will include a ‘tie-breaker’ clause to decide which country the individual should be treated as a resident in for tax purposes. The UK has DTAs in place with many countries throughout the world.

So which taxes for expats apply to you?

Income tax

A UK resident who receives income from worldwide sources will incur a UK income tax liability. They will pay UK income tax on their worldwide earnings.
In comparison, a non UK resident will only be liable to pay UK income tax on income earned from sources in the UK, including:

  • Profits from carrying out a vocation or trade in the UK
  • UK partnership profits
  • Income from a UK pension
  • UK property business profits (where the property or land is located in the UK)
  • Income from UK based employment
  • UK rental property income
  • Income from savings, interest or dividends from a UK bank or UK source

All UK and EEA country citizens have a tax-free personal allowance and as a non resident, you are also entitled to claim this allowance for any year where you have UK income. Use the form R43 to make your tax-free allowance claim.

Any UK income over the tax-free allowance will be taxed at the normal income tax rates, basic, higher or additional, depending on your personal circumstances.
Should you settle in a country which has a DTA with the UK, this will state which country, the UK or the country you have settled in, you should pay taxes to regarding your income. The benefit of living in a country that has a DTA with the UK is that it counters the risk of being taxed in both countries.

It is usual practice for UK property income to be taxed within the UK, as is the case with UK state pensions too.

Capital gains tax

Generally, a non resident who disposes of assets, whether UK assets or overseas assets, will not be liable to pay UK capital gains tax, unless one of the following applies.

Temporary non residence

Where the period of non residence is less than 5 full tax years, a capital gains assessment will be made when that individual returns to the UK.

This assessment will examine any gains made during the period of non residence from the disposal of assets owned when that individual first left the UK.

This assessment applies to individuals who were resident in the UK for at least four of the seven years before the period of non residence.

UK residential property

Since 6 April 2015, any non resident who disposes of UK residential property is liable to pay UK capital gains tax.

Any disposal of UK residential property by a non resident must be registered with HMRC no more than 30 days from the conveyance. Failure to do this will result in a penalty. Payment of any tax due may be required within the 30 day period, although there are exceptions to this rule, for instance, where a UK tax return is due to be filed. In this situation, it may be possible to delay payment until the usual tax payment date.

Use the ‘Non resident: Report and pay Capital Gains Tax on UK residential property’ online form to report the disposal to HMRC. Completion of this form includes the computation of capital gains tax owing so you may prefer to seek professional advice.

If you feel that you need professional advice to report the property disposal to HMRC, you should seek this straightaway to ensure that you meet the 30 day deadline and avoid any penalties or interest for late filing or late payment of tax.

Trading in the UK through a branch or agency

Where a non resident individual or trust trades in the UK through a branch or agency, UK capital gains tax will be payable on any assets involved in that trade.

How do you tell HMRC that you are moving abroad?

Generally, you should file form P85 with HMRC to tell them that you are moving abroad, but where you are required to file a UK tax return, you should submit this instead for your final year living in the UK.

Where you are due a tax refund for your final year in the UK after having filed the P85 form, HMRC will calculate what you are owed and make this payment to you after the P85 form is processed.

Taxes for Expats who are non resident landlords

During your time living overseas, should you derive income from renting out a UK property that you own, it will be necessary to pay UK tax on that income. The Non Resident Landlords Scheme (NRL) is a tax regime put in place to cover this situation.

The NRL makes the property management company used by the non resident landlord, or the tenants of the rental property, responsible for the collection of tax from rental payments to the non resident landlord. The default position is to withhold 20% of the gross rental amounts and pay this to HMRC. The non resident landlord is entitled to claim a refund when they submit their UK tax return.

Alternatively, the non resident landlord may register with HMRC as an NRL. Should the HMRC approve your registration, rental payment will be made to you gross, with no amounts withheld for tax. Use the NRL1 – ‘Application to receive UK rental income without deduction of UK tax’ – individual online form.

All non resident landlords must make a UK tax return in any tax year where they receive rental payments for their UK properties.

Where you already file a UK tax return because of other UK income and you are a non resident, it would always be recommended that you take professional advice.

Use form SA109 – ‘Residence, remittance basis etc’ to record your residence and domicile status and to make claims for non resident allowances when submitting your SA100 tax return. SA109 is a supplementary page to the general tax return form but an important element of your tax documentation as an expat.

At the current time, the SA109 can’t be completed online.

Taxes for Expats – what you need to know

The key to ensuring that as a British expat living overseas your UK tax situation is healthy and compliant, is to get clear on your personal circumstances and how UK tax law applies to that.

Ask yourself questions like:

  • Exactly what UK income do you receive?
  • Which form of UK tax will apply to that income?
  • For tax purposes, are you treated as a resident of more than one country and is there a DTA in place?
  • What allowances are you able to claim?
  • Do you know the relevant forms to use?
  • Have you communicated with the HMRC?

Whether you take professional advice or not, attaining clarity on your UK tax situation will avoid worries, wasted time, and unnecessary expense.

School Fees Savings Plan: Why Use a Trust?

Having a plan of action in place on how you will pay for your child’s private school fees is always a good idea, and one way to lessen the burden financially is to investigate tax efficient investment structures.

Your starting point, as with any type of tax planning, should always be to decide exactly what you want to achieve. So before you consider the range of school fees savings plans, ask yourself questions such as:

  • How many children is the savings plan for?
  • What time period should the savings plan cover?
  • Does your savings plan need to be flexible, for instance, to accommodate a new baby?
  • What makes up your portfolio of assets?
  • What kind of access to your capital do you want to arrange?
  • What does your overall financial situation look like? Are you paying into a pension? Are you self-employed?
  • Looking at the kind of return a savings plan may provide, what do you need to pay current school fees and cover any future rise in fees?

There are numerous investment structures available to you, and various tax planning tools, that may be suitable for your school fees savings plan. One of the most popular tax efficient structures is the trust.

How does a trust work with a school fees savings plan?

Setting up a trust can be a tax effective way for parents to save towards their children’s school fees while retaining a usually high level of control and protection of their investment.

There are several different kinds of trust that may be suitable for a school savings plan:

Family business trusts

As suggested by the name, the main advantage of a family business trust is that it is intended to cover family expenses.

Eligibility for a family business trust requires that the parents own shares in a family-run business, and that the grandparents are willing to make a contribution towards their grandchild’s school fees.

Further eligibility requires the possibility for the trust to hold shares in the family business, with the intention that dividends payable on those shares will be held by the trust. The family business trust may also take advantage of the child’s tax-free personal allowance to avoid such dividends pushing the parents into the higher tax rate.

Setting up a family business trust can also be a useful way to plan for handing over a family business to the next generation.

Using a trust to save for your child’s school fees can also offer a level of protection for the capital involved.

One factor to take into consideration when setting up a family business trust, however, is whether the transfer of shares and assets involved will have any implications for inheritance tax or capital gains tax.

Bare trusts

A bare trust, the most simple and straightforward category of trust, is established with a stated set of beneficiaries from the outset. Exactly how the capital and income will be distributed is also stated when the trust is entered into.

A common use of bare trusts in regard to school fees savings plans is where grandparents wish to contribute to their grandchild’s school fees. Their grandchild is specified as the beneficiary and the grandparents stipulate that any income from the trust is used to pay that child’s school fees. The capital asset held by the trust will eventually be paid to the grandchild once they reach 18 years of age.

One commonly recognised benefit of using a bare trust is that assets may be transferred to a minor, who as the trust beneficiary then takes ownership of those assets for tax purposes, but control over those assets still remains with the settlor until the child turns 18. By reducing the settlor’s estate, any later inheritance tax liability can be lessened.

However, a bare trust does not allow the opportunity to make changes, for instance to add a beneficiary on the birth of a grandchild.

The administration costs of a bare trust are usually low, and the reporting requirements are generally more simple than with other kinds of trust.

Discretionary trusts

Under a discretionary trust, the control of the capital and income is totally at the ‘discretion’ of the trustees. Where this can prove useful is the scenario where numerous parties make contributions to the child’s school fees and where a level of flexibility is required, for instance, on the regularity of contribution and the amount.

Beneficiaries do not have an absolute right to the capital or interest income of a discretionary trust because the trustees are wholly responsible for making decisions regarding how that capital and income are treated and distributed.

However, the decisions made by the trustees should be in the best interests of the beneficiaries, which in this context would be the payment of school fees.

The added flexibility of the discretionary trust does mean that it incurs higher levels of set-up cost, and more complicated administration requirements.
An additional factor, when considering this type of trust, is that because the beneficiaries do not have any ownership over the trust capital and interest income, all trustees will face a high rate tax liability, although this may be slightly offset by nominal allowances.

Using a trust for a school fees savings plan – what are the implications?

Whether a trust is the right way for your family to pay for your child’s school fees, and if so, the type of trust you choose, will depend largely on your family’s financial circumstances, but taking a look at the wider tax implications must always play a part of that decision too.

Inheritance tax

Should you choose to use a discretionary trust to pay for school fees, you should be aware that there could be inheritance tax to pay on assets transferred to, held in, or transferred out of this kind of trust. As mentioned above, this is down to the fact that the beneficiaries of a discretionary trust do not have ownership of the trust-held capital or income for tax purposes. Business property relief and other exemptions may, however, offset a level of inheritance tax liability.

When considering a bare trust, any gift made into that trust will be treated as a potentially exempt transfer, incurring no immediate inheritance tax liability.

Should the person making the gift live for more than seven years afterwards, there will be no inheritance tax liability on that gift.

The amounts that can be transferred into a trust with no resulting inheritance tax liability are:

  • up to £325,000 for an individual, or
  • up to £650,000 for a couple.

Income tax

The factor to bear in mind when considering whether your trust will incur income tax is that of ownership of the trust income.

Where the trust is discretionary and the beneficiaries have no absolute right to the involved capital and income, the trust is taxed at the relevant trust rate. In this situation, most of the income will become taxable at the highest income tax rate of 45%. This rate is for non-dividend income.

Where the trust is not discretionary, for instance, in the case of a bare trust, the income is assigned to the beneficiary for tax purposes, bringing into play their personal allowances and a basic tax rate where applicable.

However, where a gift is paid into a bare trust from a parent to a minor child and the income for that tax year is more than £100, the gifting parent will be taxed on that income.

Capital gains tax

One of the benefits of holding a discretionary trust is that assets standing at a gain may be transferred into such a trust without incurring a capital gains tax liability at that time, on the condition that the settlor and their dependants receive no benefit. So that the asset is received by the trustees at the same value as the settlor, any gain on the assets may be held over.

In the case of a bare trust, any gain on a transfer of assets into the trust will incur capital gains tax.

If a gain is made on the disposal of any trust-held asset, there may be a capital gains liability.

Use of trusts in a school fees savings plan

When considering the use of a trust for a school fees savings plan, it is always necessary to consider your aims for that trust (simply to pay school fees or also to pave the way to hand over your family business to the next generation?), what is required from that trust (is flexibility a fair trade for a simpler set-up and administration?), and what the wider tax implications are for your family?
The answers to any of these considerations will come down to your personal circumstances and plans for the future.

Non Dom Tax Status: What does it Mean?

So what exactly is a ‘non-dom’ and how is it connected to your tax status?

A person’s domicile is an important factor when it comes to deciding on their tax status. The term ‘non-dom’ is used to describe a person who for tax purposes has a domicile outside the UK.

The non-dom status generally brings with it certain tax benefits, however, recent changes in UK tax legislation may go some way to reducing, or in some cases eliminating, these benefits.

What is meant by ‘domicile’?

Although ‘domicile’ is not strictly a tax term, it does carry a legal definition and therefore can also be used in a tax context.

When you are born, you automatically have a domicile, your domicile of origin. You can only ever hold one domicile at a time.

Throughout your life, you will continually hold a domicile, although the details of that domicile may change over time and more than once.

There are rules around what decides your domicile, and the results are not always obvious.

Domicile may be confused with residence, citizenship or nationality, but these concepts are all very different.

Within the overall concept of domicile, there are three distinct categories:

  • origin
  • dependency
  • choice

Domicile of origin

Your domicile of origin is intrinsically linked with the details of your birth and therefore not necessarily as straightforward as you might initially think.

If you were born to married parents, your domicile of origin will be the same as your father’s then domicile.

If your parents weren’t married when you were born, you will take your mother’s then domicile.

If you are adopted, you will take the domicile of your adopted father, or in the absence of an adoptive father, the domicile of your adopted mother.

To discover the domicile of the corresponding parent, you may need to carry out a level of investigation. Never assume.

Domicile of dependency

Until you are 16 years old, your domicile will correspond to the relevant parent, as mentioned above. If the domicile of that parent changes while you are still under 16 years of age, then your domicile will change to that as well.

This is the domicile of dependency, whereby your domicile as an individual under 16 years of age is dependent on that of your relevant parent.

This category of domicile is also used for women who married prior to 1 January 1974, taking their husband’s domicile at that time. If their husband’s domicile changes, theirs will follow suit.

Domicile of choice

Once you have reached the age of 16 years old, you have the ability to take a new domicile. This is called your domicile of choice.

To take a new domicile, you must settle in another country or region with the intention of making it your permanent dwelling place and take steps to demonstrate this intention of permanent settlement.

It is not necessary to completely sever ties with the previous place where you were domiciled. You may still hold a passport and continue to be a citizen there, but still be domiciled to a different country.

Although you do not have to seek a passport or citizenship of your new country of domicile, your choice to not do so may be used to decide whether you have in fact settled in a new country and changed domicile.

The responsibility to prove that a domicile has changed is down to the person claiming that the change has occurred. Therefore, in the situation where HMRC wishes to prove that a person without UK domicile of either origin or dependency has taken a domicile of choice in the UK, the onus would be on HMRC to prove this.

Equally, where a person who has UK domicile of choice status claims to have taken a domicile of choice in a foreign country, it is their responsibility to prove this.

Any claim of change of domicile and permanent settlement in a new country will require the provision of strong, sound evidence to persuade the HMRC, or indeed the courts who hold the opinion that the concept of domicile is rarely straightforward.

HMRC are, however, unlikely to challenge individuals with a non UK domicile with the claim that they have taken a UK domicile, regardless of whether they have substantial UK interests or have been UK residents for a number of years.

What is ‘deemed domicile’?

In the context of inheritance tax and prior to 5 April 2017, any person who held UK resident status for 17 of the previous 20 tax years was treated as a ‘deemed domicile’ in the UK.

Since 6 April 2017, however, new rules apply to the concept of deemed domicile when one of the following two conditions comes into play:

  • ‘Condition A’ relates to long term UK resident non doms. In this instance, deemed domicile status comes into effect for all tax purposes, including inheritance tax, when the period of UK residence is 15 out of the previous 20 tax years, a reduction from the usual 17 years.
  • ‘Condition B’ relates to non doms born in the UK with a corresponding UK domicile of origin at that time who later take up a foreign domicile. In this instance, the non dom will be granted deemed domicile status for all tax purposes for any tax year during which they are a UK resident. Under Condition B, individuals born in the UK who later lost their UK domicile status may be treated as a deemed domicile for all tax purposes once they enter the UK, regardless of whether they have any financial ties with the UK.

The potential advantages of non dom tax status

Where a non dom is not recognised as a deemed domicile in the UK, there are several potential tax advantages available.

Remittance basis

Where a non dom individual has foreign income or gains amounting to no more than £2,000 that is not brought to the UK, it is not necessary to pay tax on this amount or state it in a tax return.

However, where the non dom’s foreign income is over £2,000 in a tax year, tax is payable and the amount must be reported in their tax return. The non dom may then choose whether to pay the UK tax or make a claim on the remittance basis.

Under the remittance basis, income and gains only incur UK tax if they are brought to the UK, for instance, paid into a UK bank account.

Should a non dom make a claim under the remittance basis, however, they will lose certain personal allowances and exemptions, and where they have been resident in the UK for several tax years, the use of the remittance basis will incur an annual charge.

Foreign Worker’s Exemption

Where a non dom works both in the UK and overseas, they may be eligible for the foreign worker’s exemption, under the following conditions:

  • income derived from working overseas amounts to £10,000 or less
  • any foreign income other than this amounts to £100 or less
  • overseas income is taxable in the country where it was earned, regardless of whether any tax was due
  • income derived from working overseas and in the UK, in combination, are not more than the income tax basic rate

Overseas Workday Relief

Where a non dom is seconded to work in the UK, they may be eligible for Overseas Workday Relief.

Overseas Workday Relief treats part of the income earned from employment in the UK as a foreign source of income, under the following conditions:

  • employment is carried out overseas either partly or in entirety
  • a claim has been made under the remittance basis
  • the resulting income is not brought to the UK

Non doms are eligible to claim Overseas Workday Relief in the first three years of UK tax residence, as long as they were not resident in the UK during the three years before that.

Excluded property

It is usual practice for assets located overseas that are owned by a non dom to be treated as excluded property for the purposes of inheritance tax. Inheritance tax charges on death or in relation to lifetime transfers do not, therefore, apply to excluded property.

Excluded property in relation to a non dom may include:

  • overseas assets that are held in trust where the settlor has non dom status at the time of settlement, regardless of whether that
  • non dom takes a UK domicile or a deemed domicile at a later date
  • foreign currency bank accounts overseen in the UK by non UK residents
  • holdings in open ended investment companies or authorised unit trusts
  • exempt UK government securities where the beneficial owner is a non UK resident
  • works of art located in the UK for public display, or cleaning and restoration

Non dom tax status – key points

There are many advantages to acquiring a non dom tax status, including tax exemptions and relief, and protection from inheritance tax, but any individual holding non dom tax status or wishing to acquire this status must remain informed on their personal domicile situation, and exactly how that will apply to and impact on their personal circumstances.