How do you break UK tax residence?

The issue

With rising tax rates many taxpayers are considering leaving the UK and crystallising gains and income in a more favourable tax environment. From 6 April 2022 dividends will be taxed at a top rate of 39.35% and capital gains will be subject to a top rate of 20% (for now!). For shareholders with companies holding significant distributable reserves it would be appealing to nip out of the UK, receive an untaxed dividend and then return. Although this is broadly possible, it is more complicated than many people think and three key factors need to be considered:

1. Can you lose UK residence?
2. What about the tax in the place you move to?
3. How long should you stay away for?

Can you lose UK residence?

The statutory residence test will dictate how many days you can stay in the UK without losing residence in a particular tax year. See the Forbes Dawson statutory residence flowchart here.

The answer all depends on the number of ‘ties’ that you have with the UK.

Example

Jim is 53, has no minor children. His wife will follow him wherever he goes and he will sell his UK property before he leaves. Jim therefore concludes that he has one tie (relating to his presence in the UK for more than 90 days in the last two years). He therefore concludes that he can ‘leave’ the UK if he limits his presence to 120 nights from 6 April 2022.

If he did this, then dividends and most gains (all except UK property) would be outside the scope of UK tax (subject to point below).

Where to go?

Clearly if Jim leaves the UK then he will want to be comfortable with the jurisdiction that he does end up tax resident in (if indeed he ends up resident anywhere). Previously we have talked about the advantages of non-habitual residence in Portugal as a way of sheltering non-Portuguese dividend income.

How long should you stay away for?

Unfortunately, this kind of planning does not work if you just leave the UK for a year. This is because there is ‘temporary non-resident’ legislation which serves to tax a taxpayer on their return, on what they would have paid tax on had they been resident in their years of absence. Depending on the circumstances of the individual, it may be necessary to avoid UK residence for six complete tax years to avoid falling foul of these rules. Therefore, in the case above, Jim would have to avoid spending more than 120 nights in the UK for each of the tax years ending 5 April 2028.

Forbes Dawson view

This kind of tax planning will not be for everyone, as it does undoubtedly create a certain amount of upheaval. However Covid 19 has taught many people about the possibility of working ‘location-independently’ and the prize is high if a move to a sunnier clime can offer a shareholder the opportunity of accessing reserves tax-free.

 

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