Non-UK resident individuals can choose for their UK sourced investment income, including dividends and interest, to be disregarded for UK tax purposes. This so-called ‘disregarded income’ can then be received free from UK income tax.
Under the Statutory Residence Test, special split year treatment rules apply where individuals move overseas mid-way through the tax year, either because they, or their partner, are starting full-time work abroad, or where they cease to have a UK home. Where the split year rules apply, the individual is treated as becoming non-UK resident on the date they leave the UK, with the tax year split into a UK part (prior to departure) and an overseas part (after departure).
Individuals may expect that if they qualify for split year treatment, their UK sourced investment income will be outside the scope of UK income tax, providing that it is received in the overseas part of the tax year, i.e. when they are non-UK resident.
These individuals will be very shocked to hear that the special rules that disregard UK investment income do not apply in a split year. Instead, the rules only apply where the individual is non-UK resident for an entire tax year.
Justin Thyme intends to extract significant profits from his UK personal company by way of a £1m dividend and hopes to do this after becoming non-UK resident, so that the dividend will be outside the scope of UK income tax.
Justin moves from the UK to Dubai to work full-time on 1 June 2022 and the split year rules apply. He therefore becomes non-UK resident from 1 June 2022 and remains so for the next five years.
The company pays the dividend on 1 August 2022 and his accountant has to break the news to Justin that he has a tax liability of just under £0.4m!
If, instead, the dividend payment was delayed until 6 April 2023, the dividend could be disregarded and, consequently, Justin would not suffer any UK income tax on the dividend.
Note that Justin will need to remain non-UK resident for at least five complete years, otherwise the dividend will fall back into the scope of UK income tax under the Temporary Non-Residence Rules.
However, the five year ‘clock’ for these purposes starts ticking on the date that Justin became non-UK resident under the split year treatment rules on 1 June 2022. Hence, Justin needs to remain non-UK resident until 2 June 2027, otherwise the dividends will fall back into the UK tax net.
Forbes Dawson’s view
If you are considering leaving the UK prior to extracting a windfall dividend, tread carefully and obtain professional advice both on the UK position, and not forgetting the tax position in your destination territory.
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