Tax advice ahead of UK election day

Tips for those thinking of migrating to the UK – in particular, becoming become a UK resident but not UK domiciled.

By STUART HARRIS & LEON HARRIS
April 28, 2010 06:48
taxes 1 88

taxes good 88. (photo credit: )

 
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As the UK goes to the polls on May 6, it is time to consider a measure that the UK government is considering to help plug its enormous deficit. Specifically, it would like Israelis and others to head for Britain to help make up the difference. We all know the streets of London are paved with gold....

Here are some tips for those thinking of migrating from Israel to the UK – in particular, becoming become a UK resident but not UK domiciled.

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A few weeks ago we wrote about the Gaines-Cooper tax case which was heard in February in  London. We commented on how this was a lesson on how not to leave the UK tax net. This ruling was described as “a nail in the coffin for non-doms,” as it would herald a crackdown on wealthy tax exiles by Her Majesty’s Revenue and Customs (HMRC). However, our previous article contained useful tips for UK Olim to Israel to guide them through the tricky requirements.

The recent Budget in the UK was mainly a political one. As there will soon be a general election in the UK, all the political parties are now jostling for position. It is also expected that once the election has passed, there will be some sort of Emergency Budget introduced by the incoming government. Indeed, the biggest worry seems to be that of a hung parliament, and/or a minority government with insufficient power to introduce the legislation necessary to sort out the UK’s financial problems. We will not discuss the political side here, but the uncertainty is a cause for concern to some.

Notwithstanding the above, life still has to go on, and we must plan our lives and our tax affairs according to the laws and rules as they currently stand.

What does “domicile” mean for UK tax purposes?

To start with, it is important to discuss the actual meaning of “domicile.” Domicile is a fundamentally different concept from residence and ordinary residence. It is not the same as nationality, although this may be a factor in determining domicile. Usually, a person is domiciled in the country he regards as his real home. Under English law, an individual normally acquires his father’s domicile at birth. The mother’s domicile may apply instead where a child is illegitimate or the parents divorce. The domicile acquired in this way is called the individual’s “domicile of origin.”



However, you may change your domicile to that of a “domicile of choice.” Normally, this happens if you are leaving your country of origin and taking up permanent residence with the intention of never returning to live in your country of origin. You must be careful if you change your mind and decide not to make a permanent home in the new country. This will be a question of fact, and was dealt with in the case of Allen & Another (executors of Johnston) v HMRC. Here, a woman acquired a Spanish domicile of choice, and was held to have retained this even though she returned to the UK to be cared for by a relative.

Married women

For UK purposes, women married before January 1, 1974 generally acquired their husband’s domicile – referred to as a ‘domicile of dependency’. This could continue after divorce or their husband’s death, although it could be discarded in favour of their domicile of origin. For couples married after December 31, 1973, The Domicile and Matrimonial Proceedings Act 1973 allows a woman to retain an independent domicile on her marriage.

Remittance basis

This is the heart of much UK tax planning. Under the remittance basis, you only pay tax on non-UK source income and capital gains on amounts brought into the UK. If you are not domiciled in the UK, then you have to make a claim to be taxed in this way. From April 6, 2008 this claim has to cover all the overseas income and capital gains, however, in doing so you will lose personal allowances and the annual exemption for capital gains tax. Plus, there may be an additional £30,000 charge for longer-term UK residents.

It is also important to consider what actually constitutes a remittance, including constructive remittances and also unauthorized remittances. Since 2008-9 there has also been an extension of the definition of a remittance. This now includes property brought into the UK which has been purchased out of overseas unremitted income. Again, the rules are fairly detailed, and you should seek professional advice.

£30,000 special charge

This legislation attracted much publicity. It commenced in 2008/09 and applies to individuals over the age of 18, and who elect for the remittance basis. The conditions for this are as follows: you have already been resident in the UK for seven of the preceding nine tax years ; and your unremitted overseas income and capital gains are greater than £2,000.

If you don’t make this election (after living in the UK 7 years), then you will be liable for UK tax on your entire worldwide income and capital gains.

You are allowed to make a decision about this £30,000 payment each year, i.e., you can choose the remittance basis some years and not others. You should therefore seek professional advice and review your affairs regularly.

What about Israeli tax?

Israeli residents who stop being Israeli residents are subject to an “exit tax”. This is really a capital gains tax – at a rate of 20% to 45% – on the market value of their assets one day before they left Israel. They can pay this tax when they depart from Israel, and if they don’t, they are supposed to pay the tax on the date they actually sell the assets. This rule even applies to share options held by Israelis who relocate abroad and triggers almost certain double taxation, necessitating urgent advice. The exit tax does not apply to homes in Israel and other assets (in Israel) that stay within the Israeli tax net.

How do you know you stopped being an Israeli resident? The domestic Israeli tax law says that you must be away from Israel at least 183 days for at least two tax years, and your center of living is abroad in the next two years.

However, if you appear to be resident in the UK under UK law, and in Israel under Israeli law, there are additional “tie-breaker” rules in the UK-Israel tax treaty. The tie-breaker tests, in order of priority, are: permanent home, center of vital interests, habitual abode, nationality, and failing all that, by mutual
agreement between the tax authorities of the two countries.

What is a tax year?

Even that differs. The tax year ends on December 31 in Israel and on April 5 in the UK.

What next?

In practice, it is advisable to review the structure of your investments and activities carefully, before you move, with regard to the various taxes on income, capital gains and inheritances. You should also review your will and family succession arrangements. Or just rely on the streets of London being paved with gold.

As always, consult experienced tax advisors in each country at an early stage in specific cases.
stuart@sha1.co.uk
leon.hcat@gmail.com

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