Are the streets of London paved with gold? Approximately 23,000 Israelis relocate each year, and one of their favorite locations is the UK, for two main reasons: Business, as the UK is a gateway to the European Union and public listings on the London Stock Exchange and the AIM market are popular; and personal as the UK offers a benign tax regime for "non doms," or persons classified as resident but not domiciled in the UK. For example, they may remain Israeli-domiciled. For those Israelis moving to the UK, it is important to plan ahead, even amid the confusion of uprooting oneself and one's family to a foreign country. If you are planning to move to the UK, you should first consider whether the move will be temporary or permanent as this may affect your liability to tax.The main UK taxes are income tax, capital gains tax and inheritance tax. To understand where planning opportunities may arise, it is first important to have some background in the basic UK tax rules. UK Domicile The term "domicile" can broadly be defined as the place where you have your permanent home and is established according to a set of criteria as laid down by the UK Government. Under the UK rules, each person is assigned a "domicile of origin," meaning the place where your father had his permanent home at the time of your birth. If your father lived permanently in Israel at the time of your birth there, under UK law you were originally domiciled in Israel. However, your domicile may change if you choose to go and live permanently elsewhere. This is known as your "domicile of choice." Thus, if you intend for your move to the UK to be temporary or for a fixed period, you will remain domiciled in Israel. Factors which may be relevant in determining your intention are your citizenship and your social, family and professional connections. If you wish to remain domiciled in Israel, it is advisable to retain connections in Israel. Although citizenship is not necessarily the deciding factor in determining one's residence, not obtaining UK citizenship would also serve as evidence in support of your retention of your domicile of origin in Israel. However, some balance is needed - if you maintain a permanent home in Israel, this may help signify to the Israeli Tax Authority that you retain Israeli residency for Israeli tax purposes under Israeli domestic law and the UK-Israel tax treaty. Residence The overriding rule for determining residence under UK law is that you will be regarded as resident in the UK if you live in the UK for more than 182 days in any tax year. But even visitors to the UK can be UK residents if they visit for an average of more than 90 days per year over a period of four consecutive years. In this case, resident status normally starts from the beginning of the fifth tax year in which you visit the UK. However, you will be regarded as resident from the date of your arrival in the first year if, when you arrive, it is anticipated that you will exceed the 90 day average over the four-year period. The UK resident status of an individual is determined according to particular tax years (the UK tax year runs from April 6 to April 5). The fact that a person is treated as resident in one year does not mean that he will necessarily be resident in the next year. In addition to determining residence in the UK based on days present, Her Majesty's Revenue and Customs ("HMRC" - the new name for the Inland Revenue Service) will sometimes look at your intentions in assessing whether you are a UK resident. For example, if you come to the UK for a purpose that means you will remain there for at least two years, own or purchase a home in the UK or take on a lease of a property for a period of three years or more in the year of arrival, you may be treated by HMRC as resident from the day you arrive in the UK. The UK/Israel Treaty The UK and Israel have signed a treaty that helps determine where a person is resident; which country has authority to tax; and a credit in the country of residency for taxes paid on income derived in the other country. Israel applies a "center of living" test of residency. In the event that a person is resident both in the UK and Israel under domestic legislation, the treaty has a "tie breaker" clause that binds both countries. The "tie breaker" test is to look at where a person has a permanent home available to him. If the person has a permanent home in the UK only, he may claim to be resident in the UK. If he has a permanent home available to him in both the UK and Israel, he will be deemed to be resident where his "center of vital interests" is located - this is the country with which his personal and economic relations are closer. A person's family and social relationships, his occupation, political, cultural or other activities, place of business and the place from where he administers his property are all taken into account. However, in the case of a person whose residence cannot be determined using this test, the next step will be to determine that person's nationality. In this case, therefore, an Israeli citizen would be resident in Israel. If the problem were still not resolved, such as if the person has dual nationality, the HMRC and the Israeli Tax Authority would settle the question by mutual agreement. Income Tax and Inheritance Tax - Putting the Rules Together Liability to UK income tax depends mainly on the taxpayer's residence, domicile and the source of the income. An individual who is UK resident and domiciled is liable to UK income tax on his worldwide income. However, if you retain your non-UK domiciled status (i.e., are viewed as an Israeli domiciliary in the eyes of HMRC) but are a UK resident, you will pay UK income tax only on income arising in the UK or income brought into the UK. But remember that Israel taxes on the basis of residence. Persons who cease to be Israeli residents are generally liable to Israeli capital gains tax at rates of 20%-48% as if they sold all their assets one day before they ceased to be residents. This especially applies to employee share option and purchase arrangements. The tax is payable upon departure or upon the sale of the relevant assets. An exemption applies if the tax will be due later in Israel upon realization; for example, regarding Israeli real estate (if the residential home exemption is not applicable). Also, certain assets should not generate capital gains, such as cash and bonds that pay interest. As to inheritance tax, Israeli law does not levy tax on the value of a person's estate passing at death but the UK does at a rate of 40% for everything over the first 300,000 (which is taxed at 0%). Inheritance tax applies to the worldwide assets of UK domiciled individuals, but only to the UK assets of non-UK domiciled individuals, such as those viewed as Israeli domiciled under the UK rules (even if no longer Israeli resident under the Israeli rules). Note further that for UK purposes, residence is not relevant in determining a person's liability to inheritance tax; you may be liable to pay inheritance tax despite the fact that you are domiciled in Israel if you live in the UK for an extended period of time (17 out of 20 years) as you will be deemed domiciled in the UK. Planning opportunities and considerations In certain circumstances, the interplay between the UK and Israeli rules can provide significant income tax planning opportunities if you are careful. To give one simple example, take the case of an Israeli person who holds cash. After ceasing to be an Israeli resident but before becoming a UK resident, he may establish an appropriate trust structure funded with the cash to acquire a securities portfolio outside both countries. The UK would levy tax only if the dividends or proceeds of sale were brought into the UK and Israel would not levy tax if the individual is no longer considered an Israeli resident. Thus, while living in the UK, the individual and his family can enjoy years of income tax free growth on his investment account. Additional planning would be needed with regard to real estate investments in the UK or elsewhere. Additional detailed advice is essential in each country in specific instances. Interaction with Israeli taxation If you plan a move to the UK (or elsewhere) various Israeli tax considerations will need to be taken into account. See for example, the column entitled "Working abroad: What Israeli residents need to know" (The Jerusalem Post, December 20, 2006). Such considerations include: * Israeli residency criteria and the "exit tax" if you cease to be Israeli resident, as mentioned above * If assets are held in a trust settled before you leave Israel, there may be an immediate or deferred Israeli exit tax liability, depending on the circumstances * If you work in the UK but remain an Israeli resident, special travel, living expense, health care and child tuition expense deductions are available. In the UK, you may only be taxable on UK source income if certain conditions are met * Check the long term National Insurance position in both countries. There is a social security "totalization agreement" between the UK and Israel, but issues may still arise if Israeli citizens return to Israel for a visit or permanently after a number of years. To sum up, in planning a move to the UK, the length of your stay, your intentions as to where you plan to live in the future and the nature and extent of contacts you keep in Israel and the UK, will have an impact on whether you will be liable to tax in the UK or Israel or both. Planning ahead may help reduce your liability to tax and it is therefore vital to seek tax and legal advice before moving firstname.lastname@example.org Leon Harris is an International Tax Partner at Ernst & Young Israel. Elli Zaidman and Michael Ben-Jacob are with the London and New York offices of Withers LLP.