No Hiding Place
In my article in November I warned that, following a legal victory against Barclays, the Revenue were hunting out off shore accounts, with a view to taxing, and probably penalising the owners of those accounts. The advice, quite simply put, stated was that if you have such an account own up to it, pay the tax and any interest, and sleep at night.
The Revenue has now secured another victory in the Courts with off shore connotations. In November 2006, the Courts rule for the Revenue, and against Robert Gaines Cooper, who was a businessman and a resident of the Seychelles. The Court decided that he would be taxed in the U.K., because in a landmark ruling, it declared that the day of arrival and departure in the U.K. should be taken into account in calculating the amount of time a non resident be deemed to spend in the United Kingdom for tax purposes.
This has opened the way for the taxman to go back six years, and attack potentially thousands of British ex patriots who are living abroad, but who return to England from time to time.
The rules have been relatively simple and well known for a long time. If you leave the country to become a non resident, you are still deemed by the Revenue here to be subject to tax on your worldwide income and capital gains, if you spend time in Britain. The rule is that you must have spent an average of no more than 90 days a year in Britain over a four year period to be non resident. Hitherto the taxman has always excluded the days that you arrive and the days that you leave. Bearing in mind that there can be a number of visits in one year, those days of entry and exist can add up to quite a few. The new ruling, which includes days of arrival and leaving, will significantly reduce the amount of time that ex patriots can stay in the country, and will significantly reduce the amount of visits they are able to make.
This does not just affect the rich. There are many middle class families who have decided that enough is enough, and have retired to, perhaps the Continent to work, who may be affected by these new rules.
It is important to understand the rules and to abide by them, because failure to do so would not only compromise your position both on income tax and capital gains tax, but also on inheritance tax on death.
So what are the rules?
Firstly British residents are liable for tax in the United Kingdom on their worldwide income and capital gains. Note: worldwide, not just income and capital gains arising in the U.K. In order to escape U.K. capital gains tax you need to be non resident now for 5 years. Gone are the days when you could slip abroad for a tax year, realise the gain, pay no tax and come home. In order to escape U.K. income tax, you need to be non resident for at least 3 years, unless that is you accept a contract to work abroad for at least a full tax year.
To become none resident you must spend no more than 90 days a year on average in the United Kingdom, this over a period of 4 years, but you must also make sure that you spend less than 183 days in the United Kingdom in one tax year over that period.
With regard to inheritance tax, that is slightly more difficult because inheritance tax depends upon domicile not residence, and domicile is a matter of fact. In order to become non domiciled for inheritance tax purposes, you need to leave the country, to remain out of the country and to sever all links with the country. Bank accounts must be closed, clubs resigned from, property disposed off. It is sensible to organize your funeral abroad.
If you own a property abroad, bear in mind that U.K. residence means that you pay tax in the U.K. on foreign income and foreign capital gains. It is quite likely that the regime in which your overseas property is situated also charges similar taxes. As a general rule, if the country in which the property sits charges lower taxes, then you will have to make up the difference in the U.K. to the U.K. tax rate. If however, the off shore tax is more, you will not get the benefit of a refund on the U.K. tax.
As always, it is very sensible to get the rules right, because failure to do so could be very expensive, and to that end it is always sensible and indeed cost effective to take proper legal and technical advice.
