New regulations coming into force from 6 April 2017
As the tax year end approaches, people will be rushing to ensure they maximise their annual allowances and have their finances in good shape. This deadline applies equally to foreign expats (often referred to as ‘non-UK domiciles’) living in the UK as it does to those who were born in the UK. In fact, this year, foreign expats may have even more considerations due to new regulations coming into force from 6 April 2017.
Legitimate tax planning opportunities
Foreign expats have legitimate tax planning opportunities available to them, in much the same way as UK nationals do. It is important to seek professional advice before the tax year end deadline to maximise these opportunities and ensure finances are structured in the most effective way possible.
Tax year end considerations for foreign expats in the UK:
1. Inheritance Tax implications for those living in the UK for 15 years
From 6 April 2017, the calculation used to determine when a foreign expat (non UK-domicile) living in the UK becomes deemed UK domiciled for tax purposes will tighten. The timescale will reduce from 17 out of 20 years to 15 out of 20 years.
For anyone approaching the 15-year deadline, they will need to take advice regarding Inheritance Tax (IHT), as once they become deemed UK domicile they will become liable to UK IHT on their worldwide assets.
2. Implications for those on the remittance basis approaching the 15-year deadline
Foreign expats living in the UK can choose to pay tax on a ‘remittance basis’, which means they are not required to pay UK tax on their foreign assets. Once a foreign expat has been in the UK for five years, they need to start paying HM Revenue & Customs a charge each year to remain on the remittance basis. They can continue on the remittance basis until they become deemed UK-domiciled (which will be once they have been in the UK for 15 out of 20 years).
Those on the remittance basis approaching this 15-year deadline may benefit from taking immediate action. They have a window of opportunity to help ensure their overseas finances are structured in the best way possible. For example, assets can be placed in an Excluded Property Trust, a legitimate way of mitigating any income and Capital Gains Tax arising from assets held outside the UK. Assets will need to be placed inside the trust before they become deemed UK-domiciled.
3. Any UK property held through an offshore company structure should be reviewed
From 6 April 2017, foreign expats investing in UK property through an overseas corporate structure or trust (known as ‘enveloping’) will no longer be excluded from UK IHT. HMRC will essentially ‘see through’ the corporate structure, making them ineffective from an IHT planning perspective.
It might make sense for these structures to be unwound, as they will no longer be effective and may not justify the ongoing fees involved. If individuals are concerned about their exposure to UK IHT, they may benefit from some estate planning to help ensure beneficiaries have enough money to pay any IHT liability.
4. Maximise ISA and pension contributions
Foreign expats living and working in the UK (paying UK Income Tax) are able to invest in ISAs and pensions and benefit from tax-efficient investing in the same way as those who were born in the UK. This can help their investments grow tax-efficiently while they are in the UK, and they can continue to hold the investment when overseas (though the tax advantages may be limited).
5. Utilise Capital Gains Tax (CGT) allowance
Foreign expats living in the UK are liable to UK CGT on their UK and worldwide investments (those on the remittance basis are liable to UK CGT on their UK assets only). This means they are entitled to an annual tax-efficient allowance, currently £11,100. Making the most of the annual allowance by selling investments and recognising the gain on a regular basis could prove highly effective.
6. Utilise annual gift allowance
On death, foreign expats are liable to UK IHT on their UK assets. They are also liable to UK IHT on their worldwide assets if they have been in the UK for 15 years, as explained above. Utilising the annual gift allowances of £3,000 a year can be an effective way of passing wealth on to future generations bit by bit, rather than waiting and storing up future IHT problems.