Do you have to live in a country for a certain period of time to avoid UK taxes, or can you just effectively move there and then your taxes are avoided or eliminated as soon as you move there?
This is a very popular question and one that people frequently ask.
Primarily, to get out of the UK taxes you have to satisfy the UK and the UK HMRC that you are no longer Ordinarily UK resident.
That means that the UK is not your habitual home and you are do not have significant UK source income.
You also must be resident in another country for a period that covers at least one complete UK tax year. That is April 6th to April 5th the following year. This applies if you are going to work abroad.
If you go abroad without having any work, but for a Settled Purpose say to study or learn another language for example, then the UK HMRC will expect you to spend at least 3 complete UK tax years abroad to be considered non-resident.
To avoid UK Capital Gains tax on Assets owned or acquired whilst UK tax resident, you need to spend 5 full UK tax years abroad and only dispose of those assets in a UK tax year following the one in which you left the UK
Obviously, as we said in the previous article, if the source of your income is from a UK property or it is a UK business that is paying you, then leaving the UK alone will not necessarily eliminate your UK tax liability as there will be certain taxes that still apply to you.
However, let us take someone who has a profession, or transferable skill, that enables them to go and work anywhere, the first thing that should be addressed is their permanent home. If you have a permanent home here in the UK, you should either sell that property or rent it out, so that it could not be argued that that home is still available for your use. The other important thing is that your family really has to move with you.
If you are moving abroad, but your wife and children, or partner and children, are continuing to reside in the UK then it will be much more difficult to demonstrate to the UK HMRC that you really have moved away from the UK and taken residence elsewhere, especially if you are returning home at intervals to visit your family.
Another point to remember is the length of time that you can return for. The UK HMRC will not consider you to be a UK tax resident provided your return to the UK is for 90 days or less on average over a period of 4 years. However, that practice been turned on its head slightly by a very recent case called ‘Sheppard’ where an airline pilot who was doing long-haul flights technically qualified as a non UK tax resident because he only spent approximately 77 days in the UK. Now, his wife, family, car, home and all his hobbies were based in the UK and the UK HMRC successfully argued that, on this basis, his case should be looked at in a broader context. They suggested that the fact that he had spent less than the 90 days in the UK should be ignored and that he should still be regarded as a UK resident. The UK HMRC got their wish and the pilot continued to be affected by UK taxes. This approach has been followed again in the recent case of Gaines-Cooper a multi-millionaire who claimed to have taken up residence in the Seychelles, but continued to have a home and family connections in the UK. He has been found to be UK resident.
As you can see from these cases one has to be very, very careful and get expert advice to make sure that you are properly severing your ties with the UK. The UK HMRC call this making a Distinct Break and what constitutes such a break is not always easy to define, unless nearly all UK ties are cut.
Double tax treaties between the UK and your new Country of residence can have a positive impact on the situation, if they contain a Tie-Breaker clause dealing with residence and again you will specialist advice on how such a clause might assist in protecting your income and gains from UK tax.
One thing that I have probably not emphasized enough is that you must close down UK bank accounts and do away with all UK investments.
You have got to show that the UK is no longer the centre of your economic and family life.
If you can achieve that then the UK HMRC will probably accept your residence is somewhere else.
Obviously, it is also helpful if you are officially deemed to be a resident in that place or location, even if it is a pure tax haven that does not levy any taxes.
One of the UK HMRC’S favourite requests is to see a foreign tax return in your new country of residence.
Even, if you do not have a foreign tax return and having official proof of residency for that country maybe beneficial. It is a very complicated matter and really needs expert advice.
To use Mr. Sheppard as an example, one thing he did not do was take advice before he left the UK and it came back to haunt him. This is a salutary warning to those who think they can just read a few articles; get the gist of what they think will apply to them and do a DIY job. In this area, unless you are going to get it spot on, the UK HMRC is going to come after you, especially if you are someone who is going to return after a number of years of living abroad and have made large capital gains or had large earnings, in that time.
In this article I have discussed some of the issues and advice I give to people who are contemplating moving to a tax haven and how long they need to live there in order to avoid or eliminate their taxes. This is the final article on tax havens; however please keep a look out for my future articles on international taxation.