For people who have likely spent their entire lives in the former British colony, the decision to relocate to the UK can be a difficult one to make. Having worked with hundreds of clients moving between Asia and the UK, and having also experienced the process first-hand with my own family, I fully understand the stress and upheaval that moving countries can bring. Making what may be a permanent move from Hong Kong to the UK will undoubtedly be challenging with many things to consider. One of the key considerations will be tax and financial planning. Moving from a territory with lower rates of tax to the extremely complex and, potentially, highly taxed UK regime needs to be carefully thought through and advanced planning is key.
WHEN WILL YOU BECOME UK RESIDENT?
Understanding the date you become UK resident is extremely important as from that date you may, potentially, be charged to UK tax on your worldwide income and gains as they arise with rates of tax of 45% applying for the very highest earners. The UK has complex rules to determine your UK residence status and the date you will become UK tax resident.
The Hong Kong tax year starts on 1 April whereas the UK tax year starts on 6 April. If you do become UK resident in a tax year the default position is that you become UK resident (and potentially fully taxable on worldwide income and gains in the UK) from the 6 April being the beginning of the UK tax year. That could give rise to an unexpected UK tax bill if you don’t arrive in the UK until say October; you could have already been UK resident and possibly taxable in the UK on all of your income and gains, for the six months before you set foot in the UK. The government recognises this is unfair and has provided five different ways you can become UK resident at a date later in the tax year rather than defaulting to becoming UK resident on 6 April. This is called “split year treatment’.
Split year treatment is helpful because it can delay the date you come under the UK tax net. However, there are some traps for the unwary. Various conditions need to be met to qualify for split year treatment. In addition, some of the cases of split year treatment can still make you UK resident before you arrive in the UK. Finally, if more than one case of split year treatment applies, the rules which determine which of those possible cases takes priority are complex.
WILL YOU CHANGE YOUR DOMICILE STATUS IF YOU COME TO THE UK?
There is a difference between domicile and residence when we think about UK tax. Your UK residence status is determined each year under the complex Statutory Residence Test. Your domicile status is determined over your lifetime. For UK tax purposes everyone has a tax domicile status at every point in their lives.
Your UK domicile status is extremely important to understand as it determines your exposure to UK tax. A non-UK domicile is only exposed to UK Inheritance Tax on their UK assets. However, if you are UK domiciled it is your worldwide assets that are within the scope of UK Inheritance Tax. That UK Inheritance Tax charge is a 40% applied on assets held at death after allowances and exemptions have been deducted. As overseas assets are not included in the chargeable estate of a non-UK domicile there is a clear advantage to that status. It is worth mentioning that there are tax planning steps you can take to reduce your Inheritance Tax if you are UK domiciled. However, a non-UK domicile status can provide a straightforward Inheritance Tax mitigation strategy.
In addition to enjoying a possible UK Inheritance Tax advantage a non-UK domicile may also be able to benefit from an exemption from UK Income Tax and Capital Gains Tax on their overseas income and gains when they are UK resident. This is achieved by claiming a special “remittance basis” of taxation. This special remittance basis is not available to UK domiciles. There are various conditions to be met in order to claim the “remittance basis” of taxation. In addition, the ability to claim the remittance basis is time limited and will not be available after a certain number of years of UK residence.
You generally acquire a domicile status from your father when you are born based on his domicile status. Be aware that matters can be far more complex than that. Your domicile of origin is hard to shake off. However, when you have been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year, you are deemed to be UK domiciled for all tax purposes. It is possible to become UK domiciled and lose the tax advantages of being non-UK domiciled much earlier than that, if it is clear you have chosen the UK to be your permanent home or intend to live in the UK indefinitely. One piece of evidence that you have chosen to reside in the UK indefinitely can be applying for UK citizenship. It is important to understand whether or not applying for UK citizenship will change your UK domicile status.
ACTIONS TO TAKE BEFORE YOU BECOME UK RESIDENT
There are actions that you can take before coming to the UK to minimise your exposure to UK tax after you have triggered UK tax residency; these are some of the important tax considerations:
- Understand the date you will become UK resident which could be before you physically arrive in the UK.
- If you have been non-UK resident for more than five continuous years, you should aim to realise capital gains before you become UK resident to avoid a future UK Capital Gains Tax charge. Retain assets standing at a loss and realise those losses after you become UK resident as it may be possible to use those losses against future capital gains.
- Consider carefully how much tax you will pay on your sources of income and gains when you are UK tax resident. The rules are not straightforward. To give one example, Hong Kong pension income is likely to remain taxable in Hong Kong and will not be subject to UK tax even after you have become UK resident.
- Having considered how your income and gains will be taxed as a UK resident you may wish to consider restructuring your investments to be more tax-efficient for life in the UK.
- Determine your UK domicile status and consider if and when a non-UK domicile status may be lost if you become UK tax resident.
- If you are non-UK domiciled, consider structuring your assets and investments to make use of the special remittance basis of taxation which, for a time at least, may allow you to exclude overseas income and gains from UK tax. Such structuring will need to be in place before you become UK tax resident.
- If there is a chance your UK non-domicile status will be lost if you become UK resident there are actions that can be taken to protect overseas assets from UK Inheritance Tax even past the point you become UK domiciled. There are advantages to taking those actions before you become UK tax resident and should form part of your planning at an early stage.
- Consider whether or not your Wills need updating in contemplation of your move to the UK.
- Finally, consider the tax implications and reporting requirements that may arise for you in any other relevant jurisdiction for your assets, income and gains and for any actions that you take.
Here at The Fry Group have helped hundreds of people move to the UK from overseas. We have an office in Hong Kong with dedicated tax advisers and financial planners who can assist you with specialist UK tax advice for your move to the UK; help you with formulating a tax-efficient wealth strategy for life in the UK and assist you with Wills and reducing your UK Inheritance Tax liability.