Becoming a UK Tax Resident - what do I need to consider?

As the aftermath of Brexit settles, the UK remains an attractive place to do business with a wealth of talent and technical resources.

We see many businesses choosing the UK to set up new ventures and our international team are well placed to help such businesses with their professional services. 

As part of setting up a new business, individuals may relocate to the UK for the longer term and as a result fall into the UK tax system for the first time. This article looks at some of the things these individuals may need to consider before they arrive.

UK Tax Residence

UK residence is determined under the Statutory Residence Test (SRT) which sets out a number of rules for whether an individual will become UK tax resident.

Those temporarily seconded to the UK for a short period or who travel substantially will need to consider the terms of the SRT to assess whether they will fall to be considered UK tax resident.

We have produced a factsheet on the application of the SRT.

It is crucial to note that the UK tax residence rules are different to the legal requirements which must be met to live and work in the UK.

In advance of any move to the UK a person must ensure that they have the correct visas and meet the legal requirements to allow them to do so. Trying to obtain the relevant permissions once already in the UK can be far more difficult, if not impossible, and professional guidance should be sought at the earliest opportunity.

Why does UK tax residence matter?

Although it is possible to be tax resident in two places at once, in this article it is assumed that a person becomes solely UK tax resident. This means they become subject to UK tax on their worldwide income.

For those with significant assets outside the UK, this could result in an unexpected tax liability as a result of the move, and an increased tax burden in respect of the overseas assets.

Recent changes to the Stamp Duty Land Tax regulations can also mean that certain taxpayers relocating suffer a higher rate of UK tax on the purchase of a UK property.

For those with significant assets overseas, planning pre-arrival is key.

Some common areas which we assist clients with are discussed below.

Asset rebasing

As noted above, an individual is subject to UK taxes on their worldwide income and gains whilst UK tax resident (subject to a claim for the remittance basis – discussed below).

Where an individual owns non-UK assets such as stocks and shares which are standing at a gain, if they are sold within a period of UK tax residence they will be subject to UK tax.

Depending on the tax implications in their current jurisdiction of residence, selling such assets and repurchasing them may allow such gains to be crystalised prior to UK tax residence and thus protected from UK taxation.

Timing UK property purchases

An individual moving to the UK for the longer term may wish to purchase a UK property and historically may have done so in advance of arrival in the UK.

Purchasers of UK property are required to pay Stamp Duty Land Tax (SDLT) based on the purchase price.

However, recent rule changes taking effect from 1 April 2021 mean that non-UK residents purchasing UK residential property will be subject to a higher rate of SDLT on a property purchase  - a surcharge of an extra 2%.

To further complicate matters further, the SDLT definition of UK residence varies from the SRT definition discussed above.

If purchasing a property, a taxpayer must therefore take great care to understand at what point they will be considered UK tax resident for SDLT rules to make sure that they do not unwittingly suffer the extra 2% charge.

See our article on Stamp Duty trap awaits returning ex-pats.

Bank account structuring

For those considered to be non-UK domiciled a special basis of taxation exists.

Domicile status is different to UK tax residence and relates to a person’s longer term intentions.

See our factsheet on domicile for further information.

When a non-UK domiciled individual first becomes UK tax resident, all of their capital at that point will be “clean” and can be brought to the UK without tax implications.

From the moment a person becomes UK tax resident, income and gains arising overseas are potentially within the scope of UK tax. As income and gains begin to arise, a taxpayer’s clean capital can very swiftly become muddled by income and gains that will be subject to UK tax. 

Example

Take for example an individual with £1m in a non-UK bank account all accrued before they first become UK tax resident. In the first 6 months as a UK tax resident they receive dividends from overseas companies and income from their non-UK rental properties which is paid into the non-UK bank account amounting to £100,000.

After 6 months they decide they would like to purchase a flat in the UK and need to use £500,000 of the funds in the non-UK account to make the purchase. Unfortunately, even though the bank account has £500,000 from before they became UK tax resident, The UK's HM Revenue & Customs (HMRC) will consider that the £500,000 brought in will include the £100,000 of foreign dividends and rental profits and will subject these to UK tax.

Had the same individual planned before they arrived for all of their non-UK income to go into an entirely new separate non-UK bank account from the date at which they became UK tax resident and kept it away from the original non-UK bank account, they would still be able to access the £1m with no UK tax charges.

This is a good example of how a taxpayer giving some thought pre-arrival to what funds they may need to support their UK lifestyle can enable them to take actions before they arrive to give them access to their overseas funds in the most tax efficient way. 

How can Bishop Fleming help?

The above are just some of the common areas we look at in advance of clients relocating to the UK and should be considered as part of wider intentions.

For anyone considering relocating to the UK, we can help them understand their personal exposure to UK taxes and any actions which can be taken to improve the position.

We also have a strong network of professionals across all disciplines to assist with visa applications, property purchases, banking arrangements and many more practical matters that can arise as part of a relocation. 

Further information

For more guidance and advice check out our Employer Solutions and International Advisory Knowledge Hubs.