RISK MANAGEMENT AND TAX COMPLIANCE FOR FAMILY OFFICES
11 / 08 / 2021
Family Offices – tax compliance during the pandemic
As well as the standard tax compliance themes with which a family office must deal, the past year has presented a new issue as a result of the Covid-19 pandemic. This relates to tax residency. In the UK, there have been, to date, three national “lockdowns” during which travel bans have been imposed in respect of leaving the UK. This has led to members of internationally mobile families, who have been here temporarily during the course of the pandemic, becoming “stranded” in the UK for a prolonged period.
A Covid-enforced stay in the UK can impact on tax residency status for both the individual personally and any companies or trusts with which they are associated. In the UK, there is a statutory test in Finance Act 2013 to determine whether an individual is resident for UK tax purposes. There are different tests for different circumstances but these all involve an element of day-counting. Days spent in the UK due to “exceptional circumstances” can be discounted.
The UK government confirmed in March 2020 that days spent in the UK for reasons relating to the pandemic, including the closure of international borders or the UK government’s advice not to travel, would constitute “exceptional circumstances”. This concession is helpful but there are two important points to note. Firstly, the maximum number of days that can be discounted is 60. Individuals who have followed the government’s travel advice since March last year will have exceeded this limit. Secondly, the “exceptional circumstances” rules do not apply to all the day-counting elements of the statutory residence test. For example, those who have come to the UK to work could potentially become UK tax resident (subject to other factors) if they work in the UK for more than three hours on at least 40 days, with no discounts permitted. Professional bodies in the UK have been in dialogue with the government on extending the “exceptional circumstances”. concession, but so far without success.
Family offices should therefore take advice in relation to any affected family members for the tax year ending 5 April 2021. Becoming UK tax resident will bring an individual within the scope of UK income tax and capital gains tax. However, if a double taxation agreement applies and an individual can rely on the “tiebreaker” tests, the UK government have stated that tax treaty residence will not change as a result of spending time in a temporary location.
As well as personal tax, the family office must consider the potential impact on non- UK companies and trusts within the family office structure. If a director, stranded in the UK during the UK’s Covid restrictions, takes significant decisions relating to the company in the UK, there is a risk that the company could be deemed to be “centrally managed and controlled” here and the company subject to UK tax on its profits. The UK government has not made any Covid-related concessions in respect of corporate residency. Affected directors should consider deferring major strategic decisions until they are outside the UK wherever possible and keep accurate contemporaneous records of all meetings.
Being able to show a historic record of decision making outside of the UK over a longer period could be persuasive. Trustees of non-UK trusts should also take advice but unless the unexpected UK residency of a trustee causes all of the trustees to be UK tax resident or the settlor of the trust was resident, domiciled or deemed domiciled when they set up or added funds to the trust, the tax residency of the trust for UK purposes is unlikely to be affected.
This article was first published in the Global Family Office Community (GFOC) Journal and if you wish to view the full journal, please click here.