“Why, Sir, you find no man, at all intellectual, who is willing to leave London. No, Sir, when a man is tired of London, he is tired of life; for there is in London all that life can afford.” – Dr Samuel Johnson.
Perhaps London is not the UK. Perhaps a “man intellectual” would not choose to leave either.
But a man (or indeed woman) who is entrepreneurial, a citizen of the world by virtue of their background and lifestyle, and whose business is global and digitally-enabled (or better still digitally-native), could well be tempted to consider relocating.
While, traditionally, international mobility away from the UK may have been most prevalent (and naturally so) among those born and domiciled outside the UK, the reduction of tax advantages for business owners on exit in the form of capital gains tax (“CGT“) “entrepreneurs’ relief” (now known as “business assets disposal relief”) from £10 million to £1 million; speculation about the possible equalisation of the rates of CGT (currently charged at up to 20% or 28%) and income tax (payable at up to 45%) off the back of an Office of Tax Simplification recommendation for a closer alignment of the two in 2021; and ongoing political uncertainty in anticipation of the next general election which is due by January 2025, are all factors contributing to an increasing trend of UK born and bred individuals moving abroad.
Such a move can be attractive from a personal tax perspective where the individual ceases to be UK tax resident and for as long as they remain so. This ensures that only their UK source income and property related gains are subject to ongoing taxation in the UK. This is subject to anti-avoidance rules where the individual resumes their UK tax residence within five years (“temporary non-resident“).
There can also be corporate tax advantages for businesses led by such individuals in certain jurisdictions, such as the Dubai International Financial Centre (“DIFC”), where new arrivals will additionally be invited to consider setting up a DIFC foundation, perhaps in conjunction with one or more trust structures in suitable jurisdictions, to hold and succession plan for the individual’s (newly acquired) global assets.
An aspect that is often overlooked, however, is that the individual’s domicile, and not just residence, determines their liability to UK tax.
In particular, where a non-UK resident who is actually or deemed domiciled in the UK establishes a trust or trust-like foundation (each a “settlement“), there is no CGT payable on the transfer of appreciated assets into the settlement. However, from a UK inheritance tax (“IHT“) perspective, there is an immediate entry charge of 20% on value contributed in excess of the settlor’s available nil-rate band (up to £325,000). This is topped up to the death rate of 40% if the settlor dies within seven years. Thereafter, there are ten-yearly and exit charges of up to 6% on value above the available nil-rate band during the life of the settlement. Therefore, creating a settlement shortly after relocating abroad and before the individual’s domicile has been confirmed to be outside the UK, can be an expensive mistake.
It should also be appreciated that an individual’s domicile does not re-set immediately upon their leaving the UK, if at all.
Where the individual is deemed to be domiciled in the UK by reason of their long residence (under the 15 out of the last 20 tax years rule) but not actually domiciled in the UK under the common law, following their leaving the UK, their deemed domicile will endure for IHT purposes for a further four tax years.
If an individual who is actually domiciled in the UK physically moves to another jurisdiction with the intention to live there permanently or indefinitely, they may acquire a domicile of choice in their new jurisdiction, but this is not an automatic process. The individual’s intentions for the future will need to be considered; they will be inferred from the surrounding circumstances, which must be consistent with the acquisition of a new domicile of choice. Such intentions may not always be present at the outset, but may develop over time. It is only when the twin elements of physical presence and the requisite intention are both present that a change of domicile to non-UK may occur. And even then, the individual will be deemed to be domiciled in the UK for a further three years.
Finally, individuals who have their domicile of origin in a territory in the UK should be aware that a domicile of origin tends to be adhesive and not easy to displace. Years of living abroad may be insufficient in establishing that the individual had left the UK never to return. Basing oneself long-term in a jurisdiction for business and family reasons, but with an intention to retire elsewhere outside the UK will prove damaging to a claim to having acquired a non-UK domicile.
Having a domicile statement prepared and periodically refreshed to capture the individual’s evolving circumstances and thought processes can help evidence the position. Maintaining meticulous records and ensuring that all correspondence (official or otherwise), testamentary documents, as well as public pronouncements where the individual is high-profile, convey a consistent message regarding the individual’s intention to make the new jurisdiction their permanent home are all aspects that can make all the difference when seeking to persuade HMRC or the tax tribunal – typically after the individual is no longer there to speak for themselves – of the individual’s non-UK domicile position.
Evaluating and evidencing a prospective settlor’s domicile status prior to their carrying out any wealth structuring involving settlements is fundamental. We have extensive experience advising on domicile matters and dealing with HMRC enquiries in this regard.