Liquidity event in the pipeline? If so, you essentially have two options - stay in the UK and pay tax or relocate. UK resident clients with a liquidity event in the pipeline might well consider whether now is the time to relocate.
There are UK tax reliefs for disposals of business assets, and it may be possible to structure sale consideration to maximise the impact of those reliefs but, for those with a less strong connection to the UK, the possibility of relocating and, potentially, paying no tax might well appeal. We are increasingly receiving enquiries from clients regarding their relocation options. These include enquiries from UK resident 'non-doms' (particularly since the announcement of proposed changes to the non-dom regime at the last Budget in March), but also enquiries from UK resident and domiciled individuals with a liquidity event in the pipeline (eg, a sale of their business).
For those individuals who are open to relocating, the options are no longer limited to a number of small (but perhaps unexciting) traditional 'tax havens'. Instead, Western Europe is awash with jurisdictions actively trying to court wealthy foreigners, to come and reside (and spend money) in their jurisdiction with attractive inpatriate regimes. But as clients' plans transition from idea to reality what is it that they should be considering?
The process of relocation can be broken down into four main phases: an exploratory phase, in which clients need to consider practicalities and the implications of the move; planning (to ensure that the main elements have been properly considered, including taking tax and legal advice in the UK and the new country they are moving to); the actual move, and the period following the move.
It shouldn’t be a surprise to readers that things often do not progress beyond the exploratory phase. For some, their connections to the UK are simply too strong to envisage moving abroad for a prolonged period, however attractive another jurisdiction's inpatriate regime may be. For those whose connection to the UK is less strong, relocating presents the possibility of benefiting from what are, in some cases, incredibly advantageous tax regimes.
In many cases, these regimes exempt individuals from tax on income and/or gains provided such income and/or gains arise outside the jurisdiction in which they are then resident. In some cases, the regime is 'free' (eg, in Spain), although there are stipulations as to the basis upon which the individual is becoming resident in the jurisdiction (typically linked to the individual working there). In others, the regime is available for a flat fee (typically around €100,000 a year) as is the case in Italy and Greece (and there are no such stipulations with regards to working). Of course, whether the regime exempts income and/or gains will be of particular relevance to anyone who is looking to relocate with a view to mitigating tax on a liquidity event and in all cases it is therefore necessary to match the chosen jurisdiction with the client's specific tax objectives.
If a client is open to relocating, what do they need to consider?
Practicalities
Firstly, the client should consider certain basic practical questions. Have they spent much time in the chosen jurisdiction previously? Can they really see themselves living there? Do they like the climate? Can they speak the language? How will any children get on at the schools?
Immigration
The fact that the intended new country of residence has an attractive inpatriate tax regime will be irrelevant if the client cannot obtain the right to live and work there. Within the EU, moves between countries are simple for those with an EU passport; but for British clients without an EU passport (post-Brexit) or other non-EU passport holders, due consideration will need to be given to the chosen jurisdiction's immigration rules. In many jurisdictions, clients can obtain some form of investment visa; but it is important for clients to bear in mind that their chosen jurisdiction's tax and immigration regimes are likely to be separate processes (albeit two that can be managed concurrently).
Tax
As mentioned, it will be necessary for clients to match their chosen jurisdiction with their specific tax objectives. For example, if a client is looking to sell their business, it will be necessary that the inpatriate tax regime in their chosen jurisdiction exempts them from tax on chargeable gains (or can do provided they take certain steps). By way of example, Italy's 'flat tax' regime broadly caps an individual's liability to tax on non-Italian source income and gains at €100,000, but this does not apply to gains arising on disposals of 'qualified participations' (i.e., entities in which the individual has an interest of greater than 20%), However, such gains can be covered by the 'flat tax' by agreement with the Italian tax authorities if the individual commits to five years of residence in Italy; effectively capping an individual's liability in respect of a potential business sale at €500,000 (being five years of the annual €100,000 flat tax).
Returning to the UK
Clients who plan on subsequently returning to the UK should be prepared to be non-UK tax resident for six complete tax years to ensure that the tax they have mitigated by moving abroad is not brought back into charge when they return. Anti-avoidance rules subject certain income and gains (typically including those arising on major liquidity events) which arise to an individual in a period of 'temporary non-residence' to tax on the individual's return to the UK.
In light of proposed changes to the UK inheritance tax rules, announced in March as part of the reforms to the non-dom regime, individuals who are prepared to relocate may now want to consider remaining non-UK tax resident for at least 10 tax years as, at least under the current proposals, they would then fall outside the scope of inheritance tax (even if they remain UK domiciled under general law).
Future use of the UK 'inpatriate' regime by non-UK residents
The proposed changes to the non-dom regime also include the introduction of a new four-year exemption regime for individuals who have been non-UK resident for the last 10 tax years. Individuals who meet the criteria will enjoy exemption from UK tax on their foreign income and gains for the first four tax years of UK residence even if they bring it to the UK, and without paying a fee. If these proposals are implemented as announced, we may well find non-UK residents with a liquidity event in the pipeline looking to the UK's attractive inpatriate regime!
We can advise clients in relation to the key aspects of relocation projects. In doing so, we typically work alongside strategic partners in the client's chosen jurisdiction whilst centrally managing the relocation process and providing a single point of contact for the client. If you have any questions about leaving the UK or about any aspect of UK tax, please do feel free to get in touch with our private client team.
Contact us
If you have questions or concerns about structuring considerations when setting up a business, please do not hesitate to get in touch with a member of our Private Client team.
This publication is not intended to constitute legal advice.
