Leaving the UK: Q&As on international mobility

Residency status is the primary factor that will determine an individual's liability to UK taxation on their income and capital gains. The first thing to note is that even when a person 'moves' abroad they may still be UK resident for tax purposes.

The UK's test for tax residency is codified in statute in the Statutory Residence Test, which is made up of three component parts:

• Automatic Overseas Test - An individual will conclusively not be UK resident in a tax year if they spend 16 or fewer days in the UK (as a previous non-UK resident), spend 46 or fewer days in the UK (as a previous UK resident) or work full-time abroad.
  
  If an individual does not satisfy this test, they move on to consider the next test…
• Automatic UK Test - An individual conclusively will be UK resident in a tax year if they spend 183 or more days in the UK, have their only home (or homes) in the UK or work full-time in the UK.
  
  It is usually clear if an individual satisfies the Automatic Overseas Test or the Automatic UK Test. However, if they satisfy neither, the Sufficient Ties Test will determine their UK residency…
• Sufficient Ties Test - This test works by assessing how strong an individual's ties to the UK are. The only relevant ties for the purposes of this test are:
  • UK resident family (spouse/civil partner, co-habitee or minor child)
  • available UK accommodation
  • work (3 hours or more) in the UK on 40 or more days
  • more than 90 days in the UK in either of the previous 2 tax years
  • (for "leavers" only) more midnights in the UK than any other country.

According to the number of ties an individual has, they will be able to spend a prescribed number of days in the UK without attracting UK residence.

Under the Statutory Residence Test, an individual will be either UK resident or non-UK resident for the tax year in question.

UK resident – a UK resident individual will generally be subject to UK taxation on their worldwide income and gains. Yes – that means that if you remain UK resident, you will continue to be liable for UK tax even on income or capital gains from your new life abroad. UK-resident, non-UK domiciled individuals are an exception to this rule as they may prevent their non-UK source income and gains from being subject to UK tax by claiming the remittance basis of taxation.

Non-UK resident – generally speaking, a non-UK resident individual will only be subject to UK taxation on particular categories of UK-related income or gains. For example, employment income from duties performed in the UK, rental income from UK properties or gains on directly or indirectly held UK real estate.

It should be noted that certain anti-avoidance rules are in place to prevent individuals becoming non-UK resident, taking advantage of non-resident status and then resuming their UK residence shortly after. For example, an individual will not be able to avoid UK tax by becoming non-UK resident, crystallising a gain (at possibly lower rates abroad), then returning to the UK the next year. As a rule of thumb, an individual must be non-UK resident for 6 complete tax years to avoid falling foul of these rules.

Aside from residency, domicile is the other key factor that determines an individual's liability to UK taxation and, specifically, inheritance tax on the assets in their estate, or gifts made during their lifetime.

Everyone acquires a domicile on birth; usually being their father's domicile at the time of birth (a 'domicile of origin'). However, an individual's domicile may change if the individual moves to another country intending to live there permanently or indefinitely – the new domicile being known as a 'domicile of choice'.

UK domicile – an individual will be subject to UK inheritance tax on their worldwide estate. Yes – that means if you have a UK domicile, the assets in your estate will be subject to UK inheritance tax on your death (or potentially in respect of certain lifetime gifts) even if you no longer live in the UK at the time of your death (or the time of the gift).

Non-UK domicile – an individual will only be subject to UK inheritance tax on UK situated assets, including UK residential property (and indirectly held UK residential property).

Therefore, even if an individual does not spend a single day in the UK in a tax year, and does not hold any UK assets, they can still fall within the UK inheritance tax net – if they have a UK domicile and have not obtained a new (non-UK) domicile on moving abroad.

In practice, however, it is extremely difficult for an individual with a UK domicile of origin to abandon that domicile of origin – it often being described as having an adhesive quality. Even if an individual manages to lose their UK domicile under common law, they will still remain within the scope of UK inheritance tax for a further three years.

Finally, in certain cases, individuals may be deemed to be UK domiciled for UK tax purposes even if they are not actually UK domiciled.

There are a few options available to individuals who find themselves potentially at risk of being taxed in more than one jurisdiction. This may be particularly relevant to those relocating and below are some worked examples using our fictional taxpayer, Sophie, who is considering relocating from the UK to Spain.

Split-year treatment

As set out above, under the Statutory Residence Test an individual will be either UK resident or non-UK resident for the tax year in question – and that means for the whole of the tax year.

If Sophie decided to leave the UK to relocate to another country on 1 February 2022 but had already satisfied all of the requirements to be UK resident in the 2021/22 UK tax year under the Statutory Residence Test, she would continue to be UK resident until 5 April 2022 (i.e. even after she'd physically left the UK)!

This would be particularly problematic as most countries – Spain included – have a tax year that runs from 1 January – 31 December. Therefore, Sophie would likely be tax resident in Spain for the calendar year 2022 under Spanish rules, even when she was also UK tax resident until 5 April 2022.

In a certain number of special cases, 'split-year treatment' may be available to divide the tax year into a UK resident part and a non-UK resident part. For example, if Sophie were starting full-time work in Spain, she could claim to be UK resident from 6 April 2021 to 1 February 2022 and then non-UK resident from 2 February 2022 – 5 April 2022.

Double Taxation Treaties

Double Taxation Treaties are bilateral agreements between countries which, as their name suggests, are primarily aimed at reducing double taxation. The UK has an extensive network of Double Taxation Treaties, with over 100 agreements in place worldwide.

If Sophie were not able to claim split-year treatment, she could hope to rely on the terms of the UK-Spain Double Taxation Treaty to make sure that the income from her new job in Spain would only be taxable in Spain, and not also in the UK.

It should be noted that you may still have tax reporting and filing obligations in both jurisdictions, even if one may have primary taxing rights under the terms of the treaty.

Every country will have a different tax regime, often reflecting the country's economic and political landscape. Some jurisdictions also offer beneficial tax regimes for certain groups of people with a view to attracting them to live in the country.

Watch this space as in February we will be publishing an article summarising the tax regimes in various popular destination jurisdictions.

Succession

Under English law, we benefit from 'testamentary freedom', meaning that an individual is free to leave assets to whomever they wish upon their death. However, some countries – including the popular relocation destinations, such as France, Spain and Italy – have "forced heirship" regimes that dictate who must receive assets upon an individual's death. For example, in France 50 – 75% of an individual's assets must be left to their children.

The 'Brussels IV Regulation' allows an individual to potentially elect the jurisdiction whose laws will apply to the succession of property under their Will. This can be an invaluable tool to circumvent forced heirship regimes.

Marriage, Partnerships and Divorce

By moving abroad, an individual may be removing themself from the scope of the UK Courts should a divorce or a marital/partnership dispute arise.

A relocation may also impact the effectiveness of a pre-nuptial agreement. Different jurisdictions have different approaches to such agreements and moving to certain countries may effectively invalidate a pre-nup. Couples may wish to put local or multi-jurisdictional agreements in place to ensure the effectiveness of their agreements.

Companies, Trusts & Other Vehicles

The legal and tax treatment of a structure in one country may not necessarily be the same in another – for example, the classification of trusts in many civil law jurisdictions is often unclear, with many resorting to introducing specific regimes often with adverse tax and/or reporting obligations (e.g. France). Similarly, certain body corporates may be regarded as tax transparent in one country but potentially opaque in another (e.g. limited liability partnerships, limited liability companies).

The UK's test for company tax residency is the 'central management and control' test, and many countries have similar rules in place. An individual's relocation abroad presents a real (and potentially expensive) risk that the residency of any company the individual is a director of could be impacted or there could be a risk of the company being treated as having a permanent establishment abroad. A similar risk exists in relation to trusts of which the individual is a trustee. It is also worth noting that foreign jurisdictions may have different corporate tax rates, different triggers for taxation and different reporting obligations.

Brexit is very much the 'elephant in the room' at the moment and, with the UK/EU trade deal still in its infancy, it remains to be seen exactly how it will affect those leaving the UK.

One thing is for certain, however – the immigration position for those wishing to leave the UK to live in an EU jurisdiction has been complicated as British nationals have lost the right of free movement that came with EU membership. EU Member States operate visa systems for non-EU nationals that will normally require British nationals to make visa applications in advance and possibly satisfy certain eligibility criteria for long term stays.

Those who already left the UK during the transition period and applied for settled status prior to 31 December 2020 (or who have yet to apply but satisfied the criteria prior to that date) will find themselves in a more favourable position than those who have not yet left.