AS THE UK faces a period of socioeconomic upheaval, increasing tax burdens and the growing cost of living crisis, many are pondering a life beyond its borders. The allure of lower taxes, more affordable living or better opportunities can be compelling – but such decisions are, from a tax point of view, often more complex than they first appear.

In todays’ Shipleys Tax brief we look at why just becoming non-UK resident may not in itself be enough to escape the dreaded UK tax net. In some cases, the UK’s long of arm of the taxman can reach individuals who previously believed themselves as unaffected. This brief article aims to provide general guidance on the current and upcoming non-resident tax obligations that follow you abroad, the potential traps for the unwary, and some of the important tax considerations that need to be addressed when contemplating a move from the UK.

If classified as temporarily non-resident, any income or gains earned during this period may still be taxed in the UK upon their return, just as if it had been earned while resident…

The Temporary Non-Residence Trap

The UK tax system is widely known for its anti-avoidance measures, including the ‘temporary non-residence rules.’ These rules target individuals who leave the UK temporarily to take advantage of tax benefits abroad but plan to return. If classified as temporarily non-resident, any income or gains earned during this period may still be taxed in the UK upon their return, just as if it had been earned while resident. There are suggestions that that staying non-resident for at least six consecutive tax years is advisable to avoid this trap, however this is needs to be approached with caution. Planning your departure date carefully and ensuring you remain non-resident for at least six tax years to avoid being classified as temporarily non-resident is one of the factors HMRC will look at. For the best solution, work with a tax adviser to structure your income or asset disposals during the non-residency period.

Double Tax Treaties and Split-Year Treatment

The complexities of double tax treaties often come into play when individuals find themselves potentially liable for taxes in multiple jurisdictions. In such cases, they might benefit from these treaties’ provisions, which can offer relief from double taxation. Split-year treatment can occasionally divide the tax year between periods of residency and non-residency, though this requires strict adherence to qualifying criteria. Review your eligibility for double tax treaties and split-year treatment. Conducting a residency analysis before departure to maximise treaty benefits and reduce double taxation will offer greater certainty.

Income Tax and Capital Gains Tax (CGT): How the UK Tax Net Reaches Beyond Borders

Non-residents are generally taxed on UK-sourced income. Certain types of investment income from UK companies can often be disregarded for tax purposes, but rental income from UK properties is still taxable in the UK even when non-resident.

Non-residents are generally taxed on UK-sourced income. Certain types of investment income from UK companies can often be disregarded for tax purposes

In the ever-changing CGT landscape, non-residents who once enjoyed immunity from CGT on UK assets have faced new rules since 2015. From 2015, non-residents became taxable on UK residential property disposals. Further, since 2019, this tax extends to disposals of all UK land, including commercial property and indirect disposals through ‘property-rich’ entities. Before leaving the UK, assess all UK-sourced income streams and evaluate the tax implications of any property or business asset disposals. Consider restructuring assets to minimise future CGT exposure.

UK Property Ownership: Ties That Bind

Owning property in the UK makes you subject to various tax obligations. Renting out a UK property whilst abroad leads to income tax liabilities and filing of additional paperwork with HMRC. Although the main residence relief can help reduce CGT on your property, this is restricted by stringent residency and occupancy requirements and any non-qualifying tax years since 2015 could limit the available relief.

Furthermore, the basic 90-day occupancy test complicates matters, especially for individuals who spend significant time abroad. However, designating one property as your main residence and monitoring qualifying occupancy days will help secure main residence tax relief. Additionally, those abroad need to register with HMRC for the Non-Resident Landlord Scheme if renting out any UK property. Those owning UK properties via limited company have different set of obligations which is beyond the scope of this article.

Inheritance Tax (IHT): Domicile is (still) a Decisive Factor

Inheritance tax isn’t based on residency alone but on domicile, a deeper, often permanent connection to a location. Currently, non-domiciled (“non-dom”) individuals may only face IHT on UK assets unless they gain deemed domicile status after 15 years in the UK, subjecting their entire estate to IHT. Leaving the UK can reduce this exposure, but the deemed domicile rule extends the IHT net for three additional years after losing actual domicile status.

After the 2024 Spring Budget, significant changes were announced regarding the taxation of non-UK domiciled individuals. From April 2025, the existing non-dom regime will be replaced by a residence-based system. Under the new rules, inheritance tax (IHT) will apply to worldwide assets if a person has been UK resident for 10 years. Conversely, non-residents will remain liable for IHT on their non-UK assets for 10 years after leaving the UK. This significantly extends the scope of IHT compared to the current deemed domicile rules, which require 15 years of UK residency.

From April 2025, the existing non-dom regime will be replaced by a residence-based system.

Evaluate your domicile status well in advance and plan a strategy that reduces or delays IHT liability. Consider creating trusts or transfer assets strategically to minimise exposure.

Meticulous Tax Planning is crucial to mitigate upcoming changes

Going forward, there will be a consultation on moving entirely to the aforementioned residence-based system, which will also determine how trusts will be taxed. Foreign assets in certain property trusts settled before April 2025 will continue to follow the old rules, but any trusts created after that date will be subject to the new residence-based regime. Trustees will be taxed on assets if the settlor has been a UK resident for 10 years, or if they have resided in the UK in the past 10 years​.

Given these changes, it’s crucial to stay informed as further details emerge during the consultation process, and seek advice if you think your estate may be affected. Keep in mind that the final implementation may be influenced by the results of the next general election​.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284

Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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The spring Budget delivers no surprises

IN WHAT WAS probably his last budget in the current parliament, the Chancellor of the Exchequer delivered his Spring Budget today. A timid affair with no real surprises, a symbol of a dying party on it’s last embers.

In today’s Shipleys Tax brief we look at some of the highlights and how it affects taxpayers.

Employees and self-employed

The expected 2% cut in the main rates of primary Class 1 and Class 4 NI was confirmed. From 6 April 2024, the rates will be as follows:

	Main rate	Rate above upper earnings/profits limit
Employees	8%	2%
Self-employed people	6%	2%

Disappointingly, there are again no changes to the rate or threshold applicable to employers.

Child benefit

The way that the high income child benefit charge operates has long been criticised, in particular the discrepancy that means that a family where each parent earns, say, just under the £50,000 withdrawal threshold can keep the full amount; but a single income household will lose the benefit if they earn more than £60,000.

The long-term solution offered will be to assess eligibility based on “household income”, but this will not be immediate. So in the meantime, from 2024, the withdrawal threshold will be increased to £60,000, and the rate of charge will be lower, at 1% for every £200 of excess income. This means that full withdrawal will not occur until adjusted net income is at £80,000.

Capital gains tax (CGT)

The current CGT rates applicable to gains made on disposals of residential property are 18% and 28%, depending on the individual’s level of income and the size of the gain. This compares to rates of 10% and 20% for other assets, e.g. listed shares. From 6 April 2024, the higher rate will be cut to 24%.

Note: The 18%/28% rates also apply to carried interest gains. Such gains will continue to be subject to these rates.

VAT Threshold

In a long awaited move, the VAT registration threshold will increase from £85,000 to £90,000 from 1 April 2024. The deregistration threshold will increase from £83,000 to £88,000.

Furnished holiday lets (FHLs)

The FHL rules treat short-term letting businesses in a similar way to trading businesses for the purposes of various tax reliefs (including business asset disposal relief), subject to availability and occupancy conditions being met. The FHL regime will be abolished from April 2025. Targeted rules will apply from 6 March 2024 to prevent a CGT advantage being gained via the use of unconditional contracts.

Stamp Duty Land Tax (SDLT)

Multiple dwellings relief will be abolished for transfers with an effective date falling on or after 1 June 2024. However, transfers where contracts have been exchanged on or before 6 March 2024 can still benefit from relief, subject to a number of conditions. This only applies to properties in England or Northern Ireland, as Scotland and Wales have their own devolved regimes.

Non-domiciled individuals

As predicted by this firm some last year, individuals that are UK residents but have a non-UK domicile (non-doms) can currently access a remittance basis which excludes foreign income and gains from the UK tax net unless they are remitted to the UK. Domicile is a general law concept. From April 2025, the non-dom status for tax purposes will be abolished. Instead, those arriving in the UK for the first time, or following a ten-year period of non-residence, will have a four-year foreign income and gains (FIG) regime, meaning they won’t pay UK tax on overseas income or gains for the first four years. The funds can be brought to the UK with no additional charges. After the end of the FIG period, tax will be paid on worldwide income and gains.

It is also intended that inheritance tax (IHT) will move to a residence-based system from April 2025. Details will be available following a consultation.

Other measures

• A new UK ISA with an allowance of £5,000 per year will be introduced.
• Personal representatives will no longer be required to seek commercial loans to pay IHT before applying for a grant on credit (from 1 April 2024).
• SDLT first time buyers’ relief will be extended to those who purchase new leases under a nominee/bare trust arrangement from 6 March 2024.
• The scope of agricultural property relief and woodlands relief will be restricted to UK property from 6 April 2024.

More to follow.

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HMRC HAVE ADVISED that they have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends (and/or distributions).

Unfortunately, this typical “wide net” approach from HMRC means that many individuals, perhaps including vulnerable ones, will receive HMRC letters which could be misinterpreted as an accusation of tax avoidance. If you have receive a letter, don’t panic.

In today’s Shipleys Tax brief we look at what you need to know about HMRC’s One to Many letter campaign and how to respond effectively to avoid escalation.

What is HMRC’s One to Many Letter?

The HMRC has initiated a campaign targeting taxpayers who may not have declared income from distributions or dividends. Using data from company year-end accounts, which show significant drops in profit and loss account reserves, HMRC is pinpointing individuals who might have received a distribution or dividend but not declared it on their self assessment tax return.

HMRC… have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends

The letter provides a 30-day window for recipients to either declare any undeclared income or to inform HMRC that all income has been accounted for. Ignoring the letter could lead to a compliance check and potential penalties.

Why You Might Have Received The Letter

HMRC’s usual method involves analysing publicly available company accounts to spot decreases in reserves and other factors, which could indicate dividend payments. However, this typically broad approach doesn’t account for dividends payments which may not be chargeable, e.g. they fall within personal and dividend allowances and are tax-free or issues relating to timing. Accordingly, if you’ve received such a letter, it may simply be part of this blanket strategy to ensure tax compliance but it’s best not to ignore it.

How to Respond to the Letter

If You Have Declared Everything:

• Contact HMRC using the details provided in the letter.
• Confirm that all necessary declarations have been made.

If You Need to Make a Declaration:

• Review your tax return and determine if there’s any undeclared dividend income.
• Visit the HMRC’s GOV.UK link on making a disclosure and use the specific online disclosure facility.

The Implications of Not Responding

Failing to respond to the HMRC’s letter can result in a compliance check and possibly higher penalties if undeclared income is discovered. It’s crucial to take action within the specified 30-day period stated in the letter. If they believe that they have no income to declare, the letter asks them to let HMRC know either by telephone or by email, again within 30 days. If they do not respond, the letter says that HMRC may open a compliance check and charge higher penalties.

Conclusion

The One to Many letter from HMRC is part of a proactive approach to tax compliance. If you’ve received one, take a moment to review your finances and speak to your adviser. With the right response, you can quickly resolve any issues or confirm your compliance, ensuring peace of mind and maintaining good standing with HMRC.

For further assistance or queries, please contact us by phone or email.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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THE USE OF so-called Alphabet shares has been a staple in the world of tax planning for some time. These types of shares generally allow for a flexible approach to how dividends are paid out to shareholders of a company, enabling a tailored distribution that can be adjusted according to the individual tax circumstances of the shareholders.

In today’s Shipleys Tax brief, we will cover the basic concept of Alphabet shares, their benefits and drawbacks, and the likely approach adopted by HMRC to their use.

What are Alphabet shares?

Alphabet shares are so named because they categorize shares into different classes, each denoted by a letter of the alphabet (e.g., Class A shares, Class B shares, etc.). This classification allows companies to assign different rights to each class, particularly concerning dividend payments. The flexibility in dividend allocation means that shareholders can be paid varying amounts, which can be adjusted to optimise their personal tax positions.

What are they used for?

Historically, Alphabet shares have been used as a popular method for family-run businesses to manage internal dynamics and tax liabilities. Families could allocate different dividend rights to members based on their involvement in the business or their financial needs, without altering the overall control or structure of the company.

They have also been employed in start-ups and growing businesses looking to reward key employees with a stake in the company without immediately giving away voting rights or an equal share in the distribution of profits. By issuing different classes of shares to employees, businesses could align staff interests with the company’s performance without giving away significant control.

Families could allocate different dividend rights to members based on their involvement in the business or their financial needs, without altering the overall control or structure of the company.

In corporate fundraising they provided a means to attract investment by offering variable dividend rights while retaining management control. This aspect is particularly attractive to small and medium-sized enterprises (SMEs) that are keen on securing capital but wary of outside influence over business decisions.

This flexibility makes Alphabet shares a valuable instrument for companies to structure their equity in a way that satisfied a multitude of shareholder requirements.

Tax Planning and Tailoring to Specific Needs

For certain commercial transactions, tax planning with Alphabet shares can be particularly useful in the right circumstances. Generally, you would find the following potential benefits:

– Minimise personal tax liability: shareholders can receive dividends up to the higher-rate tax threshold, effectively reducing their income tax liability.

– Utilise allowances and rates: shareholders can make full use of their dividend allowance and lower tax bands.

Minimise personal tax liability: shareholders can receive dividends up to the higher-rate tax threshold, effectively reducing their income tax liability.

– Planning for succession: Different classes can be allocated to future generations for long-term planning, without disrupting the current control of the company.

– Family estate planning: Alphabet shares can help in assigning income to family members in lower tax brackets where circumstances allow.

Not all a bed of roses…

While Alphabet shares offer flexibility as seen above, they come with a rack of potential drawbacks that can complicate their use.

– Administrative Burden: maintaining different classes of shares requires meticulous record-keeping and administrative oversight. Each class may have its own dividend schedules, voting rights, and restrictions, which must be managed and documented appropriately.

– Legal Challenges: alphabet shares can sometimes lead to legal challenges, especially if shareholders feel their rights are being impinged upon. Disputes may arise over the interpretation of rights attached to various classes, or if there are allegations of unfair treatment among shareholders.

– Corporate Governance: having multiple share classes can complicate corporate governance. The differing rights and privileges can lead to conflicts of interest and make decision-making processes more complex.

What sayeth the Taxman?

HMRC views Alphabet shares with a healthy degree of suspicion because they can be used to artificially manipulate income streams for tax advantages. One specific piece of anti-avoidance legislation (“the settlements legislation”) can apply if HMRC believes that Alphabet shares are being used to divert income to someone else and reduce tax liability.

In the context of family businesses, the use of Alphabet shares for estate planning must be done with caution. HMRC may challenge arrangements that appear to be designed to avoid inheritance tax, particularly if shares are rapidly transferred between family members in a way that seems to be timed to minimise tax liability for example.

HMRC views Alphabet shares with a healthy degree of suspicion because they can be used to artificially manipulate income streams for tax advantages.

As such, if not structured correctly, the arrangements can be easily challenged under these anti-avoidance regulations, leading to the tax advantages being negated, tax investigations and potential penalties.

Conclusion

Alphabet shares can be a useful tool for tax planning when used correctly. They allow for a high degree of flexibility and can be tailored to meet the specific needs of both the company and its shareholders. However, their use must be considered carefully, with a clear understanding of the potential pitfalls and the close scrutiny they attract from HMRC. As always, when considering the use of Alphabet shares, it is prudent to seek professional advice to ensure that they are implemented effectively.

For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking any action.

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