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INDIVIDUAL NON-UK RESIDENT TAXATION

The United Kingdom is not tax haven, but it does have relatively low tax rates compared with some other European countries, and it offers exemption from tax for income from foreign investments for people who are resident but not domiciled in the United Kingdom. For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities.

The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few "visiting" residents will therefore have a United Kingdom domicile.

Foreign investment income is exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they can safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation. Note however that capital gains crystallised abroad during a period of residence are deemed to be remitted to the UK, and are then taxed. Some types of mutual or hedge fund impose capital gains unilaterally on members.

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We provide a fast online service for company registration, LTD company formation, and business incorporation in England, Wales and Scotland. When first setting-up a business there are many issues to consider. You need to decide whether or not to incorporate your business, and to choose a structure for your business. There are several types of legal business entities which you can choose to operate as. For more information on these choices, follow the links below. We advise that professional legal and financial advice is obtained before a final choice of business entity is made. Sole Trader (Self-Employed) Limited Company Public Company Company Limited by Guarantee Limited Liability Partnership Branch or Place of Business Coddan is a leading service provider in the field of English, Scottish and Irish company formation and company registration. We can help you in starting a business in England & Wales Scotland and Northern Ireland. Over 95% of our companies are incorporated within 6 hours. The electronic submission of information enables a fast company start-up satisfying all of the required legal formalities: a director, a secretary, a registered office and shareholders. Our electronic filing software has been approved by Companies House.

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American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of this UK possibility, but for all other nationals, it is available. This rule has led to many foreign celebrities making the UK their home for tax purposes.

The United Kingdom tax year runs from 6 April to the following 5 April. The Inland Revenue requires taxpayers to file an annual return of taxable income and gains arising in that period by 31 January in the year following the end of the tax year. For many individuals, all their tax is either collected and paid by their employer or otherwise deducted at source (e.g. on bank interest), so no return is required.

However, most individuals who pay tax at the higher rates and have sources of income other than from employment are likely to need to file a tax return.

LIABILITY - RESIDENCE & DOMICILE

An individual's liability to UK income and capital gains tax will depend principally on their residence and domicile status. The rules are complex, and specific advice should always be taken, but in general terms:

If you are not resident or ordinarily resident in the UK, you will be subject to tax on United Kingdom source income but not capital gains. If you are resident, but neither ordinarily resident nor domiciled in the UK, you are taxable on income and gains from United Kingdom sources (with the exception of certain United Kingdom government securities) and on foreign income and gains paid in, or remitted to, the United Kingdom. If you are United Kingdom resident and domiciled but not ordinarily resident, you are taxable on worldwide income (with the exception of certain United Kingdom government securities) and gains.

Domicile is a general law concept and broadly speaking, you are domiciled in the country where you have your permanent home. In this way, domicile is distinct from nationality or residence and an individual can only have one domicile at any given time. It is possible to have more than one tax residence.

CAPITAL GAINS TAX (CGT)

Generally speaking an individual is assessed to income tax in the United Kingdom if he is deemed to be UK resident for fiscal purposes. Unlike the United States citizenship is not a basis for levying income tax. Generally speaking a person is deemed uk resident for fiscal purposes:

In any tax year in which he lives in the United Kingdom for more than 182 days. If his visits to the United Kingdom exceed 91 days per tax year for 4 consecutive tax years in which case he is tax resident in the 5th year or alternatively from the commencement of the tax year in which he first stated his intention to make such visits to the United Kingdom. If he makes regular visits which are substantial, habitual and obligatory: such visits may indicate residence provided they exclude an element of chance and occasion and provided they follow an almost mechanical regularity.

An existing resident of the UK can become non-resident for tax purposes by being out of the country for at least one period of 365 days, during which he did not spend more than 91 days in the country, with days of arrival and departure not being counted. Non-residents are generally speaking only liable to uk income tax on income derived from:

Property situate in the United Kingdom. Any trade or profession carried on through a branch or agency in the United Kingdom. Any employment the duties of which are performed in the United Kingdom.

This rule has led to many UK nationals seeking to become non-resident by moving abroad. In the United States by contrast the mere fact of citizenship means that a US national living in a foreign country is still liable to pay income tax in America on his worldwide earnings with a credit being given for any taxes already paid or due in a foreign country.

UK non-residents do not pay tax on:

Interest from certain United Kingdom Government securities. Interest from UK-situate bank and building society deposits. However, it is no longer possible to avoid capital gains tax by arranging for a gain to crystallise during a short period of overseas absence: five years' of non-residence is required before a gain on an asset acquired during residence is exempt from United Kingdom capital gains tax. The new rules for taper relief have made this provision almost irrelevant, in fact.

Capital gains tax (CGT) arises on the disposal of assets. This covers a sale, gift or compensation for loss or damage to an asset. The value on which the gain (or loss) is based is normally the consideration received, less the acquisition cost. However, on a gift or on certain sales, the open market value is used instead.

The first £7,700 of an individual's net gains realised during the tax year are free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £1,920, 20% on the next £27,980 and 40% on the balance.

Taper relief is available to reduce the chargeable gain on disposals made after 5 April 1998. Different rates of taper relief apply to business assets and non-business assets. There are very generous rates for business assets, which include shares in trading companies. A number of other reliefs are available to reduce or defer the charge to CGT in specific circumstances.

Gains on certain assets are exempt (and losses not allowable). These include: an individual's or married couple's only or main residence; private motor cars; chattels worth less than £6,000, enterprise investment scheme and venture capital trust shares; government securities; qualifying corporate bonds and individual savings accounts.

NON-UK RESIDENT CORPORATE TAX PLANNING OBJECTIVES

The principal concerns in the corporate taxation field will often be to ensure:

That the overseas parent does not become resident in the UK for tax purposes (and it should be noted here that under UK tax law, a corporation can be resident in more than one jurisdiction). To isolate, so far as possible, the profits of the parent from the charge to United Kingdom tax.

UNITED KINGDOM CORPORATE RESIDENCE

Companies incorporated in the United Kingdom are UK resident for tax purposes. Companies incorporated outside the UK are UK resident for tax purposes if their central management and control is exercised in the UK. The place where the central management and control of a company is exercised has been determined under English law by reference to where its board of directors exercise their control, which is not necessarily where they meet. It is a question of fact in each case where the central management and control is exercised.

If in practice the central management and control of the overseas parent takes place in the UK, there is a risk that the United Kingdom Inland Revenue will claim that the overseas parent is for tax purposes centrally managed and controlled in the UK. It may therefore be prudent in such circumstances to arrange for a formal separation of the parts of the business carried on in the UK from those carried on outside the UK by the creation of a separate corporate entity to perform those functions within the United Kingdom.

A non-UK resident company which carries on trade in the UK through a branch is chargeable to UK Corporation Tax on the profits arising directly or indirectly through or from the branch. Clearly such a charge will arise if a branch operation is established and the difficulty then will be to agree with the UK Inland Revenue the amount of the overseas corporations profits which arise in that way.

The danger of a charge on the overseas parent also exists where a subsidiary company is established if it is done on the basis that the subsidiary is the parent's agent in the UK. In such a case it should be possible to argue (if careful internal procedures are followed) that it is the subsidiary rather than the parent that is trading in the UK and that therefore only the profits of the UK company, which are clearly identifiable, should be charged to UK Corporation Tax.

TRANSFER PRICING

All transactions between the overseas parent and a UK subsidiary are subject to scrutiny by the UK Inland Revenue to ensure that they are on an arm's length basis. Under the new self-assessment regime, the taxpayer is under a duty to ensure that its tax liabilities are on the basis of arm's length prices. Failure to do so will involve penalties and interest. It is now important to have evidence available as at the time prices are arrived at to justify the arms length basis, and avoid penalties if different figures have to be substituted for tax purposes.

Since they will be "associated companies" under the tax legislation, the United Kingdom Inland Revenue will be able to substitute for UK tax purposes arm’s length charges for services provided in the place of those charges actually made.

The UK Inland Revenue will expect a UK subsidiary to make a profit so it is prudent that charges should allow for generation of such a "profit" in the region of 10% of the costs incurred by the UK company in conducting its activities.

DEFINING STATUS

Whether a branch or subsidiary is used, it will be important that its activities are clearly defined and preferably documented in an agreement with the overseas parent. Where the overseas corporation wishes to avoid UK tax residence, it is particularly important that the UK operation does not have authority to conclude contracts on behalf of the parent.

CONTROLLED FOREIGN COMPANIES

Whilst the rules for taxation of "controlled foreign companies" (CFCs) are not directly relevant to setting up a UK subsidiary or branch, they could become relevant if a UK subsidiary eventually holds shares in overseas companies. The main purpose of the legislation is to counter the abuse of tax havens by companies diverting profits to low tax countries.

Under the provisions of Income and Corporation Taxes Act 1988 relating to CFCs, companies are required to compute their tax liability including the profits of any CFCs.

There are a number of exclusions whereby the CFC rules do not apply such as where the chargeable profits of the foreign company for the accounting period do not exceed £20,000 where the foreign company is situated in a territory which does not have a lower level of taxation, where the foreign company follows an "acceptable distribution policy" or where the main motive is not to divert profits out of the UK.

The Government announced several changes which tighten the CFC regime. From 21 March 2000 the definition of control is changed from 50% to 40% i.e. a company not resident in the UK will be regarded as a CFC for UK tax purposes if it is at least 40% controlled by a United Kingdom company and at least 40% controlled by a foreign company.

IMPORTANT NOTE

Our corporate, tax and securities lawyers have extensive experience in the issues involved in all type of business entities, including corporations, private limited companies, public companies, limited liability companies, limited partnerships, general partnerships, limited liability partnerships and professional associations. Our lawyers advise clients in the choice of entity to utilize for any given business venture. Such advice includes the tax advantages of the respective entities as well as the non-tax or business issues involved in each type of entity.

Our lawyers continue their representation of such entities on an ongoing basis and advise the entity and its owners regarding the business issues which arise from time to time (such as labor and employment issues, tax issues, negotiating contracts, securities issues and licensing and regulatory matters). Our lawyers also represent many entities which are involved in negotiating mergers with other entities or acquisitions of other entities. This representation includes advising the business and the owners on the purchase or sale of a business and on tax-free mergers or other reorganizations of business entities, as well as structuring divisions of an existing entity into two or more new entities.

We structure a variety of commercial lending transactions including corporate loans, real estate development loans, asset based loans, agri-business loans, floor plans and home builder lines of credit. Members of our firm advise financial institution clients and their corporate counsel on a daily basis with respect to general lending issues including those relating to UK and Cyprus documentary stamp and intangible taxes, bankruptcy and creditors' rights, environmental concerns and problem loans. We have extensive experience in complex loan workouts.

The firm's Trusts and Estates attorneys specialize in estate and trust administration matters and the development of estate tax planning strategies designed to help our clients achieve maximum savings in income, estate, gift and generation skipping taxes. Our Trusts and Estates attorneys handle the traditional aspects of personal estate planning, such as the preparation of revocable trusts, wills and irrevocable trusts, and also deal with all aspects of tax controversies with the Internal Revenue Service dealing with estate, gift and generation skipping tax, including filing estate and gift tax returns, representing our clients in audits of those returns, and appeals to the IR and courts of proposed tax deficiencies.

Our attorneys monitor the latest developments in both tax and non-tax laws affecting estates and trusts and lecture extensively on those subjects around the country to numerous professional groups and organizations. The firm's Trust and Estate attorneys are proficient in analyzing and implementing the latest techniques to reduce estate and gift taxes, including, for example, family limited partnerships, GRATS and charitable remainder and lead trusts.

The firm's Trusts and Estates attorneys also advise our clients on the income, gift and estate tax consequences of charitable gifts; handle the negotiation and preparation of marital agreements; provide asset protection planning for individuals; and have extensive experience in the establishment of private and publicly supported charitable organizations, international estate planning and estate and trust litigation, as well as post-mortem tax planning. We recognize that a client's estate planning needs and matters that arise in the course of estate planning and administration frequently require expertise in other areas of the law, and we work closely with the firm's attorneys in other practice areas, including litigation, real estate, corporate and tax, to provide our clients with thorough legal advice.

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Dear visitors, while having a chat session with a customer, we are frequently requested to give a piece of advice on tax planning or business structuring. We would like to inform you that it is against our principles to provide online advice pertaining to these issues. The points that may be covered during a session include service description, package or service price, navigation at our website, ways of making an order, methods of payment etc. Yet, if you wish us to provide you with advice on tax or business structuring, you should be aware that this service is chargeable.

If you have any questions please E-Mail or call us: 0800 081 1510 or +44 (0) 207 637 3881, fax: +44 20 7681 3318.