Foreign Investment And Tax

With property investment in many locations increasingly linked to residency status, good tax planning is essential and nowhere more so than in the UK, as Saule Voluckyte, Partner of PKBUL (Private Client) LLP explains

Ten years ago, if you were looking to invest in a bolt-hole in a country where you could automatically qualify for residency, pickings would have been slim. Today, more than 20 countries offer residency or citizenship through the acquisition of property. Growing wealth in emerging economies, coupled with ease of international travel, banking and communication, have fuelled demand for a new life in foreign climes.

Nearly every jurisdiction taxes individuals who are resident and non-resident individuals if they source income or capital from that jurisdiction. Those tax systems that are based on citizenship, domicile and residence, tend to tax individuals on their worldwide income and assets. The ultimate right to tax rests with the country where the individual has a permanent home, the centre of vital interests, habitual abode or nationality with presence in the territory for 183 days the standard period of time for residency status to apply. In the case of the UK, the government has a statutory residence test in place to determine qualification as a UK resident. This evaluation comprises three parts: the automatic overseas test, automatic residence test and the sufficient ties test.

An individual who owns a home in the UK qualifies as ‘resident’ under the automatic residence test. Having accommodation available in the UK is considered a ‘tie’ under the sufficient ties test. In both cases - the tax year can be split with the individual found to be non-resident for part of the year and resident for the remainder.The system of taxation is also based on domicile, with three categories in play: domicile of origin (father’s domicile), domicile of dependence (children under the age of 16 or as a married woman married before 1 January 1974), and domicile of choice. A newcomer with no previous ties to the UK can become domiciled in the UK, if the intention is made to remain permanently and sever ties with their country of origin.

Individuals who are not domiciled and not resident, but own and let real estate in the UK, incur UK income tax on rental income. Capital gains tax applies only to UK residents if they sell their UK assets. Anti-avoidance provisions apply. Each tax year, individuals who are resident, but not domiciled in the UK, may choose to be taxed on a remittance basis. This means they are taxed on overseas income and capital gains only if these are brought to, or enjoyed, in the UK. Individuals who do not make this claim, are taxed on an arising basis on all worldwide income and capital gains. Long-term residents who claim remittance are liable for remittance charge.
Non-domiciled individuals resident in the UK and claiming remittance basis are advised to maintain separate bank accounts offshore for non-taxable capital, foreign capital gains and foreign income. Failure to do so creates a mixed fund, which results in higher rates of taxation on funds remitted to the UK.

Non-domiciled individuals resident in the UK who bring funds to the UK for business investment purposes, may claim business investment relief. Any foreign income or gains brought to the UK are treated as not remitted. Under UK inheritance tax rules, an individual who was resident in the UK for at least 17 out of 20 tax years, or if that individual was UK domiciled at any time in the past 3 previous years, is deemed domiciled in the UK. Their worldwide assets will therefore be subject to UK inheritance tax.

Inheritance tax situs rules apply to property located in the UK. Real estate owned by an overseas individual is taxable in the UK even if the individual is not resident and not domiciled in the UK. In the UK, non-EEA nationals can obtain an investor’s visa (investment of £2m in UK government bonds) or entrepreneurship visa (£200,000 investment in business), but investments in real estate do not qualify.
saule.voluckyte@pkbul.co.uk