Tax planning for individuals relocating to the UK

As the COVID regulations are eased, it is expected that more people will relocate to the UK. So, let us explain the restrictions and tax rules on transferring money from overseas accounts to UK residents who are not permanent residents of the UK, as well as some tax planning such individuals can do before becoming UK residents for tax purposes.

Basically, when you become a tax resident in the UK, you are potentially exposed to UK taxes on their worldwide income and gains. However, an individual who is UK resident but not permanently residing in the UK (‘resident but not domiciled’) can claim certain tax benefits and not be subject to UK taxation in relation to foreign source income or capital gain, provided the income or gain is not brought to, or directly or indirectly used in, the UK. This is called the “remittance basis” taxation which, in case of long-term residents, can be claimed by paying the appropriate fees.        

However, even if the remittance basis is claimed, if you transfer money into the UK to fund, for example, living expenses or property acquisition, you may be subject to UK income tax or capital gains tax, unless the fund is from what is known as “clean capital”.       

Clean capital basically refers to the income or profits accrued before you become a tax resident in the UK under the Statutory Resident Test (SRT) and, in principle, means capital that can be remitted to the UK without paying additional UK taxes even after you become a UK resident. The most common clean capital may include capital accrued from foreign income and profits prior to your becoming a tax resident in the UK or gifts and monies received by way of inheritance.       

So, with the right tax planning advice, some individuals may be able to live in the UK by transferring clean capital without paying taxes during their stay in the UK.

However, if the funds transferred are from a bank account in which untaxed income or profits arising after you became a UK resident are paid, the funds create “mixed funds” and taxes are applied according to the complex mixed fund remittance rules. In broad terms, the mixed fund remittance rules simply assume that the remitted funds came from the component of the funds that is subject to most unfavourable tax. In other words, the fund is regarded as being transferred firstly from untaxed income to which up to 45% income tax rates apply, then from capital gains to which the maximum 28% tax rates apply, finally from clean capital. Also, special care should be taken when transferring mixed funds to another bank account before transferring them, as this can cause more problems.                  

Therefore, individuals planning to relocate to the UK should give due consideration to whether the necessary measures are in place to create and preserve clean capital as part of their pre-arrival planning before becoming UK tax residents. It is one of the most important tax planning to be done for individuals moving to the UK; however, unfortunately, most individuals lose the valuable tax saving opportunities because they do not perform tax planning before their arrival to the UK.  

First, if you are relocating to the UK, you need to understand when to become a tax resident in the UK, as these tax planning can only be done before you become a tax resident in the UK. UK tax residence status is different from residence status for immigration law purposes and is determined mainly by the SRT. These rules are complicated so you should seek advice to determine if and when you have become a UK tax resident. In addition, you must accurately segregate and preserve the clean capital from your assets so that the clean capital does not get mixed with the income and profits accruing after you become a UK tax resident.

For clean capital to be properly segregated from income and profits, it must actually be segregated into a separate and different account. This is because if clean capital is not held in a separate account, it becomes part of the mixed fund and becomes subject to UK tax. For example, even if you create a separate clean capital account, if the interest paid to that account is deposited into the same account, it is considered a mixed fund.      

As a basic tax planning tip, it’s a good idea to have following separate bank accounts:

• A “clean capital account” with deposits of foreign income and profits and inheritance or gifts accrued prior to the owner becoming a UK resident.   
• An offshore accrued interest account.       
• A “capital gains account” to deposit profits received from the disposal of investments or assets after becoming a UK tax resident.         
• A “capital loss account” to deposit sales proceeds where the disposal of investments or assets resulted in loss after becoming a UK tax resident.   
• A “foreign income account” for depositing other foreign income.                     

You should also consider realising income and profits before becoming a UK tax resident. Also, if you plan to receive dividends, we recommend that you file a dividend declaration for the relevant company before becoming a UK resident.  

There are also other pre-UK arrival planning which you should consider to make your affairs as efficient as possible. You should consider seeking expert advice on the matters listed below.

• Review your non-corporate structures. There may be UK tax liabilities where there are UK resident directors or shareholders.
• Consider establishing asset protection structures such as trusts. 
• Review investments, investment holding structures and invest wrappers. Some of them maybe unsuitable for UK tax residents.

In summary, clean capital separation is one of the most important tax planning for individuals relocating to the UK. However, the availability of this tool is subject to the individual’s UK tax residence status and the law in this area is technical and complex. Individuals relocating to the UK must therefore seek advice as early as possible and implement the plan carefully. 

Legal Disclaimer

The information contained in this article is provided for information purposes only and is based on the law current at the date of the article. This article should not be construed as legal advice on any subject matter, and you should always consult a professional adviser with your specific tax issues or questions. We disclaim all liability for actions you take or fail to take based on any content of this article to the fullest extent permitted by law.