Relocating from the UK to a low tax jurisdiction: Practical Considerations, Tax Implications and Benefits

Relocating from the UK to a low tax jurisdiction, such as Cyprus or the United Arab Emirates (UAE), can offer many potential benefits for business owners and entrepreneurs, including lower tax rates, access to new markets and enhanced privacy, writes  a consultant with London-based Sovereign (UK) Ltd.

Selling your business after relocating can also offer significant tax savings and other advantages, but there are a number of rules that need to be considered, such as the UK Statutory Residence Test (SRT), the temporary non-residence anti-avoidance rules, group relief on restructuring transactions and corporate tax exit charges.

This article will explore such considerations and their potential impact on individuals and businesses considering relocation and seeking to mitigate UK exit tax.

Low Tax Jurisdictions

Many low tax jurisdictions are in regions enjoying a high quality of life, including favourable climates, beautiful scenery, and access to desirable recreational activities. This can be an attractive benefit for those considering a move.

To use Cyprus and the United Arab Emirates (UAE) as two examples, the corporate tax rate in the former is 12.5%, which is significantly lower than the UK’s corporate tax rate of 25% and as far as the latter is concerned, most businesses operating in the UAE are not subject to local corporate tax.

Moving to a low tax jurisdiction may offer increased privacy, as these countries often have less stringent reporting requirements and may provide more robust asset protection measures.

Finally, relocating a business to a different jurisdiction can provide access to new markets and potential customers, as well as create opportunities for diversification and growth.

Advantages of Selling a Business After Relocation

Selling a business after relocating to a low tax jurisdiction can result in tax savings on the sale proceeds, because the capital gains tax (CGT) rates in the new country may be lower than in the UK. Many jurisdictions, including Cyprus, Malta, Switzerland and Singapore, relieve residents from CGT altogether.

Selling a business after relocating may simplify the exit strategy for business owners because they can focus on their new location and avoid the complexities of managing a cross-border transaction.

UK Statutory Residence Test

Individuals planning to move from the UK to a new country need to understand the UK’s Statutory Residence Test (SRT), which determines an individual’s tax residency status. If you spend 183 days or more in the UK in a tax year you will be resident in the UK for that year in almost all cases. But even if you spend fewer than 183 days in the UK in a tax year, it is still possible to be considered resident in the UK.

To determine your residence status under the SRT, it is first necessary to consider whether you meet any of the ‘automatic overseas tests’. If you do not, you must then consider whether you meet any of the ‘automatic UK tests’. If you do not meet any of the automatic overseas tests or automatic UK tests, you will have to look at the ‘sufficient ties test’ to determine your tax residence position.

Automatic Overseas Tests

If you meet any of the automatic overseas tests, you are automatically non-resident for the tax year. The three main automatic overseas tests are as follows:

• You were resident in the UK in one or more of the three previous tax years, and you spend fewer than 16 days in the UK in the tax year under consideration.
• You were resident in the UK for none of the previous three tax years, and you spend fewer than 46 days in the UK in the tax year under consideration.
• You work full-time overseas for the tax year under consideration with no ‘significant break’, you spend fewer than 91 days in the UK in the tax year, and you work for more than three hours in the UK on fewer than 31 days in the tax year.

Automatic UK tests

If you meet any of the automatic UK tests (and do not meet any of the automatic overseas tests), you are automatically resident in the UK for the tax year. The three main automatic UK tests are as follows:

• You spend 183 days or more in the UK in the tax year under consideration.
• You have a home in the UK for a period of more than 90 days and you are present in the home on at least 30 separate days.
• You work full-time in the UK for 365 days or more with no significant break from UK work. The generally covers two or more tax years because the 365-day period will typically straddle two years.

Sufficient Ties Test

If you do not meet any of the automatic overseas tests or automatic UK tests for a tax year, you will need to use the sufficient ties test to determine your tax residence status for the tax year. The ties that you must consider differ slightly depending on whether you were resident in the UK for one or more of the preceding three tax years, but are generally as follows:

• Family tie
• Accommodation tie
• Work tie
• 90-day tie
• Country tie (only if you were resident in one or more of the previous three tax years).

Proper planning is essential to ensure that an individual has genuinely become non-resident for UK tax purposes after relocating.

Temporary Non-Residence Anti-Avoidance Rules

The Temporary Non-Residence (TNR) anti-avoidance rules are designed to prevent a formerly UK-resident individual taxpayer from taking advantage of a short period of non-residence to realise income or capital gains – typically in the context of close company distributions, chargeable event gains and lump sum pension distributions – outside the UK to avoid UK taxation on the receipt.

The TNR rules apply if the taxpayer has been UK-resident in at least four of the seven years prior to the date of departure from the UK and becomes UK-resident again within five years of that date. It is essential to be aware of these rules and their potential impact when planning a move.

Group Relief on Restructuring Transactions

When considering the relocation of a business or group of companies, it is important to be aware of the potential implications of group relief on restructuring transactions. Group relief is a mechanism that allows UK companies within the same group to offset losses against the profits of other group members. If a restructuring transaction takes place as part of a relocation, the availability of group relief can be affected. Careful planning is therefore necessary to ensure that tax efficiency is maintained during the restructuring process.

Corporate Tax Exit Charges in the UK

Companies moving their tax residence from the UK to another jurisdiction may face UK exit tax on businesses in the form of corporate tax exit charges. When a company ceases to be a UK tax resident, it may be subject to a variety of business exit taxes designed to capture::

• Any gains accrued on capital assets whilst the company was resident in the UK.
• Any profit arising on disposal at a market value at the time of exit of intangible fixed assets, financial loan relationships and derivative contracts.
• If the company is trading, it will be treated as ceasing to trade when it ceases to be UK tax resident and will be required to take into account the value of its trading stock, at its market value, when calculating the profits of the trade.

These corporate exit tax charges apply to companies that cease to be UK tax resident while still holding chargeable assets. If a company moves its central management and control to a jurisdiction like the UAE, it may still be subject to UK exit tax liabilities.

UK Exit Tax for Individuals

Although the UK imposes no general or limited exit taxes on individuals who are emigrating, an individual will continue to be liable for Income Tax and Capital Gains Tax (CGT) for the remainder of the tax year in which they emigrate.

However, there is one significant exception: the UK exit tax re-entry charge. This rule states that an individual who emigrates and spends less than five tax years outside the UK, and then returns, is liable to CGT on disposals of assets made during the interim years when they were not resident. The liability arises in the year of return. This provision extends UK CGT to former residents who emigrate and spend less than five years outside the UK.

Key Considerations for UK Exit Tax Planning

Relocating from the UK to a low-tax jurisdiction can offer numerous benefits but can also impact all areas of financial planning, including:

• Capital Gains Tax (CGT) on UK assets
• Income Tax obligations after leaving the UK
• Investment portfolios and UK tax ties
• State benefits eligibility after relocation
• Pension plans and potential exit tax implications
• Private residence and property disposals
• Inheritance Tax (IHT) planning and Wills

Proper planning and consultation with tax professionals can help reduce UK exit tax exposure and ensure compliance with relevant regulations.

How Sovereign can Assist with Relocation

Sovereign is a global corporate and trust services provider, which can assist with establishing structures to facilitate relocation, market entry and business exits. It is essential, however, that any action should only be undertaken in conjunction with independent tax advice from professional advisors. Sovereign is well-equipped to collaborate with professional advisors to ensure a smooth transition for individuals and businesses contemplating such a move, regardless of the intended country of relocation.

For any further information, please contact Peter Fenyves, a consultant with London-based Sovereign (UK) Ltd., by telephone at +44 (0)7498 378972 or by email below.