Moving abroad to avoid the 50% rate of income tax
Moving abroad to avoid the 50% rate of income tax
As the top rate of income tax (officially known as the 'additional rate') has increased to 50% as from 6 April 2010, we're often asked "Can I move abroad to avoid this 50% tax rate?".
There are two key issues to consider. Firstly there's your residence status and secondly there's the type of income.
Residence status
If you're UK resident you will remain within the scope of UK income tax on your worldwide income and gains (we'll assume your UK domiciled as well for the time being). Therefore to stand any chance of avoiding the 50% tax rate you would need to lose your UK residence status.
Once you've lost your UK residence status you'll then only be subject to UK income tax on your UK income. So you'll have an immediate benefit in that your overseas income won't be subject to UK income tax.
This means overseas rental income, employment income, trading income and investment income will be free of income tax. You would though clearly need to consider the foreign tax treatment of any foreign income (ie it may be taxed overseas).
We've wrote at length in other articles on this site about how to lose UK residency. In particular how HMRC are paying much more attention to individuals leaving the UK.
The recent cases before the courts/commissioners as well as HMRC guidance have confirmed that HMRC now look at the extent of an individual ties with the UK as well as the number of visits back to the UK. Therefore as well as ensuring that your UK visits are less than 90 days (on average) per tax year since your departure it would also need to be shown that you have left the UK to live abroad and have effectively severed many UK ties.
One of the key issues raised by the Court of Appeal was the fact that there should be a 'distinct break' in your lifestyle when you leave the UK. They would therefore be looking at a substantial change in your lifestyle before and after your departure. In this context for instance regular visits back to the UK whilst retaining a property here would not result in you losing UK residence even if your visits were less than 90 days per tax year.
You should ensure you do not have a UK residential property available for your use. Essentially though you should be looking to ensure that UK visits are kept to a minimum and you can clearly show your new settled lifestyle overseas.
UK income
Once you've established non UK residence how will this help you to avoid income tax at 50% on your UK income.
Well the general rule is that non UK residents remain within the scope of UK income tax for UK source income even if they are non UK resident. However, this rule is superseded by special provisions which apply to certain types of UK income.
Some forms of UK income are classed as excluded or disregarded income and the UK income tax liability for a non UK resident is restricted to the tax deducted at source.
This means that you can receive most forms of UK investment income free of UK income tax as a non UK resident.
In the case of dividends for instance, if you're subject to income tax at the additional rate you would be taxed at 42.5% (not 50%) if you were UK resident. The effective rate is 36.11% as there is a 10% tax credit.
However the special rules state that if you're non UK resident your UK income tax liability is restricted to the tax deducted at source. Given that the tax at source is only a 10% notional tax credit the net result is that there is no income tax liability for a non UK resident receiving UK dividends. This means you can avoid the effective 36.11% income tax charge.
The same applies for UK interest income. You can file a claim with the bank to receive interest gross if you're non UK ordinarily resident. As a non resident you could then potentially save income tax at 50%.
This does not however apply to all income. UK rental income, employment income and trading income could all be subject to UK income tax even after you've left the UK and are non UK resident.
One option for avoiding UK tax on the latter two at 50% would be to rely on the terms of a double tax treaty.
Providing you establish treaty residence abroad (usually by having your permanent home there) most treaties provide that:
'… remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any period of 12 months; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State…'
Therefore providing you spend less than 183 days in the UK, there is a non UK employer and no UK permanent establishment exists there would be no UK income tax charge.
Note that UK rental income would not benefit from treaty provisions as they typically provide that the UK can also tax rental income from UK property. However, basic rate tax (ie 20% not 50%) would be withheld at source.
So in answer to the original question:
"Can I move abroad to avoid this 50% tax rate?" the answer is yes in most cases -- providing you establish non UK residence and your income is either overseas income, UK excluded income or is non excluded UK income but is covered by a double tax treaty.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.