We provide a wide-ranging suite of services for clients based anywhere in the world, who are redomiciling to the UK.
The services we provide include those needed when setting up a corporate or trust vehicle in the UK, such as registered office and company secretarial services. Additionally, PraxisIFM can provide back-office support such as administration, payroll, VAT, bookkeeping, accounts, and tax.
PraxisIFM can also guide individuals through the process of securing immigration status in the UK. These will usually be individuals who have either been referred to PraxisIFM by an intermediary, or, are our clients, and do not necessarily want to set up a company in the UK. In these circumstances, PraxisIFM does not provide the advice, however, we will refer the individuals to a trusted partner. Most of these individuals’ needs contains a corporate element; this is where we would be able to provide onshore services for them. Finally, we provide services, upon request, to individuals on personal tax services and personal payroll.
In this conversation, we examine the considerations needed when assisting clients with moving from South Africa to the UK. Managing Director in our UK office Donna Shorto, interviewed Catherine de Maid, Partner in the private client team at the UK law firm, Burges Salmon, about the key legal and tax considerations.
We often have South African clients who are looking to move to the UK. However, they don’t know where to start in terms of what they need to consider before emigrating. What should they consider doing first?
It is often an overwhelming and stressful time for clients who are in this situation. There is a lot to deliberate. It is helpful to break it down into stages. Prior to their arrival in the UK, the most important task the client needs to complete is to seek and obtain professional South African and UK tax advice, as soon as possible. At Burges Salmon, we sometimes hear from clients after they have already moved and settled in the country for a while, which makes the planning a lot more difficult.
Ideally, lawyers would recommend to clients that they obtain advice in the UK tax year prior to their arrival as this enables the lawyers the most opportunities to plan effectively. The South African tax year runs from 1 March to end of February each year. The UK tax year runs from 6 April to 5 April. Lawyers will provide the client with guidance on when is the best time for their arrival date, bearing in mind that if the client arrives in the UK halfway through a tax year, they are often considered to be a UK resident from the 6 April, even if that is before their arrival date. There is a split year treatment, which can apply in certain circumstances. If the client qualifies for this, this is helpful as the tax year is then split into a UK part and an overseas part. As a result, you can understand why knowing the arrival date is key.
The second stage, which is important and links very closely to the first, is that the client needs their South African and UK tax advisers to work closely together, collaborating from the very outset. It can often be the case that steps need to be taken in a particular order so that the planning in one country is not detrimental to the planning in the other country. At Burges Salmon, often clients will come to us with an existing South African adviser, and we are happy to work with them. For clients who don’t, we know several South African tax advisers with whom we can connect clients.
The third stage is to think about the interaction between immigration and tax. In this area, one of the first things they need to do is work out their legal status in the UK. A large majority of South Africans have strong UK connections, so they might have a UK parent or grandparent, resulting in acquiring citizenship through an ancestry visa. If they don’t, lawyers will explore other options that enable the clients to live in the UK legally. For example, this could be obtaining a work permit or an investor visa. Although the immigration and the tax systems are separate, in some respect, they are linked, so it is always important to consider and understand the interactions between the two systems. For example, there are occasions when it can be possible that the tax residence and immigration residence requirements are not entirely compatible. So again, it is important to consider immigration and tax and how they interact with each other.
You touched on it a bit there, perhaps you could explain what the main differences are between the South African and the UK tax systems and what individuals might need to be aware of?
In the UK, an individual’s liability to tax is based on two important factors: their residence and their domicile. For a person’s residence, there is a statutory residency test, which enables us to work out if, and when, someone will become a tax resident under domestic law. The second concept, domicile, is more unusual and is unique to UK law. It is different to citizenship and residence. While it is not defined in statute, its meaning, having been established in case law, essentially determines which jurisdiction governs certain aspects of an individual’s affairs, such as succession or a marriage and how the individual is taxed in the UK. If the person is not UK-domiciled (in one of the legal jurisdictions either in England, Wales, Scotland, or Northern Ireland) they will only be liable to UK inheritance tax on UK situs assets, such as real estate in the UK or UK company shares.
Inheritance tax is one factor; however, domicile also has an impact on a person’s liability to income tax and CGT. If someone is a resident and not domiciled, then they will have access to the remittance base of taxation. Broadly, this means that they are only going to be subject to tax in the UK, on UK-sourced income and gains as they arise. They won’t be subject to tax on foreign income and gains unless they physically bring or remit that foreign income into the UK. So, it can be a beneficial way of being taxed. If the individual moves to the UK and spends most of their time here, there is a strong chance that they will become a UK resident under domestic law.
However, it is entirely possible that the individual won’t become domiciled under common law. That entirely depends on their intentions when they move to the UK. If they move to the UK for a job, or to enable their children to participate in the UK education system, but they intend to leave after that period, and go back to South Africa or move elsewhere, then they have not formed the intention to move here permanently or indefinitely. As a result, the individual will not acquire a UK domicile and so will have access to the remittance basis. If the individual stays in the UK for at least 15 of the last 20 years, they will then be deemed domiciled in the UK under statute, regardless of their intention.
Those are the main UK terms, however, in South Africa, it is slightly different. Taxation there is based purely on residence. You can be a resident in South Africa in one of two ways. They have a physical presence test; if you spend a certain amount of time there, you will become a resident. There is also a test of ordinary residence, which has some similarities to the UK concept of domicile. It is not entirely the same; an individual will be an ordinary resident in South Africa if they consider South Africa to be their fixed or settled home.
The UK adviser will work with the South African adviser and look very carefully at UK residence and domicile to work out when the individual will become a UK resident, and, crucially, if they will cease to be a South African tax resident. It sometimes, though not infrequently, happens that South Africans living in the UK don’t cease to be South African tax residents. In this situation, you can have the position where the individual has dual residence, they will be a resident under the UK domestic law and will remain a resident in South Africa. Luckily, the UK has a double taxation agreement with South Africa. This agreement has a tiebreaker test set out, which will determine in which country the individual will be deemed to be resident for the purposes of the treaty. That gives taxing rights to countries in different circumstances. The aim of this is to ensure the individual does not pay tax twice.
Let’s say that the South African individual has taken advice on their individual circumstances, and they understand the intricacies of the UK and South African tax system. However, it is not just themself they need to think about. They might have investments either locally in South Africa or internationally. Would those need to be reviewed prior to the individual moving as well as any structures for those investments that they might have in place?
Yes, absolutely. It is very common for wealthy South African families to hold their local South African assets in a domestic trust. They will often also typically have an offshore trust, which holds the assets that they have externalised using their foreign investment allowance, or other exchange control allowances. Most lawyers would highly recommend that we review all these structures before the individual moves to the UK. This ensures that both we and the individual understand how the trustees of the structures will be taxed and how the settlers and the beneficiaries receiving the distributions might be taxed. This is an extremely important part of the advice provided to the individual.
In relation to directly owned investments, as part of pre-immigration planning, the lawyers will look at those. Sometimes the investments the individuals hold might not make sense from a UK perspective. So, lawyers might recommend that the individual look at restructuring those investments. It is also helpful that any gains realised before becoming a tax resident won’t be subject to tax in the UK, even if they later remit the proceeds to the UK. The individual might want to look at whether it makes sense to dispose of any of those investments before moving to the UK so that they are not subject to CGT in the UK on any gain. If they own an asset when they emigrate and need to dispose of it, then subject to the remittance basis, they are going to be subject to UK CGT on the full amount of the gain, not just the amount that arose once they are UK resident.
This links in quite nicely for South Africa tax purposes. That is because South Africa has an exit charge, which it imposes when someone ceases to be a South African tax resident. If you cease to be a tax resident, you are deemed to have disposed of certain assets for South African tax purposes. The individual then must pay CGT as an exit charge, even if they have not disposed of them. It can often be quite difficult to have the funds to meet that because it is sort of a dry tax charge and actual disposal can help fund it. As I mentioned, it can also be helpful for UK tax purposes.
You mentioned there about an individual having moved to the UK and then making the disposal, assuming the remittance basis doesn’t apply that trigger for CGT purpose is purely based on residency and it doesn’t take domicile into account?
That’s right. Domicile comes in relation to whether you can claim the remittance basis, but if you are not claiming remittance basis, and you dispose of that asset, you will be subject to tax in the UK on the full amount of the gain, subject to the provisions of any double tax agreement.
You have taken us through investments and structures. What if the individual has a South African business that either they want to move to the UK, or they consider setting up a UK branch or division of that South African business? How easy is that to do?
It is key that the individual receives advice on how best to structure a new business, which will depend on the specific circumstances involved. At Burges Salmon, for example, we often work closely with our corporate tax colleagues to make sure the structure is right for that business. From a practical perspective, it is relatively easy to set up a business in the UK, provided you have the right immigration status. It is a business-friendly jurisdiction. One thing to be careful about concerns the existing South African business. If the individual is a director of it, or if they carry out duties for that South African business in the UK, the lawyer will examine that carefully and provide the individual with advice on how to ensure they do not unintentionally bring that South African business into the UK tax net, either by making it a tax resident here or by creating a permanent establishment.
What if we have the scenario where the individual wants to continue working for that South African employer, after their move to the UK? How challenging could that be?
In the UK there is a very valuable relief, which the individual can take advantage of, called Overseas Workdays Relief. It is available for the first three years of being a tax resident in the UK and the individual will only be subject to tax in the UK on the portion of their salary that relates to their UK workdays. This is whether they are working for a UK employer in and outside of the UK or if they are working for a South African employer. An adviser will explore if this is a valid option for the individual. Whether the individual will be subject to tax in jurisdictions in which they are performing services will be more dependent on the domestic laws of those jurisdictions in terms of any double tax treaty. From a UK tax perspective, individuals can structure things quite tax efficiently if they are working outside the UK.
How long is that relief available for?
If the individual is non-domiciled, they can qualify for overseas workdays relief during the first three years of being a tax resident. If they continue to work for a non-UK employer after three years, they can then qualify for a different relief, which is called the Chargeable Overseas Earnings Relief. This is a less generous relief. It is harder to qualify for that, but it is worth mentioning that it can apply in certain circumstances. If the individual qualifies for that relief, and it is structured properly, they will only pay tax in the UK on their UK workdays.
How easy is it for the individual, having moved to the UK, to purchase real estate, whether that’s for personal circumstances, so obviously to live in with their family after the move or for investment purposes? And just as a second part to that question, is it beneficial to consider appropriate structuring regarding real estate purchasing?
This is very common for many individuals, moving to the UK, that one of the first things they want to do is to is find a home for their family. The rules changed in 2017 so that if it is a residential property for their own family’s use, it is not going to make sense to structure that anymore. Nine times out of ten, lawyers are likely to recommend direct personal ownership. That leaves the individual with an inheritance tax exposure because it is obviously a UK-situated asset, so the individual is subject to inheritance tax, even if they are not domiciled in the UK. There are a few options the individual can look at which can help mitigate that. One is taking out a mortgage or a bond, as they call it in South Africa, on the property when they buy it. This is because it is only the net value that is subject to inheritance tax here. If they are claiming the remittance basis, the individual needs to think very carefully about what money they bring into the UK to fund or partially fund the purchase, and how they will fund the mortgage payments; the individual does not want to accidentally remit foreign income or gains and cause a tax charge. A bond is one way of mitigating inheritance tax. The other option to explore is life insurance. Taking out life insurance will pay out to fund the inheritance tax exposure.
If it is an investment property, either a residential buy-to-let or commercial property, some type of structure can then sometimes make sense. For a commercial property, an offshore trust company structure can still work quite nicely and for a residential buy-to-let, it can sometimes make sense to do that through a company because of the lower corporation tax on the relative income. So yes, structuring can sometimes work, but generally speaking, no longer for the residential property in which they want to live in.
This article constitutes neither professional advice nor a binding offer by us to provide professional services. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence.