The French Musician

Our client, a successful French recording artist, is a US resident taxpayer. In 2010 she performed on a short tour of the UK earning a total guarantee of $80,000. As a performer appearing in the UK special tax rules apply which mean her gross income is subject to 20% withholding tax, in this case $16,000.

This does not take into account any of her allowable tour expenses and would have a significant impact on her cash flow and ability to fund the tour. It could also mean our client cannot fully relieve the UK withholding tax credit in the US, as she is required to mitigate her exposure to overseas tax.

It is possible to avoid this outcome and an arrangement, known as a reduced tax payment application, can be negotiated in writing between the UK tax authorities and the promoter, payer or entertainer. This arrangement allows the payer to deduct an amount that is less than the 20% default rate of withholding tax. The reduced rate of tax is reached by providing detailed information in respect of the individual’s personal tax situation and agreeing a position in respect of the tour expenses/budget.

We therefore negotiated a tax clearance with the UK tax authorities on her behalf, which resulted in the total tax liability being reduced to $3,000. This also meant all of her UK tax compliance obligations were met and the UK tax credit would be fully credited against her tax liabilities in the US.

This type of scenario is common for many of our clients and mainly applies to non-resident musicians, actors, entertainer, models and sportsmen appearing or performing in the UK.

The Private Practice Surgeon

A number of our clients work in the medical profession, and self-employed consultants in particular, will invariably require professional assistance with their tax affairs.

A recent case in point was a surgeon who had started to undertake private work. She found herself having to navigate a brave new world of taxation as a self employed consultant and sought our advice on how to comply and respond tax efficiently to this regime.

First and foremost, we needed to advise her of the “basis periods” model that applies to self employment income and help her to avoid the possibility of doubly taxed “overlap profits”. Alongside this, we undertook a cash flow analysis to establish her projected income and estimate and plan for her future tax payments. It was interesting to see how quickly the tax numbers could move depending upon which date she selected as her accounting period end, making a huge difference to her in terms of cash-flow.

The next change for her was to understand her liability to National Insurance as a part-employed, part-self employed individual and to complete the relevant forms to register as self-employed, all of which we were able to help with. We also applied for a deferment to avoid her overpaying National Insurance and the inconvenience of a subsequent reclaim.

Given the likely level of future earnings, our client would also be well advised to consider an LLP structure to manage her UK tax liabilities and the timing of various tax charges. An LLP can be a very flexible and tax efficient vehicle and those starting a new business would often be well advised keep an LLP in mind as an alternative to more traditional “one man band” and limited company structures.

The answers to even the most straightforward tax questions – how should I structure my business and what date will be my business year end – need to be considered on the particular facts and can throw-up surprisingly varied answers.

“I have worked with the Tax Advisory Partnership for a number of years and have appreciated their pro-active and professional approach. I would readily recommend their services to others in need of good tax advice and a responsive tax return service.”

Khai Lam, Consultant Orthopaedic Surgeon at Guy’s and St Thomas’ Hospitals and London Bridge Hospital

The Russian Private Equity Advisor

Our recent work for a Russian client provides some good examples of planning which can be considered for a UK resident but non-UK domiciled individual.

Our client works for a US headquartered Private Equity business but is based in the UK. He sought our advice as he was looking to acquire a larger home to accommodate a new addition to his young family.

The immediate question was how he could make effective use of his offshore assets to help to fund the purchase. In particular, it was important to mitigate the tax charge on funds remitted to the UK, and to reduce the value of the property exposed to inheritance tax going forward. Various options and ownership structures were discussed, allowing the client to implement a flexible and tax-efficient solution.

Most non-UK domiciles know that income and gains arising from offshore funds will not be taxed here until the individual has lived in the UK for some time and even then can be avoided by payment of the non-dom tax charge. That is, unless those funds are remitted here and that does not necessarily mean they have to be physically brought to the UK. Deemed remittance of funds can occur in all manner of unexpected ways and can provide a nasty shock for the unwary.

The next stage of our work for our Russian client was therefore a “tidying up” of his offshore accounts to allow for future tax-free remittances to the UK and to avoid the potential horrors of the post-April 2008 “mixed fund” and “nominated income” regimes.

In the longer term, our client will need to have regard to potential inheritance tax exposure as a “deemed domicile” and discussions have started regarding use of an offshore trust to shelter his assets, in particular his carried interest (the growth in value of the companies his Private Equity firm invests in), from potentially a 40% death duty.

The Overseas Investor

Our client, a non-UK domiciled individual, has lived in the UK for a number of years. Initially, his “non-dom” status allowed him to access the remittance basis of taxation and he did not suffer UK tax on investment returns that he retained overseas.

This was a pleasing result, but the landscape changed from April 2008 with the introduction of the £30k remittance basis charge (“RBC”) – see our Non-UK Domicile page for more detail. As our client’s overseas investment returns did not warrant him paying the RBC*, he instead fell into the “arising basis” of taxation. The result would be that all of his worldwide income and gains would be subject to UK tax each year.

Naturally, our client was concerned that his investment returns were being eroded by the subsequent tax bills, particularly as economic conditions were hampering investment growth more generally. Our client had picked up on the possibility of using a Protected Cell Company (“PCC”) to defer payment of capital gains tax (click here for more detail on PCCs). However, we suggested that he should consider a number of other options to mitigate the effect of the 2008 changes and we put forward two alternative structures.

The first was to put his overseas assets into an offshore insurance bond, sometimes know as a single premium life bond. These tax efficient investment wrappers allow investment returns to roll-up within the bond tax free until it is encashed or otherwise disposed of. Given the new highly restrictive caps on pension contributions and overall values, these offshore bonds are being used even more widely as a means offering the tax favoured environment of a pension, albeit without tax relief at the time contributions are made.

The growth in value of the bond is liable to income tax if the investor is UK resident when encashing or disposing of the bond, although there are a number of techniques which can be employed to exit from such a bond with no UK tax at all. For example, whilst our client may stay in the UK until his young family have finished their schooling, he confirmed that it has always been his intention to eventually return to his homeland. Under current rules, there would be no charge to tax in the UK if he surrendered his bond after he left.

Another alternative we considered, was to settle his overseas assets on an offshore trust, as this could provide for capital appreciation without ongoing capital gains tax charges or payment of the RBC. As any income (as opposed to capital gains) arising in the trust would continue to be taxable on our client personally, it would be important for us to work with his bankers and trustees to structure an investment portfolio geared towards capital appreciation as opposed to income yields.

We could also structure the trust so that all the family members were potential beneficiaries to provide flexibility to exploit different tax exposures amongst family members and allow for effective succession planning. The assets in the trust would also benefit from “excluded property” protection from UK inheritance tax, making the trust an ideal capital appreciation vehicle for his family. If excluded property is a key driver, there would be nothing to prevent the trustees from holding investments via a PCC or a bond, of course.

The final choices made by this particular individual are unimportant. The point that is worth making however, is that there are almost always options that can be considered in any given set of circumstances. Focusing on just one of these (the PCC in our client’s case) can be dangerous and is certainly not a sensible course of action. As our client said “this is why restaurants have menus”!

* One must have significant offshore income and/or capital gains to make this economic. Looking solely at income, gross non-UK income of at least £80k would be required to make payment of the £30k RBC cost-effective.

The Investor Visa

We often advise individuals who are moving to the UK on how to structure their financial and business affairs in a tax efficient manner, prior to their arrival.

A recent case in point was a non-UK domiciled and non-UK resident individual relocating to the UK. Our client was entering the UK on a Tier 1 Investor Visa and, following an initial consultation, we prepared a detailed tax report to plan for his arrival in the UK. In particular, the client wanted to purchase a family home in the UK and our report therefore discussed the tax implications of doing so.

Initially, however, it was necessary to consider the client’s residence position between the grant of his visa and subsequent arrival in the UK, and the effect of the relevant double tax treaty. It was important that he looked to establish “clean capital” funds prior to his move to the UK in order to fund his future lifestyle and capital requirements.

The natural extension of this was to propose an appropriate structure for his UK and non-UK bank accounts, including how to segregate of investment income and gains, and practical issues such as the use of credit cards after moving to the UK.

Turning to the property, the key question was whether personal ownership or use of an offshore trust/company structure would be appropriate. This involved looking at the tax considerations at each key stage in the ownership process, i.e. funding, occupation and disposal, and the position if the client were to leave the UK at a future date. We also needed to ensure that the mortgage was structured and funded tax-efficiently.

Similar issues commonly arise for individuals coming to the UK, and the challenge is often to find a solution which is both practical and tax-efficient. If you or your client are moving to the UK, or indeed are already here and require advice in respect of your current situation, please contact us.

If you are looking to re-locate to the UK and require legal advice, we can also refer you to experienced immigration specialists.