If you have left the UK and arrived in Cayman, you now need to think about dealing with the limited formalities associated with leaving the UK.
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If you were once resident in the UK and are now resident in the Cayman Islands, then knowing your tax status and your UK tax obligations is very important. Equally, if you are thinking of emigrating the same is true.
Tax Status for Expatriates in Cayman
When moving from a country that enforces taxation upon its citizens to the Cayman Islands—a country without direct tax—there are certain rules and regulations that need to be adhered to in relation to your 'home' country. Here we discuss the differences between the UK and US Domicile/Tax Status and what you need to do to follow the rules to ensure those taxes get paid on time.
For information on how American and United Kingdom nationals, who now live in the Cayman Islands, are taxed by their home countries please read on.
In this section we describe everything you will need to know, from a tax perspective, on what it takes to leave the UK and take up residence in the Cayman Islands. We offer advice if you want to keep a UK property, whether to rent it or not, and we cover what you will and won’t get taxed on if you still have work commitments in the UK. We also discuss what to do with your UK pension, income you receive from rent, your bank account or other things remaining in the UK, and then what happens if you decide to return to the UK, as a full-time resident, before five years has passed.
Tax Advice for UK Citizens Moving to Cayman
If you have left the UK and arrived in Cayman, you now need to think about dealing with the limited formalities associated with leaving the UK.
If you were once resident in the UK and are now resident in the Cayman Islands, then knowing your tax status and your UK tax obligations is very important. Equally, if you are thinking of emigrating the same is true.
It is important to let the HMRC know that you have left the UK. We explain how you do that here. You also need to think about how you treat the interest you earn from a UK bank account, what you do with your UK-based pension and any UK rental income (if you are renting your UK house) and how to treat a split year. Read on for more information.
Letting HMRC Know You’ve Gone
When you leave the UK, you can complete and submit form P85 “Leaving the UK – getting your tax right” to HM Revenue & Customs (“HMRC”). This form advises HMRC that you are leaving the UK and will help them decide if you will still be required to file a UK tax return as a non-resident, for example, if you are in receipt of UK rental income or if you are a director of a UK company. Alternatively, you can inform HMRC on your last self-assessment tax return.
Typically, you need to let them know certain key information regarding where you will be living and how much time you will spend in the UK in the future. This is used by HMRC to assess whether you have in fact ceased residence
Dealing With Your Pension
If you have a UK pension, you may be able to apply for this to be paid gross (or in limited circumstances claim a refund on the tax deducted on a lump sum payment) by completing form “DT-Individual”. The Cayman-UK double tax treaty enables you to receive your UK pension gross. The rules regarding taking a UK pension changed from April 2015 and they are now much more flexible: it is prudent to obtain formal advice from a pension expert to help you decide how to take your pension.
UK Rental Income
Once you are non-UK resident, if you have UK investment property that is let out (this could be your own (former) residence), then you should elect to be considered a non-resident landlord. This will enable your tenants to pay you without deduction of UK income tax at source.
Split Year Treatment
You may have arrived in Cayman part way through a tax year (which runs from 6 April to the following 5 April) and think you are non-UK resident and can forget about UK tax; however, there are three things you need to be aware of.
Firstly, you need to make sure you have complied (and in some instances continue to comply) with the conditions to split the tax year into resident and non-resident parts. If you do not comply then you will be treated as resident in the UK for the entire tax year of your departure and possibly thereafter. This is particularly importantly if you are moving to Cayman to take up employment (or the spouse or partner of someone who is taking up employment in Cayman).
Secondly, you need to think about the nature of your income and capital gains. Some income and capital gains can still be subject to UK tax even if you have become non-UK resident and may continue to be taxable even if you manage to split the tax year into resident and non-resident parts.
Thirdly, how does the UK-Cayman double tax treaty affect your tax position?
UK Income Tax For Non-UK Residents
Once you have worked out if you are UK resident or not, you can then determine how you will be taxed in the UK, if at all, as a non-UK resident. If you are non-UK resident, you should only be liable to UK income tax on your UK sourced income. Sometimes determining the source of income is not straightforward but in most instances it will be obvious.
You will only receive a UK personal allowance if you are a citizen of the European Economic Area (which includes British passport holders) or you worked for the UK government during the tax year. (Many people born in the Cayman Islands are entitled to British Citizenship, but most non-British expatriates won’t be British Citizens).
As a non-UK resident, you can be taxed under section 811 Income Tax Act 2007. Under this provision, income tax on “disregarded” income (for example, UK bank interest, UK dividends and certain UK pensions) is restricted to the tax deducted at source in the UK. So, for example, you may be in receipt of UK bank interest of £100, and tax of £0 has been deducted at source. No further UK income tax will be payable by you. Being taxed under this provision does result in the loss of your personal allowance but can be advantageous in the right circumstances.
Letting Out UK Property
Many UK expatriates continue to own UK property when they leave the UK which is then rented out. It is important that your UK tenant or letting agent is aware that you, as the landlord, are not UK resident as UK basic rate income tax should be deducted from rental payments and paid to HMRC (either by the tenant or the letting agent).
Non-UK resident landlords can apply to HMRC for the rental income to be paid gross through the Non-Resident Landlord Scheme. If approved, you can receive the rent without deduction of tax at source; however, you will still be required to complete a UK tax return every year and if the net profit exceeds your available tax-free personal allowance, UK income tax will be payable.
Typically, you will need to keep a record of expenses, eg loan interest, letting agency fees, repairs and similar so you can prepare accounts to support your income tax return.
Receiving Loan Interest
If you are Caymanian resident and in receipt of UK sourced interest on a loan to a UK resident person, the borrower will be obliged to deduct income tax from loan interest payments. You should have no further UK income tax liability if you are taxed under the disregarded income rules mentioned above.
Working in the UK
As can often be the case, you may still be required to travel to the UK for work even if you no longer live in the UK, whether you are employed or self-employed.
Employed
As long as the duties you carry out in the UK are merely “incidental” to the duties that you carry out overseas, you will not be subject to UK income tax on your earnings. Examples of incidental duties include meeting clients whilst visiting the UK or spending a short amount of time training in the UK.
If the duties carried out in the UK are non-incidental, for example, similar to the duties carried out overseas or if you are a director attending board meetings in the UK, the earnings related to your UK duties will be subject to UK income tax (to the extent they exceed the UK tax-free personal allowance, if you qualify). It is important to note that HMRC are unlikely to agree UK duties are merely incidental if you are a director.
If you have to spend time working in the UK then care must be taken regarding the number of days you spend in the UK because this might have an impact on your residence position. Typically, if you work in the UK for less than 31 days and work sufficient hours overseas, then you should not be considered UK resident and may also be able to split the tax year if the tax year is a year of departure. The rules are complex and the way they are drafted mean that it is only possible to determine your residence position with certainty in retrospect.
If you are obliged to work for a UK subsidiary of a Cayman entity it is likely that that UK entity will have reporting obligations depending on the number of days you are working in the UK. In addition, you may be subject to Pay As You Earn (broadly your UK company will have to operate a payroll for you) on a proportion of your UK earnings. Your employer can agree with HMRC how much of your salary is taxable in the UK through a specific clearance process.
If you work for your own Caymanian company in the UK not only will you need to consider your own tax position but you will also need to consider the tax position of your Caymanian company. For example, you may need to consider the place of residence of your company (it could be in the UK) or whether the company has a permanent establishment in the UK.
Self Employed
If you carry out a trade, profession or vocation wholly in the UK, you will be liable to UK income tax on the profits generated. If the trade, profession or vocation is carried on partly in the UK and partly overseas, you will be liable to UK income tax on the profit from the part of the trade carried on in the UK.
This can be a complex area of tax and it is recommended that you seek tax advice as there are many issues to consider, such as the creation of a permanent establishment and the application of double tax treaties, to name but a few. The Cayman Islands does have a double tax treaty with the UK but it is narrowly drafted and therefore can only be relied upon in certain limited circumstances.
Capital Gains Tax (“CGT”) for Non-UK Residents
Broadly speaking, non-UK residents are not liable to CGT on the sale of either UK or foreign assets, although there are a couple of exceptions to this discussed below. As a general rule, best practice is to wait until the tax year following the date of your departure before disposing of any assets which will realise chargeable gains.
When you leave the UK you may be subject to CGT on the disposal of assets the tax year of departure, if you fail the conditions to split the tax year into resident and non-UK resident periods.
You will be subject to CGT on the disposal of any UK residential or commercial property (let or otherwise). Broadly speaking, you will be subject to CGT on gains arising after April 2015 (April 2019 for commercial property) and you will be entitled to the Annual Exempt Amount. You may be able to claim some private residence relief if the sale is a disposal of your former home. The deadline for a non-resident CGT return is usually 60 days after the completion of the sale.
If you are thinking of returning to live in the UK, you should bear in mind that there is a CGT “temporary non-resident” rule, which is discussed in more detail below.
If you dispose of an asset used for the purposes of a trading activity carried on in the UK then you can also be subject to CGT.
If you choose to own UK residential property through a company, the corporate vehicle would be liable for UK corporation tax on any capital gain it makes.
Annual Tax on Enveloped Dwellings (“ATED”)
This may not immediately apply to you but if you choose to own UK residential property through a company you need to bear in mind that UK and foreign resident companies and other corporate bodies that own UK residential properties valued at more than £500,000 are likely to be within the ATED regime. If this is the case, the corporate vehicle will be subject to an annual tax charge.
There are exemptions from the ATED rules for genuine property businesses, for example if the UK property in question is let out to unconnected third parties, some of these rules would not apply (albeit there would continue to be on-going compliance obligations for the company).
Inheritance tax (“IHT”)
All Caymanian residents should have an eye on UK IHT. Simply owning UK assets directly (including a UK bank account) can bring you within the charge to UK tax even though you may have no other connections. For example, you may have a portfolio with an investment manager. Assuming you are non-UK domiciled, if that portfolio contains UK shares then you may have a liability to IHT on your death. You can insure against this risk but this needs to be done carefully. Alternatively, you can consider how you own such investments: typically, such investments are held via an overseas company.
Any UK residential property (even if held by a non-UK company) is within the scope of IHT, even if let out to third parties. If you own shares in a Caymanian company owning UK residential property then the value of the shares will be within the scope of IHT. There are also significant risks where such property is ultimately owned by a trust which may be settled by you. If you transfer a UK residential property that you own (either directly or indirectly) into a trust, you could crystalise a 20% “lifetime IHT” charge.
Once again, risks can be managed by obtaining appropriate levels of life insurance which should provide funding provided it is correctly held.
Returning to the UK
If you return to the UK, there is no specific form to complete and submit to HMRC. Instead, you will need to determine whether or not you will be required to complete a Self-Assessment tax return (“SA return”). Your obligation to complete a SA return will depend on your personal circumstances.
Split Year Treatment
Similarly to leaving the UK, you may be able to claim split-year treatment when you return to live in the UK such that the tax year is split into an overseas part and a UK part. You may be able to make a claim if you meet any of the following criteria:
• you start full-time work in the UK;
• you cease full-time work overseas;
• your partner ceases to work full-time overseas and you return to the UK with them; or
• you start to have a home in the UK
There are various conditions attached to each of the above criteria and as such, it is important to consider them in light of your personal circumstances. If you fail the conditions to split the tax year into resident and non-resident periods, you will be treated as resident in the UK for the entire tax year of your year of return to the UK. It is essential to make sure that you split the year in the year of return: if you do not do this correctly any actions taken in the overseas part of the split year could be taxable.
It is important to understand that even if you manage to split the tax year, certain income and capital gains are still subject to UK taxation even in a split year, ie when you are regarded as non-UK resident.
Temporary Non-Residence
If you return to the UK within 5 years of leaving (and for these purposes we are considering 5 complete calendar years, not 5 complete tax years), you may be liable to UK tax in relation to income and capital gains that arose whilst you were non-UK resident. Any UK tax charge will arise in the year of return. It is therefore important to consider the timing of any return to the UK before you actually move. The so-called 5 year rule generally only applies to income which was connected with the period prior to your commencement of non-residence or capital gains on the disposal of assets held before you became non-UK resident.
This article only considers the personal UK income tax and CGT implications of ceasing or commencing UK residence and an individual’s liability to UK income tax and CGT when non-UK resident in broad terms. Specific UK tax advice should be sought for your personal circumstances.
Hotchkiss Associates Limited
If you are looking for professional tax advice, then Hotchkiss Associates can provide you with clear and concise UK and international tax advice. Paul Hotchkiss is the author of this UK Tax and Domicile advice on this page.