In the UK, HM Revenue & Customs publishes a booklet on residency (HMRC 6, previously IR20) but it is only guidance and not law, and it has been famously challenged by some taxpayers and so far HMRC have won (mostly)

Expatriates are used to counting days to establish their tax residency. Many countries including the UK have the ‘183 days a year rule’, while the UK also has the ‘90 days a year over four years’ rule. It is not always as simple as day counting, however, and many countries also stipulate other situations which would make you liable for tax in that country.

Next year the UK intends to introduce a statutory definition of tax residence. The consultation document says that the government considered but rejected a test based solely on the number of days spent in the UK because “it believes that where someone is resident is more than just a question of where they spend their time”.

Its proposed tests therefore seek to prevent someone becoming non-resident simply by reducing the number of days to below a set level and impose a requirement to reduce their other connections with the UK. The rules are far clearer and will provide more certainty BUT they are still complex and confusing to the non-tax specialist. So while they are no longer subjective and vague, the new rules remain complex.

• The number of nights which you can spend in the UK refers to the number in a UK tax year ending midnight 5^th April.

There are separate rules for Leavers, Arrivers and those working full time abroad, so it will be important to follow the rules for your situation.

There are five newly defined connecting factors which are: family in UK (spouses/civil partners and children under 18); UK accommodation; substantive employment in the UK; UK presence in previous years and more time in the UK than another single country.

Are you a Leaver or an Arriver?

Under the Leaver rules, British expatriates who spend less than 10 nights a year in the UK will never be considered UK resident even if they have connecting factors. At the other end of the scale, anyone who spends over 182 nights a year in the UK, or whose only home is in the UK, will always be classed as UK tax resident regardless of how few other connecting factors he/she has (subject only to be overridden by any appropriate double tax treaty).

Otherwise whether or not you are UK tax resident will depend on the number of nights you spend there and the number of connecting factors you have.

Here are some examples under the new rules (the number of days is per UK tax year):

• David and Sarah have sold their London home, are no longer working and will move to Andalucia in Spain where they will live permanently other than visits to the UK. Their adult children remain in the UK. They have one connecting factor (over 90 days in UK in previous two years). They can spend up to 119 nights in the UK provided they are in hotels, not staying regularly elsewhere, without being UK tax resident. This would commence from 6^th April after they have left the UK.
• John and Anne have been living permanently in their property in Bergerac, France for 10 years and shook off UK tax residency. They are both retired. They kept a flat in Manchester because Anne likes to visit her adult children and grandchildren regularly spending over 90 days there each year. They have two connecting factors (UK accommodation and over 90 days) but unlike David and Sarah are classed as Arrivers, not Leavers. They can spend up to 119 nights in the UK without being classed as UK tax resident (had they been ‘Leavers’ it would have been limited to 89 nights).

There is a special rule for people who go to work full time overseas, leaving behind their families in the UK. They will be deemed to be non-resident as long as they spend less than 89 nights in the UK and work in the UK for less than 20 days (defined as less than three hours work in a day: a difficult one to prove/disprove).

• Andrew has been living and working in the Algarve for 15 years where he owns a property. During this time he did not keep any property in the UK and only visited briefly. He will now start to carry out consultancy work in the UK for one week each month and has signed a long-term lease on a flat so he has somewhere to stay. He falls under the Arriver rules and can spend up to 119 days before being liable to UK tax on his worldwide income. He might be liable to UK income tax on the consultancy work undertaken in the UK.
• George is a retired divorcee who owns property available for his use around the world, including London. He spends time in all these countries as well as sailing around the Caribbean. However, he spends more time in England than any other single country and has young children who live with their mother in the UK. He has three connecting factors (UK accommodation; family in UK; more time in UK than any other country) and as a Leaver will be UK tax resident if he spends more than 44 nights there.

The above examples are simplified and you will need to understand exactly how each of the connecting factors work and the number of days you can then spend in the UK to establish your specific situation.

Remember that you will also need to take your local residency rules into account. It is important to seek advice on your personal situation from a firm experienced with international tax residency issues such as Blevins Franks.

Contact details: Article written by Blevins Franks.

To contact Blevins Franks for additional information go to: www.blevinsfranks.com or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

The bottom line is that this new tax will not set property owners back that much

In this article, we shed some light on the proposed new French tax on holiday homes and put the issues into perspective and show how to calculate the amount you may have to pay. Although it may hit the rich hard, others may not feel the effect quite so much.

A new holiday tax has been approved by President Sarkozy’s Cabinet and will be put before parliament to take effect from 2012 onwards. The tax will be imposed on all those who own a French holiday home and who don’t rent it out on a long-term basis. It could even hit French expats living abroad who are no longer residents for tax purposes, although not if they’ve paid tax for three of the previous ten years, which will probably account for the majority.

The tax won’t have any effect on investment properties such as French leasebacks and properties that are rented out (buy to lets). Second home owners in France already pay two local taxes – taxe d’habitation and taxe foncière – and this one will also be calculated based on the rental value of the property.

“Owning one or more second homes implies that one benefits directly or indirectly from local and national public services, like the police, legal system and national infrastructure,” the Finance Ministry said.

Many are worried that with the already weak pound, this new tax will have a serious effect on the housing market in France, in particular in more rural areas. The number of expats selling up has already increased considerably (doubled in fact in the past year) and this may be one step too far for them.

Rental value

As the tax is calculated based on the rental value (so dependent on the size and location of the house) you will pay more if your property is located along the French Riviera, in Paris or in one of the ski resorts. However, many would argue that for those who already own such premium housing or are looking to purchase in these areas, the extra levy will be no more than loose change.

Markets in France become very much a part of the lives of property owners

The flip side is that for most second home owners who’ve bought a character property in a rural area of France (be it Normandy, the Dordogne, Charente or Limousin) the rental value won’t actually be that much, and thus the amount owners will be levied won’t be very much.

To calculate the charges you might face, look at a copy of your last taxe foncière bill. On the last page, under ‘Taxe foncières – Détail du Calcul des Cotisations’, next to the word ‘base’ should be the rental value of your property. You should see that the various taxes levied by your Council produce amounts that relate to that rental value. The new tax will be 20 percent of that ‘base’ or notional rental value. So 20 percent of that figure is what you’d be liable to pay each year.

We can illustrate this point with a villa located near Allemagne en Provence (in the Alpes de Haute Provence), currently on the market for €577,500, with two acres of land, a pool and five bedrooms. The ‘base’ is €1,914 which is the estimated rental value for the French tax office. The owner currently pays a taxe foncière of €1,046/a year. This new tax equates to an extra €382.80 a year, or €32 a month, which is not a large sum of money, and this is a fairly desirable area of France, under an hour from Aix en Provence.

The bottom line is that this new tax will not set property owners back that much. Hope remains that it may not even come to this – the tax will no doubt be challenged as discriminatory under European law, even though the wording tried to avoid this issue by saying that all who own a second home are liable, even French citizens resident abroad.

An interesting aside: The French will be reforming their own wealth tax, and items such as art work (paintings) and statues will now be taxable and part of the wealth tax calculation. They had previously been excluded from the list when the new wealth tax was created in 1981. The threshold is likely to be €900,000, so relatively high. The tax shield put in place by Sarkozy in 2007 puts the ceiling on the tax at 50% of income but MPs are keen to scrap the shield altogether. Both still remain to be debated, however.

For more information on French property in general and the new tax in particular, go on-line at: www.sextantproperties.com

David Franks: Chief Executive, Blevins Franks Tax Limited

Are you or will you become a British expatriate living in France? Do you own property in France? Both France and the UK impose an inheritance tax, but which country will tax you?

French residents:

1)         French tax

Worldwide assets belonging to French residents (including real estate located outside France) passing by way of lifetime gift or death are subject to tax in France.

2)         UK tax

Usually, the worldwide estates of UK domiciles are subject to UK inheritance tax, and only the UK assets of non-UK domiciles are subject to UK inheritance tax. However, under the tax treaty on death taxes between the UK and France, long-term French residents are deemed to be domiciled in France for UK inheritance tax purposes, and thus are only liable to UK tax on their UK–sited assets.

So, where you are French resident when you die but have UK assets, tax is due in both countries, but under the terms of the tax treaty, credit is given in France for any tax paid in the UK, so you do not actually have to pay tax twice. You will have to pay the higher liability in whichever country it arises, though.

If you make a gift, however, the tax treaty does not apply, and therefore any lifetime gift made will only drop out of the UK inheritance tax net if you survive for seven years from the date of the gift.

3)         Receiving an inheritance from the UK

Double tax credit relief is available if the asset (e.g. a French property) is taxable in both countries.

If you are a French resident and have been so for at least six out of the previous 10 years, when you receive an inheritance or gift it is taxable in France. This applies even if you receive the gift from someone who is not resident in France and/or the asset/s in question are not located in France.

However, if you receive an inheritance of non-French assets from a UK domicile, it will have been subject to UK inheritance tax, and under the Double Tax Treaty, the inheritance is not liable to French succession tax as well, even if you have been living in France for more than six years. This relief does not apply to gifts, though!

Non-residents

If you own property and other assets in France they will be subject to French succession tax when you die, even if you are not a French resident. They will also form part of your estate for UK inheritance tax purposes, but your heirs will be entitled to a credit of the French tax paid on the asset to avoid double taxation.

Since this is a complex issue you should seek personal advice regarding French succession tax and its interaction with IHT, particularly if you wish to minimise your liabilities, or, more likely, the liabilities of your inheritors!

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.

Article written by: By David Franks, Chief Executive, Blevins Franks Tax Limited

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

The four key issues are:

• The crisis buffeting the weaker Eurozone sovereigns: Greece, Ireland, Portugal, Spain, and potentially even Italy and Belgium.
• The second round of Large Scale Asset Purchases by the Federal Reserve, the potential for the Bank of England to follow through, and the gap that is widening among different monetary authorities and their responses to the crisis.
• The continuing macroeconomic unbalances between ‘saver’ countries, i.e., those with persistent trade surpluses (particularly Pacific Asia and Northern Europe) and ‘spender’ countries, particularly the United States and (to a lesser and diminishing extent) Mediterranean Europe.
• The end of fiscal stimulus in developed economies, to be replaced in some countries (notably, the United Kingdom and the troubled sovereigns of the Eurozone) by a significant fiscal drag brought about by draconian austerity measures.

To repeat, the most notable feature of the global financial landscape remains the lack of resolution in any of these critical issues

Which currencies will be the winners and losers in 2011?

“The absence of any sense of global coordination (so critical in stopping the downward slide in 2009) adds more uncertainty to the mix, and makes it even less likely that any of these problems will be resolved without a high degree of market volatility. We therefore expect 2011 to be a tumultuous year, one in which at least some of the global contradictions described above will be resolved for better or worse. What follows is our ‘best guesses’ as to the developments an FX investor can expect in each of these defining themes for 2011.

The European crisis is nowhere near being resolved

“Ireland and Greece have already given up on funding themselves in the markets, and have tapped IMF and Euro-wide bailout funds. It is doubtful whether Portugal can issue bonds to private investors in any significant size. At any rate, current yields of nearly 7% are not economically sustainable, so it is likely that it will soon ask for EFSF funds. Whether or not Portugal is bailed out in 2011 obscures a more important point, in our view. Neither Greece nor Ireland is currently financially viable. The combination of draconian austerity measures, very high real interest costs charged through the bailout facility and refusal to entertain the notion of any haircut on either sovereign or bank debt means that both countries are liquid but insolvent. This contradiction must be resolved through either a significant change in the bailout terms (particularly the interest charged) or a debt restructuring. We remain agnostic on which resolution will actually take place, but adamant that it must be one or the other.

That said, Greece, Ireland and Portugal are small enough that either of the above solutions would be manageable for any and all of them from the viewpoint of the future of the common currency

“Not so Spain. The size of its foreign indebtedness, public and private, is about 1 trillion Euros, most of it owed to core European banks. A Spanish debt restructuring would almost certainly mean the end of the European monetary experiment. Furthermore, the true state of the Spanish banking system, as well as the cost of cleaning up the damage caused by the Spanish real estate bubble, remains shrouded in opacity and equivocation.

If we rule out the possibility of a Eurozone break up, there are two ways in which these problems can be dealt with

“One would be for policymakers to allow the ECB to continue to underwrite the European banking system and expand its purchases of distressed sovereign bonds on an ad-hoc basis. This would be a clear negative both for the euro and the European economy. A more desirable scenario would be for European policymakers to develop a credible Euro-wide fiscal union to complement its monetary one. It would entail explicit fiscal transfer mechanisms between countries, some sort of common sovereign Eurobond instrument, and, critically, bailout packages under conditions that ensure economic viability for the countries receiving them. We consider this later scenario quite unlikely in the near term. Given the heavy issuance needs of peripheral countries in early 2011, we believe that the former solution is likely to be employed and maintain a pessimistic view of the prospect for the European currency.

The second factor that will be key during 2011 is the evolution of the Large Scale Asset Purchases (LSAP) program launched by the Federal Reserve in November, the possibility of an increase in the quantitative easing policy by the Bank of England, as well as the misalignments that these policies have brought about in some of the other G10 economies

Owners of overseas properties should take professional advice when transferring funds to their new country in 2011

“Both the Fed and the Bank of England have made it clear that they intend to maintain an aggressive stance, albeit for somewhat different reasons. In the case of the Fed, it is because of the explicit mandate that it has to maintain full employment as well as price stability, somewhat exceptional among central banks. The Band of England because of fears about the macroeconomic impact of the massive fiscal tightening that the coalition Government is implementing, which (as has been leaked recently) was quietly pushed by BoE leadership all along.

The decision on whether to halt or increase the balance sheets of the Fed and the BoE have had and will continue to have a major impact in financial markets

“This is not only because of the direct downward pressure on their respective currencies and government bond yields effected by the purchases, but also because central banks around the world are pressured to maintain easier monetary policies than is warranted by their domestic economies.

Switzerland, Canada, Scandinavia, and Australia are experiencing relatively thriving domestic demand; buoyant housing markets, propelled by the extremely low interests rates prevailing (except in Australia); and robust export sectors

“Yet their interest rates are very low, and markets are discounting very little additional tightening. A strengthening currency is a poor substitute for rate normalization, as it disproportionality affects the export sector, actually strengthens domestic demand, and has no impact in the housing market. We expect that the complacency in these countries will not last long, and most G10 central banks outside the major currencies will surprise to the upside in terms of rate hikes.

Overall, we think that the market is pricing roughly fairly the size of the second LSAP out of the Fed

“But is underestimating the chances of additional easing by the BoE and the chances of rate hikes in Switzerland, Canada, Sweden and Norway.

The rebalancing of the global economy remains inevitable though it is clear that it will be carried out in an uncoordinated, haphazard manner prone to numerous financial and political accidents along the way

“It must be remarked that, since the trade deficits of the weaker European sovereigns are very quickly closing already, ‘global rebalancing’ is now essentially a euphemism for a lower US trade deficit. We think this issue, which has seceded somewhat from the financial scene recently, will again dominate discussions later in the year for two primary reasons:

1. US consumption indicators are generally rebounding faster than either production or exports, and therefore the considerable progress that had been made during the crisis in correcting the US trade deficit is now starting to be undone. There is no indication whatsoever that US authorities are concerned by this return to a consumption-based economy – rather the opposite; it is being welcomed and encouraged.
2. The balance of payments position of the US tells a worrisome story. The halving of the US current account deficit from roughly 6% of GDP to just 3% has distracted attention away from the way in which this deficit is funded. But while the funding requirements have fallen, the quality of this funding has become remarkably poor. Official investors (foreign central banks and reserve managers) now fund 80% or so of the US current account deficit. This is all the more worrisome when the US is actively discouraging intervention, and thus official financing, while the extremely low yields offered by US fixed income instruments are not sufficient to attract private investors.

All of these unresolved issues regarding the US dollar make it hard to be positive on the long term prospects of the greenback even if we expect the resolution of the Eurozone crisis to be a much more important FX driver in the near term

The final risk factor for economies and financial markets, and one that is particularly relevant for the United Kingdom is the upcoming economic drag from fiscal tightening

“The world has never experienced a simultaneous fiscal retrenching of the kind that is now approaching. Further, the ability of many of the G10 economies to develop self-sustaining economic recoveries to compensate for the loss of fiscal stimuli is not clear. Finally, there is a complacent expectation that continued monetary looseness will compensate for the fiscal cuts: we are much less sanguine, as rates have been at or near zero for a long time already and therefore we do not expect the continuation or even the expansion of monetary easing policies to have much marginal effect.

Particularly at risk here are the countries where the planned fiscal cuts are truly draconian

“The United Kingdom stands out, as do the weaker Eurozone sovereigns. The example of Ireland is particularly sobering: the Irish have been relentlessly cutting Government spending for two years, but the economy has shrunk so fast that the deficit has actually worsened. In contrast, the relative lack of concern with deficits prevailing in the United States could be an unexpected positive for the US currency in the coming year.

While we do not have a crystal ball (unfortunately) we hope this two-part series has helped you in clarifying the issues and events that will drive financial markets in 2011. Good luck to everybody!”

Ebury Partners can be contacted directly via the company’s site at www.eburypartners.co.uk

David Franks, Chief Executive, Blevins Franks: A QROPS can help you structure your pension funds to suit your expatriate status.

Whenever you take any wealth management decisions, whether it’s investment, tax planning or pensions, they should be based on your personal circumstances and objectives.  If you’ve moved abroad I recommend that you review your wealth management arrangements to make sure they are suitable for your position as a tax resident in your new country of residence and that they are the most effective they can be.

If you’ve moved from the UK your currency situation has obviously changed.  You may now have different requirements for income and growth, and your tax planning definitely needs to be reviewed since your income and assets are now taxed under a different tax regime.  You should also consider what tax planning opportunities your new country or your expatriate status has to offer.

While in the past UK pensions remained under the UK rules even if you had permanently moved overseas, this has changed since the introduction of QROPS in 2006.

Qualifying Recognised Overseas Pension Schemes (QROPS) are offshore pension schemes into which HM Revenue & Customs allows UK pensions to be transferred. The provider must meet a number of HMRC rules relating to how and when benefits can be taken and while they must comply with HMRC reporting requirements, this is only for the first five complete UK tax years.

Currency

Unlike UK pension schemes, the assets held within a QROPS and the income paid out can be in any major currency.  This is a significant benefit for British expatriates living in the Eurozone as they can match their pension income to the currency they are spending and therefore remove both exchange rate and exchange costs issues.

Many funds allow you to change the currency after the fund is set up so, for example, you could set up the fund in Sterling and change to Euros at a later date. If in the future you return to the UK you can convert back to Sterling.

Investment and income

Wherever you live, do make sure you take professional advice for your pension

When it comes to setting up your pension fund for your income and capital growth objectives, a QROPS may provide greater discretion over investment choice compared to that of UK-approved pension schemes. QROPS provide considerable flexibility to invest in a wide variety of diversified funds such as equities, bonds and real estate, as well as guaranteed investments to lower investment risk.

There is no requirement to buy an annuity with a QROPS (though you can do so if you wish), so you can leave your pension fund invested as long as you like.

QROPS also provide ability to vary your pension income (within limits) around your lifestyle and financial requirements.

If you have not yet taken your pension commencement lump sum you can still do so after you have transferred into a QROPS, though typically 70% of the fund must be used to provide an income for life.

If you have more than one pension fund you can consolidate them all into one QROPS. This makes it simpler for you to manage the investment assets and could also potentially reduce costs.

Tax benefits

A QROPS can provide significant tax benefits.  It is outside of UK PAYE and while income will be taxed in your country of residence with professional advice you can often set your QROPS up to provide various tax savings. This means you have more income to spend.

If you have been non-UK resident for the five complete and consecutive UK tax years leading up to your death, your fund is exempt from all UK taxes on death. From the 6 April 2011, the 82% tax on income drawdown if you are over 75 years is to be abolished, but at the same time the tax rate on those under 75 will increase from 35% to 55%. A QROPS will therefore help you leave your heirs a much larger inheritance when compared to UK schemes.

Once you are in a QROPS, there will be no further ‘benefit crystallisation events’ that occur so your fund can grow without limit. As a rule there will be no further UK tax charges arising; however certain holdings within a QROPS may still expose you to UK tax charges.

QROPS also avoid succession laws.

All things considered, QROPS can be a very attractive wealth management and tax planning opportunity for British expatriates.

While many private pensions can be transferred you cannot do so if you have already purchased an annuity or if you have begun taking benefits from a final salary scheme. UK state pensions also do not qualify.

You should always seek professional advice from a firm which is authorised to conduct UK pensions business, such as Blevins Franks Financial Management Limited, to ensure that a QROPS would be appropriate for your pension funds and your objectives and for advice on selecting which QROPS to use. An adviser will also explain exactly what benefits you and your family will receive.

Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com  or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

Clapham, London short rent homestay

The financial strain of tuition fees could leave many parents having to choose between their offspring’s further education and their own mortgage. However, what many don’t realise is that their child’s bedroom could be the secret asset that makes a degree a financial possibility.

Despite protests from inside and outside parliament, it seems as though the maximum annual tuition fees are set to increase from £3,290 to £9,000 within two years. And that’s only the tip of the iceberg when you take living costs into account, which the NUS estimates to be around £9,500 a year.

David White, the chief executive of The Children’s Mutual, speculates: “There is a very real concern that parents could be jeopardising their own financial security to help their children avoid university debt”. Remortgaging is one option for parents looking to fund their child’s further education. However, another, less drastic solution has recently opened up, thanks to homestay sites like Crashpadder.com

A common-sense solution

Crashpadder.com allows people to supplement their incomes by renting out spare rooms on a short-term basis. The fit with ‘empty-nesters’ couldn’t be better. Since these would-be students are leaving perfectly good rooms vacant, what better way to fund their next step in life than letting those rooms out to paying guests?

Homestays – also known as ‘pop-up hotels’ – such as those facilitated by Crashpadder.com are a relatively new way for people to supplement their incomes. Adding a room to the site is as easy as placing a posting on eBay, since rooms do not need to conform to any strict regulations. Operating as a host is also relatively low-maintenance, allowing hosts to continue with day-jobs with ease.

What about a lodger?

Oxford Crashpadder bedroom

Having a permanent tenant is another way parents may choose to top up their coffers each month. However, filling your child’s empty bedroom on a permanent basis would inevitably leave them with nowhere to stay when they return home for study breaks and holidays.

As Crashpadder founder, Stephen Rapoport points out: “Short let bookings can last for anything between a single night and a couple of months, allowing for greater flexibility.” A host’s Crashpadder account also features an availability calendar, allowing them to mark periods when the room will be unavailable, which can be especially useful for those with children at University. “We’ve noticed that the demographic of hosts is older than we’d imagined when we set up the website,” continues Rapoport. “The phenomenon of the short-letting empty nester is very palpable onsite.”

Tax free income plus savings to boot

Thanks to the government’s HMRC Rent-a-Room scheme, a host can make up to up to £4,250 a year tax-free from letting furnished rooms in their home. This would go a long way towards a degree and ideally allow parents to leave their savings and mortgage arrangements relatively unscathed.

For more information, contact Crashpadder at: www.crashpadder.com

David Franks, Chief Executive, Blevins Franks

British expatriates do not necessarily escape the attention of the UK tax authority just because they spend less than 91 days in the UK, and the existence of a double tax treaty does not provide as much protection as you may imagine.

It is possible for an individual to be initially classed as a tax resident in both their country of residence and the UK under each country’s local rules. The UK can argue, despite you being a tax resident in your country of residence under the local rules, that you remain a UK tax resident if you have not made a ‘distinct break’ from the UK and cannot prove that you have gone abroad ‘permanently or indefinitely’.

This argument can prevail even when you spend less than 91 days in UK. Maintaining a UK home available for you use in particular is a red flag to the HMRC bull.

Robert Gaines-Cooper maintained that he was non-UK resident, since he spent less than 91 days in the UK each tax year, and therefore he fell within the guidance given in HMRC’s booklet IR20 on residency and non-residency (revised as HMRC 6), regarding the number of days a non-UK resident can spend in the UK, averaged over four UK tax years.

But he had also retained many ties with the UK such as a house for his use, in which his second wife and son lived, and his son attended public school in the UK. Gaines-Cooper also has a collection of classic cars and paintings at the property, and had his Will drawn up under English law.

Buying a home abroad doesn't necessarily mean HMRC will believe you are a full time resident of another country

In upholding a High Court decision, the Court of Appeal found that Gaines-Cooper had not left the UK ‘permanently or indefinitely’ as referred to in IR20, and deemed that he had indeed been UK tax resident and was potentially liable for UK taxes going back over thirty years.

Gaines-Cooper has since won the right to appeal in the Supreme Court, but whichever way the Court rules it is important to remember that each residency case is different and a decision is made on each individual’s set of circumstances. Other court cases also show that spending less than 91 days in the UK is not necessarily enough for HMRC to regard you as non-UK resident.

Tie breaker rules

Many countries, including Spain, France, Portugal and Cyprus, have a double tax treaty which will determine an individual’s tax residency status in favour of just one country, forcing the other to drop their residency claim. If you remain within the UK’s residency rules and the tax residency rules of your country of residence, then tie-breaker rules will come into effect.

Let’s look at Spain as an example (it is similar in many other countries). In Spain, you will become resident for tax purposes if you spend more than 183 days in the calendar year (tax year) in Spain; or your ‘centre of economic interests’ is in Spain.

There are various tax tie-breaker rules to be considered

The first tie-breaker rule is that if you are resident in both countries according to each country’s domestic rules, you are deemed to be resident in the country in which you have a permanent home available to you. Note that a ‘permanent home’ is any form of accommadation which is continuously available to you for your personal use, and does not have to be owned by you.

Where you have a permanent home available in both countries, the second tie-breaker rule comes into play and that is which country is your centre of vital interests, i.e. the country with which your personal and economic relations are the closest. The term ‘centre of vital interests’ covers the full range of social, domestic, financial, political and cultural links within your personal and economic relations.

For example, if you have a home in the UK where many of your possessions are kept, and your family and majority of friends live in the UK, and you have UK-based pensions and investments, it can be difficult to prove that Spain is the centre of your vital interests.

When you are making plans to own a property abroad, do take professional financial advice

If this test is indeterminate, then the third tie-breaker is used: in which country do you have an ‘habitual abode’? This broadly means the country in which, over a reasonable period, you stay more frequently. The comparison must be made over a sufficient length of time for it to be possible to determine whether residence in either the UK or Spain is habitual.

Finally, if the answer to the third test cannot be determined i.e. you have an habitual abode in both countries, you are deemed to be resident in the country of which you are a national. At this point UK nationals will be regarded as UK residents.

How you can protect yourself

There are steps you can take so as not to give HMRC reason to question your UK residency:

• Keep well within the 91 day residency rule, remembering that presence at midnight in the UK counts as a day spent there.
• Sell your UK home and certain possessions and do not keep a property there for your personal use. Personal effects such as family photos, furniture, cars and pets can go with you.
• Your spouse, minor children and any dependants should move abroad to live with you. It is not necessary for adult children or aged parents move with you.
• Dispose of as many UK investments, bank accounts and credit cards as possible.
• Resign from UK club memberships and sever UK business connections.

Under the UK self-assessment system, HMRC do not have to agree your tax residence position. Even though you submit a UK non-resident tax return (or even don’t submit any tax return), HMRC can argue the case several years later.

If you are at all concerned about your UK residency status and would like further advice on this and how to minimise your tax liabilities both in the UK and Spain, a long established and international tax and wealth manager like Blevins Franks can advise you on solutions best suited to your personal circumstances.

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

What is a trust?

By David Franks, Chief Executive, Blevins Franks

A trust is a legal relationship that exists between the settlor, the beneficiaries and the trustees. For tax purposes, a trust is treated as a separate and continuing body of persons and different tax treatment is afforded to trusts than to individuals.

A trust is created when a person (the ‘settlor’) transfers assets to two or more people or a company (the ‘trustees’) with instructions that the assets are to be held for the benefit of one or more individuals (the ‘beneficiaries’). An agreement (the ‘trust deed’) is prepared which sets out the duties and powers of the various parties to the trust.

The settlor can also specify how they want their assets to be handled in a ‘letter of wishes’. Though not legally binding upon the trustees, the wishes are almost always followed by the trustees, unless circumstances change and then their duty is to do the very best they can for the beneficiaries. Trustees are obliged by law to administer the trust so as to safeguard the best interests of the beneficiaries.

The trust deed states who the initial beneficiaries are, which may include yourself, your spouse, children, grandchildren, any future unborn children or anyone else you wish, including charities. The trustees are normally professional trustees or a corporate entity managed by a professional firm authorised to act as a trustee.

The usual types of assets which are placed in a trust are investment portfolios, equities and bonds, bank deposits, life assurance policies, jewellery and property. If you own many assets spread across different countries they can be consolidated in a trust. Trusts are particularly useful when it comes to estate planning and ensuring your assets are used to help your family, according to your wishes. You can stipulate how you want your assets managed and distributed in certain circumstances.

If you leave the UK, don't forget to protect your family's interests. Trust are particularly useful

One example is where you want to leave your money to your spouse/partner if you die first, but know that he/she is uncomfortable with financial planning. The trustees will manage your assets for your spouse according to your wishes. You can do the same to look after yourself should you become incapacitated in the future – the trustees can coordinate protection for them dealing with medical and care needs, as well as full financial support.

Provide instructions

Trusts can prove invaluable for complex family situations, for example if you and/or your spouse have children from previous relationships and you want to ensure that your assets are only distributed as you want them to be.  They are also very useful where you are leaving money to a child as you would provide instructions when he/she is to receive the money and in what amounts, and also on how the monies are to be invested in the meantime.

Assets in a trust are usually protected from bankruptcy, creditors and divorce. A trust is completely confidential – it does not need to be registered and the settlor does not have to be openly connected with it.

Tax and estate planning advantages of a trust

No Spanish succession tax on non-Spanish assets transferred into a trust and income and gains are free from Spanish tax.

The assets themselves would also be free from Spanish wealth tax. Although Spanish wealth tax is currently set at a zero rate, but many experts believe a higher rate will be reinstated after the Spanish government announced a tax offensive on those who have the most and looks to find ways to increase income. Where the trust asset consists of an insurance bond, any beneficiaries resident in the UK may receive up to five per cent per annum of the sum originally invested tax-free. The exact calculation depends on previous withdrawals.

Trusts avoid Spanish succession law.

If the settlor dies in Spain as a non-UK domicile, there is no liability to UK inheritance tax on assets held in certain trusts

Even with a carefully prepared will, probate can be a lengthy process, delaying your estate’s distribution. If your estate is in a trust, there are no delays as the trustees already have possession of the assets and can continue to hold them or distribute them to your beneficiaries according to your wishes.

Modern trust deeds can be tailored to meet your specific requirements, but as they are varied and wide ranging in their application you should always seek expert advice from a wealth management company like Blevins Franks, who are specialists in this area, before establishing a trust to ensure you use the most appropriate type for your circumstances and objectives.

The tax treatment(s) detailed above is current at the time of writing and may change in the future.

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

By Bill Blevins, Managing Director, Blevins Franks

Few expatriates used to think twice about opening an offshore account. They provide a means of keeping Sterling outside the UK (useful to help prove your UK-non residency status); you can usually open and use them from anywhere in the world; interest rates were often higher than their onshore counterparts and they have also been popular for ‘tax planning’ purposes.

While the first two benefits listed above still apply, offshore banks do not necessarily provide the same interest rate advantages that they used to, and from a tax planning point of view the situation is very different today, with more developments on the horizon.

Alternatives homes

Following the collapse of Icelandic banks in the Isle of Man and Channel Islands, savers also began to question how safe their savings were, even though the jurisdictions did then implement or improve depositor protection schemes.

As a result of these changes, more savers today are considering alternative homes for their wealth.

Offshore banks were often used by people to hide capital and interest earnings away from the taxman. While they were legally obliged to declare worldwide income, the taxman had no means of tracing their account so there was little pressure to report it. Interest was usually paid gross and as offshore banks were not bound by the laws of your country of residence it was a case of ‘what the taxman doesn’t know about he can’t tax’.

The lifestyle's attractive but don't forget the taxman back home

The introduction of the EU Savings Tax Directive in 2005 served to change this. All Member States are required to operate automatic exchange of information on interest payments on accounts held by residents of other States. However, Belgium, Luxembourg and Austria were allowed to operate a withholding tax system with a view to change to automatic exchange of information after a transitional period.

The Isle of Man and the Channel Islands also operate withholding tax with the option for exchange of information. The withholding tax option effectively maintains banking secrecy. Although the interest earnings now have tax deducted at source, it still falls to the owner to declare it in his country of residence.

By this time next year this will have changed. In June the Isle of Man parliament agreed that from 1 July 2011 it will withdraw the withholding tax option and only operate automatic exchange of information – there will be no more banking confidentiality for EU residents. This was an endorsement of the commitment it made at the Organisation for Economic Co-operation and Development (OECD) Forum in June 2009.

It was the first offshore jurisdiction to do this and the decision will impact on all expatriates who have not declared their Isle of Man accounts in their country of residence. Anyone affected by this will need to ensure that they have reported all their interests to their local tax authority… or bear the consequences.

Following quickly on the Isle of Man’s heels, on 28 July, Guernsey’s Chief Minister announced that the jurisdiction will introduce automatic exchange of information, thereby abolishing the current option to pay a withholding tax and avoid disclosure. A government announcement said that Fiscal and Economic Policy Group has recommended to the Policy Committee that institutions in Guernsey should move to automatic exchange of information from 1 January 2011, and no later than 1 July 2011.

Following the announcement, other European jurisdictions which operate the withholding tax option, eg Switzerland, could come under increased pressure to follow suit. In any case, the withholding tax rates jumps from 20% to 35% next July.

High interest rates a distant memory

Currently interest earned in offshore banks is not generally more beneficial than onshore banks. The days have passed when they were in a position to offer high returns to attract investors

With the money markets expecting the Bank of England base rate to stay low for some time, many offshore banks have cut the rates they offer on fixed rate bonds. In June, Michelle Slade of Moneyfacts warned that now that demand for savers’ money has eased, rates are being cut as banks readjust back to more normal margins. “Banks do not want to pay more than they have to on savings, so once a few cut rates, others will invariably follow,” she said.

While a couple of banks did increase rates on fixed term bonds in July, there are still very few attractive rates available to those who do not want to tie up their money for too long.

Who owns your bank?

Do you really know who owns the offshore bank you may be using and in which jurisdiction it is based? Since the credit crunch more countries have set up depositor protection schemes but you would need to check with the bank exactly what protection they offer. Banks are no longer considered to be 100% safe and in the event of another failure it could take a long time to receive compensation.

Offshore banks closing

At any time and without much warning offshore banks are being closed down, leaving savers with less options. In June Northern Rock announced that it is closing down its operation in Guernsey on 2 September and Irish Permanent said it was shutting its Isle of Man branch by the end of the year. Other banks may follow as they retrench and reduce peripheral arms of their business. For example the Yorkshire Building Society is deciding whether to keep Yorkshire Guernsey open or not.

More and more foreign banks are closing their doors to US citizens as the US authorities take ever more draconian measures to trace and prevent tax evasion. France started to close branches of French banks in tax havens from March 2010.

Many of advantages that offshore banks used to offer investors are gradually being eroded. There are investment structures available that can reduce tax liability, and offer the potential for capital growth and higher rates of return. Speak to an experienced tax and wealth manager like Blevins Franks for the most suitable tax planning and investment strategy to meet your specific circumstances.

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com or call them on +44 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

David Franks

Throughout Europe economies are buckling under the weight of swollen budget deficits. Besides the costs of the financial stimulus measures introduced during the financial crisis, the economic downturn drastically reduced tax revenue, exacerbating the situation as did the lost tax on bank interest.

Governments throughout Europe are therefore under pressure to cut spending and raise taxes to rein in their deficits. Spain has increased tax on savings income and will increase VAT later this year and France has reduced the social tax breaks available. As we move through 2010 and into the following years we can expect to see tax increases of one form or another spreading throughout Europe.

While Eurozone members are meant to keep their deficits to 3% of gross domestic product or less, this is currently proving an impossible task. Spain’s deficit for 2009 was 11.4%, with 9.8% forecast for this year. The Portuguese deficit rose to a record 9.3% last year, while in France it was also a record at 7.9%, with 8.2% forecast for this year.

While the French government is opposed to increasing taxes, in its 2010 Finance Bill, it went for the option of reducing the ‘social’ tax breaks available as a less direct way of increasing tax revenue. There is no guarantee that we will not see direct tax increases in France in the not too distant future, particularly those aimed at higher earners. The Portuguese government has also so far resisted tax increases, but will it be able to pull the country out of its much-publicised slump without them?

A demographic revolution

The Spanish government’s 2009-2013 Stability Programme aims to reduce the country’s deficit down to 3% by 2013 – a very ambitious task. The government has said that higher taxes and a drive against tax evasion will contribute to the reduction.

Aside from the economic downturn, there is another key issue facing governments throughout Europe. In France, President Sarkozy also touched on this when he said: “In 2010 we will need to consolidate our pensions system, whose future financing I have a duty to secure, and face the challenge of how to care for the elderly, which in the decades ahead will be one of the most painful problems faced by our families.”

This is not a concern for France alone, and echoes a warning in a paper by the Centre for European Reform in 2008, which read: “Europe stands on the cusp of a demographic revolution. Europe’s changing demographic profile poses political, economic and social challenges that are as important as climate change, security and globalisation.”

The post war ‘baby boomer’ generation is starting to retire. Birth rates have been dropping off so that the EU has one of the lowest fertility rates in the world. Octogenarians currently represent 4.4% of the EU population, increasing to 12.1% by 2060. This will result in an increasing ‘dependency ratio’ – the number of retired people as a proportion of those working and paying income tax. Spending on pensions, healthcare and long-term care is estimated to hit 27.5% of GDP by 2035.

Bill Blevins

This is a not insignificant threat to the fiscal stability of EU countries. Countries have a duty to fund care for their elderly, but it begs the question – where will this funding come from, particularly at a time of high public sector debt? In Spain the government has proposed increasing the official retirement age from 65 to 67 (to be phased in between 2013 and 2025), but the major unions have condemned the plan. Even if it goes ahead, it will not be enough. The number of people aged over 64 is set to double over the next 40 years.

Last year the European Commission forecast that unless the UK government cuts state pension costs and healthcare bills, its public debt will jump from 60% of GDP to 160% by 2020 and 406% by 2040. Such forecasts illustrate the fast approaching problems to be faced by the UK and other governments.

To add to these issues, a surge in inflation as a result of the fiscal stimulus packages could also force governments to review their taxation policies.

In the Eurozone governments do not have the luxury of setting their own interest rates even if they would prefer to take that route. Tax rates and government spending, on the other hand, are something they can control, even if their electorate will not thank them.

Higher taxation

Nonetheless, it is still often possible, particularly for higher earners and those with savings and investments, to lower your tax liability to much lower levels than you may expect. So while higher taxation is a threat, with suitable approved arrangements in your country of residence you may still be able to reduce your tax bill.

Besides looking at ways to lower tax on your savings and investments, you can also review any deferred UK private pension funds or pensions in ‘income drawdown’. As an expatriate you may be able to transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme – see an earlier article by Blevins Franks on www.homesandtravel.co.uk)) and potentially enjoy improved tax efficiency on your income and avoid the UK charges on death.

Enjoy the sun and the fun, but don't neglect your money

At the same time as tax planning for your current country of residence, do bear in mind that if you are a British expatriate you may return there one day or, if you do not, your money may return if inherited by UK residents. Provided you take action while still non-UK resident you will be able to organise your wealth in a more tax efficient manner for your return, or on your wealth being passed to your heirs, than UK residents are able to achieve.

The old adage: “Nothing in life is certain save death and taxes” is not entirely true if you plan effectively for the latter – seek advice from an experienced tax and wealth management adviser such as Blevins Franks to establish the best tax mitigation strategies for you.

Contact details: To contact Blevins Franks for additional information go to www.blevinsfranks.com or call them on 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com