Welcome to the world of income tax
A new land, a new home, a new spouse, a new life. This is part two of the Bermuda Pondstraddler continuing series. Part one featured a relevant discussion on this hypothetical Bermudian individual's background and emigration concerns was published in The Royal Gazette, last month (see link below).
A frequently asked question from a Bermuda Resident Soon-to-be-Retired. “I'm making a permanent move to the United Kingdom after retirement to be with my extended family. I'm planning ahead as I've never been exposed to the UK tax system and it appears that my ‘new tax responsibilities' and future financial planning will be daunting.”
We think, what is the big deal moving country? Just go — take the simple approach. Sell everything and walk in with cash only.
However, life is never, ever that simple. Pensions, property, elderly relatives, long-held investments, life insurance, foreign currencies, businesses, estates and trusts, and so on may not be readily rationalised, complicating the picture.
BRSR, our reader said it first.
Understanding any income tax regime outside of Bermuda (we don't have such a tax structure) is culture shock. All those endlessly confusing tax manuals.
Thus, recommendations are always made to seek qualified professional advice to define an individual/family position, both pre and post-financial planning for another country's taxation, residency, domicile, investment, insurance, pensions, retirement, and estate planning.
Should BRSR become a UK resident or stay non-resident? This status determination is an absolute perquisite. Again, see my previous RG article linked below. Where you are considered resident is where you will be subject to tax — in most countries — on your worldwide income.
Non-resident status: if an individual is classified as a non-resident, he will be exempt from UK tax on non-UK sources of income, and capital gains except for assets used in UK trade or businesses — provided currently, that the non-residence period spans at least five complete years.
How is residency determined? The UK HMRC (Her Majesty's Revenue & Customs) Statutory Residence Test utilises a number of precise and subjective criteria that are applied to an individual's circumstances to establish UK residence (or non-residence) status.
Fiscal year computations! Unlike most countries, the UK uses a 150-year old fiscal tax year, from April 6 to April 5 each year. Each fiscal year residency computation also involves day-counting necessitating maintaining accurate travel records.
SRT Three Tests. Every individual's circumstance is considered separately, plus the three tests need to be reviewed each and every year. Each test runs consecutively, so if an individual meets the criteria category of the first test — the Automatic Overseas Test, the second and third are disregarded. If the second is inconclusive, then the third test is taken.
Brief test summaries — see details in guidance links below.
Part A — Automatic Overseas Tests
Two parts are a confirmation (or not) of prior UK residency and a day-counting set of tests, retroactive in perspective. The third component assesses full-time overseas employment without significant breaks during the tax year, also day counting time spent in the UK.
Part B — Automatic UK Tests
1. You meet the substantial presence in the UK — more than 182 days.
2. You have a home in the UK available to you (three months) where you spend a certain number of days (30), an overseas home where you spend less time than in the UK, or you do not own an overseas home.
3. You work full time in the UK.
Part C — The Sufficient Ties Test
This test is tediously long and used if one and two are inadequate. Five detailed, connecting criteria determine if sufficient ties to the UK exist: family, accommodation, work, 90-day ties — spending 90 days or more in the UK in either of the previous two tax years, and country ties.
The number of ties are then calculated on a day count basis for the resident/non-resident decision.
Determining domicile is equally important for both income tax and estate/inheritance reasons. BRSR has Bermuda (not UK) domicile based on being a born Bermudian of a Bermudian-domiciled father. Currently, he plans to rent his Bermuda property to care for his elderly mother's nursing-home care, but bequeathing it ultimately to his children.
If he keeps his Bermuda domicile, will his UK estate avoid paying inheritance tax on his Bermuda (soon-to-be considered foreign) property?
Bermuda (foreign domicile) may have another benefit. The UK alternative remittance basis tax treatment is available to people who are UK resident but not domiciled. Based on certain criteria, BRSR may be able to exclude foreign income/gains from tax if he does not remit proceeds to the UK.
Got all that? And you thought the United States Substantial Presence Test based on day-counting only was complicated!
Keep in mind this article provides general information on just some of the moving country issues for planning. Specific consultation for your personal situation is absolutely warranted. Complicated, confusing, costly, yes, but doing it yourself could be worse. Better to start on your new life on the right foot in the right country for your best future.
BRSR is not finished. Next month: how to handle BRSR's other income/assets relative to the UK? BRSR may have some Bermuda tax obligations, too, giving the changing nature of future budgets. How will BRSR handle various Bermuda pensions distributed in a series of payments (eg annuity or drawdown), Bermuda life insurance, and Bermuda estate planning?
Disclosure: this is a composite illustrative overview situation provided as general information reference purposes only, it does not reference any specific person, living or deceased. Readers are advised that tax laws are subject to change without notice — this article is not intended to be, and cannot be used or relied upon for any individual's personal financial planning advice.
“The Tax complexities of relocating abroad”, Martha Myron, The Royal Gazette, December 1, 2018, https://tinyurl.com/y8rwthe2
HMRC — Her Majesty's Revenue and Customs Guidance note for residence, domicile and the remittance basis: RDR1 and RDR3 (more than 100 pages each!), https://tinyurl.com/yamkcxsr
The UK Statutory Residence Test RDR#, https://tinyurl.com/ozo5uhx
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Personal finance columnist to The Royal Gazette. All proceeds earned from this column go to The Reading Clinic. Contact: firstname.lastname@example.org