TOP RATE OF UK INCOME TAX INCREASES TO 50%

  With the proposed introduction of the 50% top rate of income tax in the UK from 6 April 2010 a number of higher earning residents of the UK may be considering relocating to jurisdictions with lower tax rates.

The following case study illustrates that people with high incomes can achieve a very significant reduction in their tax liabilities by moving to Guernsey.

Case Study
Mrs A sits as a director on the boards of two UK companies. 10% of her duties need to be performed in the UK but the remaining 90% can be performed outside the UK. She holds shares in the two companies and also owns a commercial property in the UK which is let to an unrelated business. She receives director’s fees of £400,000 per annum, net dividends of £100,000 and commercial rental income after expenses of £150,000. She also has bank deposits generating annual interest of £100,000 after the deduction of 20% withholding tax. She pays interest of £15,000 annually on a £400,000 mortgage secured on her home.

Mrs A intends to sell a residential property for £500,000 which she purchased as a buy to let investment for £150,000 and which she has never occupied.

The two tables below show calculations of the income and capital gains tax that would be payable by Mrs A if she were to stay in the UK (Table 1) and if she were to move to Guernsey (Table 2). The annual allowances and exemptions and the UK tax bands that apply here have not yet been published so these have been estimated. Social security contributions have been ignored but are lower in Guernsey.





In this scenario Mrs A would save about £225,000 of tax in the year ended 5 April 2011 by moving to Guernsey.

Moving from one country to another is clearly a major decision and in order to break UK resident status for the purposes of UK taxation, a great deal of separation is required. There are no hard and fast rules for what is needed to break UK residence as the residence test is very subjective. However, individuals would need to spend very little time in the UK keeping visits to a minimum. They would need to consider selling their UK home, closing UK bank accounts and breaking links with clubs and associations. They would also need to establish strong links with their new country of residence such as purchasing a home, getting on the electoral role and getting involved socially. Some planning will be necessary to mitigate UK tax liabilities further using corporate structures and, in due course, UK inheritance tax planning could be undertaken, but have not been expanded on further in this article.

FOR MORE INFORMATION CONTACT

André Trebert
Tel: +44 (0) 1481 727929           andre.trebert@praxisgroup.com