A recent tax residency court case involving a couple living in Portugal and my recent article on the subject, A Tale of Two Leavers, have generated quite a bit of interest. This is an important subject for British expatriates and worth visiting again.
If you want to stop paying income and capital gains taxes in the UK, you must ensure you are non-UK resident. It is not enough to look at Portugal’s tax residency rules, you also need to understand the rules governing UK tax residency, follow them carefully each year and keep records if necessary.
In the case of Mr and Mrs Rumbelow, getting it wrong cost them £600,000 in taxes.
The Rumbelows left the UK in April 2001, initially being granted residence in Belgium. Later that tax year they disposed of UK properties, believing they would avoid UK capital gains tax since they were no longer resident there.
They bought a plot of land in Portugal, had a villa built and moved there in September 2002. Becoming a Belgian resident first meant that their property disposals in 2001-02 would be subject to a zero rate of capital gains tax in Belgium; if they had been resident in Portugal then they would have had to pay tax there.
HM Revenue & Customs opened a tax enquiry into their disposals of UK property, and they were assessed for tax as a result. The matter was referred to the First Tier Tax Tribunal.
Mr and Mrs Rumbelow maintained they stayed within the limits set for non-UK residence and made a “substantial loosening” of family, social and business ties to amount to a distinct break as required by HMRC's IR20 residence guidance. However they were unable to provide a detailed diary of their movements, or documentary evidence of their Portuguese villa purchase.
The tribunal used evidence of cash withdrawals, debit card purchases and records of business transactions to track their movements, and considered they showed the UK visits must have been more frequent and extensive than described. The fact that their 15 year old daughter remained in the UK family Cheshire home, where they stayed on visits, and they kept a taxed and insured car there did not help.
The tribunal ruled that their settled and usual abode remained the house in Cheshire, and they were resident in the UK. HMRC's decision to levy capital gains tax for the years 2001-2005 was upheld.
Although they were resident in Belgium and then Portugal, it is possible to be resident in more than one country under the local rules. Double tax treaties exist for such cases, but do not provide as much protection as many believe. In this case, the terms meant that the gains were taxable in the UK.
The case is reminiscent of Robert Gaines-Cooper’s, which had highlighted how difficult it can be sever tax ties with the UK. Gaines-Cooper, a wealthy entrepreneur, had moved to the Seychelles in 1976. Although he kept his days in the UK to less than 91 – which was the widely accepted measure of residence – the court ruled that he had such close connections with the UK that he was in fact still resident there and liable for years of back taxes.
On the other hand, careful planning about when you leave the UK and sell assets can prove very beneficial. In a case brought by HMRC against Mr Glyn, the tribunal ruled in favour of Mr Glyn, who saved himself £5.5 million in capital gains tax as a result. The tribunal ruled that he had effected a distinct break; significantly loosened his family, social and business ties and he had no “habitual abode” or “abode for a settled purpose” in the UK. It is clear that Mr Glyn’s meticulous records aided his case considerably.
These court cases relate to the pre-2013 residency guidance. The UK’s Statutory Residence Test which came into effect last April does clarify matters considerably going forward. It is still very detailed and complex, but at least there are clearer rules to follow.
However HMRC is still looking at cases from the previous 10 years, and the old and new rules also run alongside for three years.
Whether pre or post April 2013, the burden of proof falls on the taxpayer. It is therefore essential that you seek specialist advice, understand the application of the rules, follow them closely and keep detailed records.
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 is advised to seek personalised advice.
Written by Gavin Scott, Senior Partner, Blevins Franks