Olim and others need to be aware of how not to leave the UK tax net.
There‘s not much gloom and doom in Israel these days. The economy is doing nicely. There‘s a 10-year tax holiday for new residents and ‘‘senior‘‘ returning residents (who lived outside Israel over 10 years) for non-Israeli-source income and gains.
And to cap it all, Elton John is coming to perform his music in Israel. Perhaps he will sing ‘‘Goodbye Yellow Brick Road.‘‘ This is especially relevant for olim from the UK and elsewhere when considering their residence, ordinary residence and domicile status.
In the UK, the Court of Appeal has just issued a judgment in the Gaines-Cooper case. This was a lesson on how not to leave the UK tax net, which olim and others need to be aware of.
The Gaines-Cooper case
Mr. Gaines-Cooper started a successful jukebox venture in England in 1958 and went on to set up other businesses around the world. He didn‘t make aliya to Israel; he preferred tax exile in the Seychelles.
In 1975, he bought a house in the Seychelles and then constructed and operated a plastics factory there. In 1976, he was granted a residency permit for the Seychelles. He also retained, through the medium of an offshore company, a house and farm in England. There he had a collection of paintings, classic cars and guns, and he went to the Ascot races.
In 1993, Mr. Gaines-Cooper remarried. His new wife was a Seychellois, but she went to study and then work in England. The marriage took place in England. In 1994, Mrs. Gaines-Cooper applied for naturalization as a British subject. In 1998, their son, James, was born in England, where he later went to school.
Mr. Gaines-Cooper claimed that he had kept strictly Her Majesty‘s Revenue & Customs (HMRC) demands that tax exiles can spend no more than 91 days a year in Britain. But the recent judgement, written by Lord Justice Alan Moses, ruled that this was not enough, because Mr. Gaines-Cooper had never given up his UK fiscal residence.
The UK does not have a statutory definition of fiscal residence. Instead, residence is defined in various cases, many dating back to the 19th Century. So HMRC issued guidance, known as IR20. The Court of Appeal accepted this as ‘‘being within the Revenue‘s powers of providing statements of practice and identifying how it proposed to deal with the residential status of taxpayers in particular circumstances… it assisted cooperation and, thereby, the collection of tax.‘‘
In brief, IR20 guidance indicated that an individual can leave the UK and be treated as nonresident and not ordinarily resident in the UK if he/she visits the UK for less than 183 days in any tax year and on average less than 91 days per tax year – but only after leaving the UK for at least a whole tax year: (1) to work full-time abroad; or (2) to live permanently or indefinitely outside the UK; or (3) for a settled purpose.
In the Gaines-Cooper case, the taxpayer did not manage to prove ‘‘a distinct break from family and social ties‘‘ in the UK, so he remained a UK resident regardless of his days in and out of the UK. He retained UK residential property, some UK businesses and links to the Swansea Rugby Union Football Club and the Area Health Authority. In short, the ‘‘center of gravity of his life interests and his chief residence was in the UK… and he spent more time in the UK than the Seychelles or anywhere else.‘‘
Was this a change of policy on HMRC‘s part? No, according to the Court of Appeal, just a ‘‘closer and more rigorous scrutiny‘‘ of the situation.
What does HMRC now require?
HMRC replaced its IR20 publication with HMRC6, which was updated on February 12, 2010, just four days before the Gaines-Cooper judgement was issued. This says, among other things:
If you are leaving the
UK permanently or indefinitely, either to work or for another reason, you must tell HMRC by contacting your Tax Office. It will give you form P85 to complete so that you can get any tax refund you are owed. It will also tell you if you will need to complete a UK tax return after you have left the country.
If you say you are no longer resident and ordinarily resident in the UK, HMRC might ask you to give some evidence to show that you have left the UK permanently or indefinitely. For example, HMRC would expect you to show that when you left the UK you had acquired accommodation abroad to live in as a permanent home.
If you still have property in the UK that you can use after you leave, HMRC might want you to explain why you are retaining that property when you say you have left the UK.
There are now murmurs for ‘‘statutory definitions‘‘ of residency and domicile. However, our feeling is that this could take a long time before it is legislated; it will probably be delayed by the upcoming UK election and the recession.
What does this mean for UK olim?
If you are making aliya to Israel, make a clean break with the UK. This will reduce your UK taxability even if you receive a 10-year Israeli tax holiday (exemption from Israeli tax and reporting) for non-Israeli-source income and gains.
In our experience, many UK olim retain work links and/or investments in the UK or other countries and fly frequently to those countries, returning to their families in Israel for the weekends, for example. If you are one of those people, review your UK tax status in light of the Gaines-Cooper case with professional advisors in each country.
In cases of doubt, UK olim have one extra ace up their sleeve: the UK-Israel tax treaty. If HMRC claims you are still a UK resident but Israel happily treats you as an Israeli resident with a ‘‘center of living‘‘ in Israel, you can insist on applying ‘‘tiebreaker‘‘ tests in the treaty to be fiscally resident in one country, not both. These tests, in order of priority, are: permanent home, center of vital interests, habitual abode, nationality and, if all else fails, mutual agreement between the tax authorities of the two countries.
Get specific UK advice about minimizing your exposure not only to UK income tax but also to UK capital-gains tax and inheritance tax on assets in the UK, even if you successfully become an Israeli fiscal resident. Inheritance tax is hefty: 40 percent on the full value of your UK assets in excess of the GBP 325,000 nil-rate amount, not just on your gain.
The timing of your aliya must be planned appropriately in advance of D-Day (Departure Day).
Get specific Israeli advice about stretching the 10-year tax holiday beyond the 10 years and to Israeli-source income and gains, in certain circumstances. An appropriate structure needs to be planned before you become an Israeli resident.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is a UK/Israel accountant at Harris Consulting & Tax Ltd. in Ramat Gan. Stuart Harris is a UK chartered certified accountant at Stuart Harris Associates Ltd. in London.