Tax and residency: Taking up a role in the UK

Question

I have a client, let’s call him ‘Mr Carney’. He is a Canadian who has recently been asked to move to the UK to work at a major financial institution for an extended contract (over four years). What tax considerations should he keep in mind, particularly with regards to residency and housing? What are the questions he should ask his prospective employer?

Answer

You’re certainly not alone in finding the UK’s tax system and residency rules difficult to navigate. As your client is a senior executive working in the UK, there are a number of tax matters to consider, especially given the new tax legislation that came into effect on 6 April 2013 (FA 2013 Sch 45).

Confirm how he’ll be using his housing allowance

Your client is coming to the UK for longer than two years, so he will not fall within the temporary workplace rules. This means that only the first £8,000 of any relocation allowance from his new employer will be tax-free (ITEPA 2003 s 271). This is unlikely to go far in London’s overheated property market. Mr Carney, for example, will likely be making full use of the £250,000 housing allowance that is part of his package.

If your client is offered a similar allowance in the form of additional salary, it is important to remember that it will be taxed at your client’s personal rate (45% for an additional rate taxpayer), and 2% national insurance will be deducted. Perhaps more likely is that your client will be given a budget for rent that would be paid by his employer. Provided the employer enters into the rental contract, then being entitled to live in a property rent-free would result in a taxable benefit in kind. Having a benefit in kind rather than additional salary would still mean that tax is payable, but it does remove the individual’s personal 2% national insurance liability.

Determine residence status

The new residency rules put in place on 6 April 2013 set out no fewer than five different scenarios (in FA 2013 Sch 45 Part 3 paras 47–51) under which an individual arriving in the UK can treat part of the tax year as a non-resident and part as if they were resident.

In Mr Carney’s case, as a full-time employee of the Bank of England, he falls within one of the five scenarios and so will qualify for the split-year treatment. His official date for arrival in the UK was 1 July. So by splitting the year, none of his income as governor of the Bank of Canada will be subject to UK tax. Unless, of course, it is UK sourced (which we certainly don’t imagine is the case!).

However, the chancellor did introduce a complication for internationally mobile individuals who have some form of tie to the UK prior to their arrival. The ‘sufficient ties’ test (defined in FA 2013 Sch 45 Part 1 para 17) means that if a non-resident meets the sufficient ties test in the period between 6 April 2013 and the date he starts to be treated as UK resident, he will be seen as resident for the entire tax year. The number of days your client can be in the UK is time apportioned, depending on the month of his arrival. For instance, if Mr Carney did have some UK ties before his arrival, say, a home here and he spent more than 90 days in the UK last year attending interviews and publicity events, then he could have only spent a maximum of up to 30 days here between 6 April 2013 and 1 July 2013 when he started his full-time employment. Before your client packs his bags and flies over for another round of interviews, you should consider adding up whether the time he has spent here will impact his tax situation.

Keep the domicile clean

If your client become UK resident but is non-domiciled, he can choose to be taxed on the remittance basis. This means he pays UK tax on:

• UK income and capital gains; and
• any foreign income and capital gains that are brought (remitted) to the UK.

In our example, as a former Goldman Sachs executive, Mr Carney will presumably have savings and investments that he expects to create capital gains as well as income. As is normal for non-doms, he will likely instruct his bank to operate a separate income and capital account. This will ensure he doesn’t mix his clean capital and remittance basis income. Similarly, his stockbroker will hopefully have sold any UK shares before he arrived, to avoid unnecessarily incurring UK income and gains.

National insurance

Despite its drive to simplify tax regulation, the government has retained the concept of ordinary resident status for NIC purposes, even though the concept has been abolished for tax purposes. This means that even if your client is a non-dom, he will be liable to NIC from his first pay packet onwards.

This assumes of course your client is not simply being borrowed from his Canadian role. Employees on secondment to the UK from Canada for a period of up to five years can remain liable to social security contributions in Canada under the UK/Canada double contribution convention.

Keeping up pension contributions

In 2003, the UK/Canada double tax treaty was amended with regard to pensions and pension contributions. It now states that for a period not exceeding five years, contributions to a Canadian pension can, subject to certain provisos, receive tax relief in the UK in the same way as UK pension contributions.

Despite the raft of new regulations for people not domiciled in the UK, the governor’s situation is relatively simple from a tax perspective – your client’s may not be. It will be far more complicated if he is transferring on secondment or within a group of companies, for example. Before taking any major decisions, make sure your client is well briefed to ensure his employment offer includes a clear housing provision, and that he can be taxed on the remittance basis without any undue complication.