What are the real implications of your travel and relocation delays?
If you find yourself dealing with issues related to relocation or tax residency, you will want to know what you can do to protect your wealth. We look at these issues in detail, with expert comment from Matthew Braithwaite, Partner at Wedlake Bell LLP, and our Senior Client Directors Nicholas Toubkin (London, UK) and Joanne Leach (Nice, France).
Lockdowns and your tax residency status
There is little warning when countries decide to close borders for all but essential travel. It is no surprise, therefore, that many individuals have found themselves unexpectedly locked down in a country that they are visiting.
“Ongoing lockdown restrictions are having a significant impact on the tax affairs of international individuals,” Matthew, who advises international clients on their legal and tax affairs, tells us. “The amount of time an individual can spend in the UK [or another country] is increasingly likely to be out of the control of the individual themselves.”
If you cannot leave as planned due to new travel restrictions, you may – depending on that country’s residency rules – find that you are at risk of becoming tax resident. It is important to note that this rule applies to all travellers; your status can change each tax year and it does not matter if you were non-resident for tax purposes when you arrived.
When – and how – do you become resident for tax purposes?
Each country has its own rules when it comes to determining who is – and is not – resident for tax purposes. Most focus primarily on the number of days that you have spent in the country in question during the tax year concerned. When you – knowingly or unknowingly – satisfy residency criteria, you become tax resident.
In the UK, for example, the Statutory Residence Test (SRT) is used to determine your tax status for a certain tax year. SRT is reliant on a day-counting test. It also takes into consideration the number of ties that you as an individual have to the UK. Ties can be those that ‘bind’ you to the UK for work, family and accommodation; they can extend to days spent in the UK in previous tax years too.
“For those individuals who already spend time in the UK, there is a significant risk that the latest lockdown could prevent those who are here from leaving anytime soon,” Matthew begins. “Back then [in the first lockdown] the assumption was that individuals would be able to manage their day counts for the rest of the current tax year to compensate for any additional days spent in the UK during the first lockdown.”
With continued uncertainty in the UK and abroad, the ability to exercise control over day counts while travelling – and navigating quarantines and lockdowns – has become much more difficult.
Unpleasant surprises for those deemed tax resident
Being deemed resident for tax purposes in a country that you are just visiting – and subsequently locked down in – can bring with it a variety of unpleasant surprises.
“For those who have left the UK for tax purposes within the last five years, being inadvertently treated as a tax resident during the current tax year could mean that they are taxed on any disposals they have made in the preceding five years in the current tax year, under the temporary non-residence rules – a nasty tax trap,” Matthew cautions.
Joanne Leach, our Senior Client Director in Nice, tells of similar ‘surprises’ in France, highlighting the potential inheritance tax (IHT) plight of a couple with several trusts in the UK with complicated structures. “If they become tax resident in France, the trusts need to be declared and each transaction within that trust, and potentially the monies within the trust, would be deemed liable to succession tax at 60% should they die.”
“you will want to be sure that your investment structures are suitable for tax purposes and currency.”
For directors who find themselves ‘stuck’ abroad, another potential issue may emerge if they unwittingly become resident for tax purposes. “Any decisions made in the UK by directors of a company who find themselves unexpectedly UK resident could have the effect of treating the company as UK tax resident, subject to corporation tax on its profits,” Matthew reveals. The same may be true if you are the director of a UK company who is making decisions while locked down abroad.
Tax relief: available agreements and waivers
Country-specific waivers and agreements can help you protect your wealth if you are locked-down in a foreign country and exceeding day counts. Here, we consider two options that may be available to you if you find yourself resident in two countries (dual residence) or running out of permitted days:
- Double tax agreements
If you have spent a substantial amount of time travelling between two countries, and you satisfy each country’s residency tests, then you may find yourself resident for tax purposes in both countries (dual residence). In such a scenario, you may be required to pay tax on your worldwide income in both locations. Fortunately, a number of countries have DTAs in place to ensure that individuals do not pay tax on their income more than once.
Before travelling – during the pandemic or otherwise – it is wise to be aware of any DTAs in place in the countries that you are (or may be) spending large amounts of time in.
- Exceptional circumstances and country-specific waivers
If you are unable to leave a country that you are visiting due to coronavirus restrictions, some countries are now introducing – or being encouraged to introduce – waivers for those exceeding their day counts.
Matthew explains: “The UK Government has recognised the impact of Covid and confirmed that additional unplanned days spent in the UK as a direct result of Covid would be considered to be the result of ‘’exceptional circumstances’, enabling up to 60 days to be discarded.”
To protect your wealth, avoid making assumptions
While agreements and waivers may put your mind at ease, it is worth noting that it is unwise to simply assume that you will be eligible.
Matthew states that the roll-out of ‘exceptional circumstances’ here in the UK has “led to the misassumption on the part of individuals that they will fall within the scope of these exceptional circumstances, when in fact they may not.”
Joanne tells us that a growing number of individuals who live primarily in the UK, but have second homes in France, have been contacting her regarding their residence status for tax purposes. “Many have found themselves overstaying their permitted days [in France], trying to navigate the travel bans whilst also trying to obey the message that any travel must be considered ‘essential’.”
She continues: “The European Commission is encouraging EU members to waive any penalties or sanctions on individuals that overstay related to Covid-19 travel restrictions, but it is only being encouraged, and if individuals find that they are staying longer, they may become deemed resident for tax purposes in that country… that could have catastrophic consequences.”
Both warn against assuming that you will automatically be eligible for a country-specific initiative like the UK’s exceptional circumstances. Joanne says: “We don’t know, at this stage, how lenient governments will be.”
Matthew continues: “Exceptional circumstances is likely to have a significant impact on those individuals who are planning to move to the UK during the next tax year. They may carry out pre-residence planning during the current tax year based on the assumption that they are currently non-UK resident.”
Protecting your wealth: tailored, independent advice from professionals
When it comes to tax residency concerns, seeking professional advice is always the best course of action. Mistakes made in relation to tax residence – such as paying tax in the wrong country – create situations that require time consuming and costly fixes.
“The key here is that sound tax advice is obtained, and sooner rather than later, to assess the likely impact of residence and any possible planning options available,” Matthew points out.
Speaking with a legal specialist and a financial adviser with international experience allows you to better understand the issues that you may face if you exceed day counts (or have already done so) in the country that you are locked down in. This then gives you and your advisers time to look at alternative planning options and the ways in which you can best protect your wealth, even if you are unable to avoid a change in residency status.
Moving abroad during the pandemic
Moving abroad during the pandemic brings with it a number of challenges. Many of our UK-based and international clients are facing a number of financial and legal issues associated with ever-changing travel restrictions, country-specific rules, and an inability to get sign off on, or approval of, travel / financial documents.
“There have been delays in various governmental processes, notably in responses from HMRC,” Nick states. “This is delaying clients in moving to new locations.”
He highlights the unique case of a client whose relocation plans have been put on hold for twelve months, while he waits for HMRC to “confirm the tax treatment on their very sizeable pension to enable that the drawdown would be tax free in the country that they are moving to.”
Requesting legal and financial advice from experienced professionals can help you protect your wealth during and after your move, or if your relocation plans are delayed. From unintentionally breaching visa conditions to assessing the financial implications and alternatives available to you, the right advice will help you understand and mitigate risk.
Nick tells us: “I have a number of clients who have moved country during the course of the pandemic, primarily for work reasons. It is possible but it is even more important to plan in advance than was the case in the past and ensure that you have everything required in order to make your move well in advance.”
Find out how you can protect your wealth while travelling or relocating during the pandemic
To discuss the ways in which you can protect your wealth while travelling or relocating during the pandemic, contact our London or Nice office. Our experienced international advisers are here to support you throughout lockdown and beyond