Editor’s note: This article, which has already appeared elsewhere, is republished by WealthBriefing with the authors’ permission. As always, this publication does not necessarily endorse the views expressed here but it is grateful for its contribution to the debate. As explained here recently, the French presidential elections are already being regarded as having a knock-on impact on the UK due to the calls by the victorious Francois Hollande for higher taxes on wealthier citizens.

David Anderson, solicitor advocate and chartered tax adviser and Graeme Perry, solicitor, both work at Sykes Anderson, solicitors and chartered tax advisors.

Please note that matters of tax law and residency are complex and you should not rely on this article without professional advice on the facts of your case.

Following the recent presidential election in France it is widely anticipated that there will be significant tax increases imposed on wealthy, high earners in France. A number of these individuals may be contemplating a move away from the country in order to escape the higher rate tax which may reach 75 per cent.

Given its proximity to France the UK may be a viable option for individuals who want to leave France. Although not generally considered a tax haven the UK’s approach to non-dom taxation offers some potential opportunities for individuals with international interests.

The concept of domicile

The UK has a concept of domicile which is distinct from the French concept of domicile. It is used in the broader sense of where someone comes from or belongs and is not necessarily the same as where someone is resident. In summary, if you are born to married parents, you obtain your domicile of origin from your father. If your parents were not married at the time of birth, you obtain your domicile of origin from your mother. Your domicile can change in a limited number of ways. For example, a domicile of choice is acquired when you live in a country with the intention of permanently or indefinitely remaining there and you sever all links to the country of your domicile of origin.

Case law shows that it is relatively difficult to acquire a domicile of choice and if you maintain links with France and have French assets this would suggest that you have not cut all ties with France. It is generally accepted in the UK that a domicile of origin is far more tenacious than one of choice and that you are likely to retain it if you maintain links with your country of origin. It is possible (and there are cases of this nature) to have lived in the UK your whole life without acquiring a domicile of choice here. People who do not have UK descendants and have never lived here should in general be able to demonstrate non-dom status in the UK.

Remittance basis of taxation

Normally UK resident individuals are taxed on their worldwide income on an arising basis. That is you pay UK tax when the income arises whether or not you bring it (remit it) to the UK.

Although the default position is that non-domiciled individuals are taxed on the same basis as all other UK residents, you can, if you are resident in the UK but not UK domiciled, elect to be taxed on a remittance rather than arising basis. This means you only get taxed on income and gains which you bring or remit to the UK. A remittance for these purposes is any money or other property which derives from offshore income or gains, which are brought either directly or indirectly into the UK to benefit either you or your spouse/children etc. This is widely interpreted by HM Revenue & Customs so funds brought to the UK via a company or trust will also be treated as a remittance.

This effectively means that you will not be taxed on any non-UK income and gains which you leave outside the UK. This is quite straightforward in relation to savings income but the rules are more complicated when relating to income from employment or a trade.

If you are employed by a UK company, any employment income will be taxed on the normal arising basis so it will all be taxable even if you are paid into an offshore account. If a part of your duties are carried on in the UK, the entire employment income will be taxed on the arising basis even if your employer is outside the UK. The only way the remittance basis will apply is if all your duties are carried on outside the UK for a non-UK company.

Only incidental UK duties will be allowed. The use of split contracts whereby you have one role in the UK and another outside the UK for the same employer is very risky. The HMRC is likely to view this as one employment. As a result, very careful consideration will be required for structuring any employment income including whether there is an overseas group company which could employ you or, in some circumstances whether one should be set up specifically. The rules are different if you are not considered to be ordinary resident in the UK but this has limited application and is not a viable long-term strategy.

When it comes to self-employed income, this will all be taxable in the UK if the trade is based in the UK. The trade is deemed to be based not where work is carried on but where the trade is managed and controlled. A UK resident sole trader is likely to be viewed as being based in the UK so worldwide income will be taxed on an arising basis. In these circumstances it would certainly be sensible to consider the use of a non-UK company. It is often best practice to use a company based in a jurisdiction which has a network of tax treaties. The most suitable jurisdiction will depend largely on where your clients are based.

Remittance basis charge

Although it has been well publicised that there are now charges which must be paid each year by non-doms looking to benefit from this basis of taxation, these do not apply until someone has been resident in the UK for 7 years. As such people can take advantage of this method of taxation when they first move here without a significant charge.

There are certain downsides to electing for the remittance basis including the loss of your personal allowance for income tax (although this will be lost in any case if your income exceeds £116,210) and annual allowance for capital gains tax. As such, it is important to fully analyse your position and ensure that this basis will be of benefit to you.

Inheritance tax

As set out above, it is difficult to obtain a domicile of choice in the UK. This is important for inheritance tax purposes as the estates of individuals who are not UK domiciled are only subject to UK inheritance tax on UK based assets. Non-UK assets are exempt. However, in addition to the common law domicile concept, there is a statutory concept whereby individuals who have been resident in the UK for 17 of the previous 20 tax years are deemed to be UK domiciled. This brings their worldwide estate within UK inheritance tax.

Importantly, UK law is subject to international law, which includes any bilateral treaties entered into by the UK which overrule UK domestic law. These are often overlooked by practitioners with limited international tax experience. The UK had agreed a limited number of treaties on inheritance tax prior to the introduction of the deemed domicile provisions, including France. As these treaties were in existence before the UK Law was introduced, HMRC sets out clearly in its published guidance that the application of the deemed domicile test is precluded in relation to individuals falling within these treaties. Therefore individuals with a domicile of origin in these countries (including France) will not be subject to the deemed domicile test even if they have been resident in the UK for more than 17 of the last 20 tax years.

This means that an individual with a French domicile of origin will only become subject to UK inheritance tax on their worldwide assets if they obtain a domicile of choice here, which is unlikely. UK assets will always be within UK inheritance tax regardless of domicile.

France has no separate concept of residency and domicile. Only individuals who are French resident at death will be subject to French inheritance tax on their non-French assets. French assets will remain within French inheritance tax regardless of residency.

This means that individuals who move to the UK but have a French domicile of origin should face no inheritance tax in either country on assets located outside the UK and France. Consideration should be given as to whether the ownership of assets can be structured to effectively take them outside both tax nets.

It is important to note that the tax treaty applies only to inheritance tax on death so lifetime inheritance tax may still be an issue for individuals who have been long term residents of the UK. However, gifts during lifetime should not be subject to immediate inheritance tax charges in the UK, which does not operate a gift tax system like France. The gifts will only become chargeable if the donor dies within 7 years.

Individuals in these circumstances can also contemplate the use of non-UK trusts to reduce their likely inheritance tax exposure.