Tax Tip of the Month
June 2009
A year abroad for your financial health
One tax-saving strategy that is definitely still about, despite some rumours we have heard to the contrary, is that of taking a year’s non-UK residence and ‘emptying’ the reserves of your company during that year of non-residence.
Quite simply, the UK Revenue doesn’t tax non-UK residents on dividends received from UK companies. So if you’ve been retaining profits year on year in your company, perhaps because it’s so expensive in tax terms to pay them out to yourself as dividends, this could be a very good way to wipe the slate clean and transfer the company reserves to you so that, when you return to the UK in due course (if you do), this money is now fully tax paid.
Where we think there may be some confusion about this rule having been abolished and replaced by a ‘five-year rule’ is in relation to non-UK domiciliaries who look to remit previously unremitted income during a year of non-residence. Broadly speaking, you now have a five-year rule in this situation, but we’re not talking about that, we’re talking about a straightforward question of a UK-resident and probably also UK-domiciled individual who pays UK source-income out in a single year of non-residence.
It may be true to say, though, that becoming non-resident is now a more complex matter than it was. Alternatively, you may say that it always has been a tricky point that you need to handle with care, and it’s only recently that people have come to realise this.
So, if you’re going to become non-resident for a year, do it properly. Don’t adopt an approach of spending the maximum amount of time you think you are allowed in the UK, keeping your spouse and family here, etc. Instead, do the maximum you can to establish that the UK is not your home in that period, and try to spend the minimum amount of time in this country during that year (which must include a complete tax year).
The Revenue has just published a new booklet on non-residence, which is called HMRC 6. This supersedes the old (and comparatively friendly) Booklet IR20, which you should now throw away.
Sometimes, things are not as simple as paying out a massive cash dividend, though. Perhaps the company doesn’t have very much cash, and most of its reserves are in the form of things like debtors, stock or even real property, which can’t easily be transferred out to the shareholders as a dividend, and in some cases would even give rise to capital gains taxation on the company if it did so.
So one way of facilitating getting the reserves out of the company without these practical and tax problems would be for the company to become a member of a limited-liability partnership (LLP) and introduce its assets into the LLP as capital. If you play your cards right, this introduction in itself is not a taxable event. But the result of it in legal and accounting terms is that the company now has, as its sole asset, its capital account in the LLP. There is no practical or tax problem, then, in transferring this balance out to the individual, who would also normally be a member of the LLP in this scenario.
So, as and when the various assets of the business turn into cash, they can be paid out to the individual against his capital account balance tax-free.
