Category: Opinion

The introduction of a corporate tax regime in the UAE has undoubtedly shifted the country’s business landscape. For a nation that has long been attractive to businesses due to its tax-free environment, the move toward corporate taxation was significant, requiring businesses to recalibrate their strategies. Now, with the first year under the new regime nearly complete, it’s time to reflect on the key challenges, opportunities, and lessons learned.

In this article, we’ll unpack the essential elements of the new corporate tax regime and explore how businesses can position themselves for success in the UAE’s evolving tax environment.

A Shifting Landscape: The Introduction of Corporate Tax

When the UAE announced the introduction of a corporate tax at a rate of 9% on taxable profits exceeding AED 375,000, it marked a fundamental change for businesses operating within its borders. Companies with profits below this threshold continue to benefit from a 0% tax rate, a clear nod to supporting smaller businesses and start-ups. However, larger companies must now adapt to the new requirements, many of which align with OECD standards.

This move is seen as part of the UAE’s broader strategy to diversify its economy and align with global standards. The introduction of corporate tax came hand-in-hand with ongoing refinements and updates to ensure that businesses are operating under a robust and fair system.

Understanding Free Zones Under the New Regime

The introduction of corporate tax in the UAE brought significant attention to the status of free zones, which historically operated under their own set of rules. Many businesses initially assumed that as long as their activities were conducted outside the UAE mainland, they would remain outside the scope of corporate tax.

However, the Federal Tax Authority (FTA) quickly clarified the framework, introducing the concept of “Qualifying Free Zone Persons.” To benefit from the 0% corporate tax rate, businesses must meet stringent criteria, including conducting qualifying activities and meeting economic substance requirements.

For many free zone entities, the most challenging aspect has been ensuring that income is derived from qualifying activities, as outlined by the FTA. Additionally, businesses conducting mainland operations or failing to meet the specific conditions risk losing their preferential tax status.

This shift has prompted a reassessment of business structures and operational models. As the distinctions between free zones and mainland operations become increasingly complex, companies must remain proactive in ensuring compliance with the new tax regime.

Transfer Pricing: A New Reality

For businesses that have multiple entities or engage in cross-border transactions, the introduction of transfer pricing has been another critical area of adjustment. Transfer pricing regulations require businesses to ensure that transactions between related parties are conducted at arm’s length—that is, reflecting fair market value.

This may sound simple in theory, but in practice, it can add significant complexity to business operations, especially when documenting transactions across borders or within multiple UAE entities. Companies are now required to provide extensive documentation to demonstrate compliance with these new rules. For those unprepared, the administrative burden can be substantial.

Guidance on transfer pricing requirements continues to evolve, with the latest update in November 2024 specifying that the Transfer Pricing Schedule in the corporate tax return must be completed if the total value of transactions with Connected Persons (including their Related Parties) exceeds AED 500,000. However, not all transactions with Connected Persons need to be disclosed. The schedule must only include details for each Connected Person whose aggregate payments or benefits exceed AED 500,000.

As tax expert Steven Ireland notes, “The key to navigating transfer pricing is documentation and justification. Businesses need to ensure that they can clearly show how they arrived at fair market values for related-party transactions.”

Increased Compliance Costs: A Necessary Investment

The new corporate tax regime has not only introduced changes in tax filing requirements but has also led to increased compliance costs for businesses. Companies must now invest in tax advisory services, update their accounting systems, and ensure their internal processes are robust enough to meet the new requirements​.

For smaller businesses, this can be a challenging transition, especially if they were previously operating in a tax-free environment. However, these investments are crucial, not just for compliance but also for future growth. Efficient systems and accurate record-keeping will not only help businesses avoid penalties but can also provide a clearer financial picture, allowing for better strategic decisions.

Ireland emphasises, “Compliance is not just about avoiding penalties; it’s about building systems that benefit your business in the long term.”

Deadline Extensions: A Temporary Solution

In the first year of the new corporate tax regime, one of the most notable developments was the extension of tax filing deadlines for certain businesses. This wasn’t a blanket extension but a targeted measure aimed at addressing delays in the tax system’s readiness. While the extension provided much-needed breathing room for some sectors, it also highlighted the need for businesses to plan for potential disruptions​.

As Ireland points out, “The extension was a practical solution, but it underscores the importance of preparing for the unexpected. Businesses should build flexibility into their tax planning to accommodate any future delays or changes in the system.”

Impact on Free Zone Entities and Corporate Structuring

The new corporate tax regime has significantly impacted how businesses approach corporate structuring. Free zones, once seen as clear paths to tax exemption, now require businesses to meet stringent conditions to qualify for the 0% tax rate.

Companies need to review their structures, especially if they operate in both free zones and the mainland. Failure to meet economic substance requirements or engaging in non-qualifying activities could lead to the imposition of corporate tax​.

Ireland advises businesses to reassess their corporate structures to ensure they are optimised for the new tax environment. “It’s essential to understand the nuances of the new rules. Simply being in a free zone is no longer enough to guarantee tax exemption.”

Common Questions: What You Need to Know

What Expenditure Can Be Claimed as a Deduction?

Businesses can claim deductions for expenses that are wholly and exclusively incurred for the purpose of generating taxable income. This includes salaries, rental costs, and other operational expenses. However, non-deductible items, such as fines, must be carefully documented​

How Should Director Salaries Be Handled?

Director salaries must comply with transfer pricing rules and reflect fair market value. Businesses must be prepared to justify these payments to avoid scrutiny from the tax authorities​.

Is a Free Zone Entity Still Tax Exempt?

Only entities that meet specific criteria, such as engaging in qualifying activities and maintaining economic substance, can benefit from the 0% tax rate in free zones.​

Businesses must regularly review their compliance to ensure they qualify for this exemption.

Practical Steps for Businesses Moving Forward

As the UAE continues to refine its corporate tax regime, businesses need to be proactive in their approach to compliance. Here are a few practical tips:

• Engage Professional Advisors: Tax regulations can be complex, and seeking professional advice can help you navigate the nuances of the new regime.
• Update Compliance Systems: Invest in accounting and compliance systems that are designed to handle the increased requirements under the new tax regime.
• Reassess Corporate Structures: Review your business structure, especially if you operate in both free zones and mainland UAE, to ensure optimal tax efficiency.
• Stay Informed: The UAE’s tax landscape is evolving, and staying up-to-date with legislative changes is essential for long-term success.

‍Conclusion

The first year of the UAE’s corporate tax regime has brought both challenges and opportunities for businesses. As the landscape continues to evolve, staying proactive, investing in compliance, and optimising corporate structures are critical to ensuring success in this new tax environment. By doing so, businesses can navigate the changes while positioning themselves for growth in the years to come.

As the UK government prepares for its upcoming Budget on 30 October, speculation is mounting regarding how it will address a £22 billion shortfall in public finances.

With Prime Minister Keir Starmer announcing that the UK will face “short- term pain for long-term good” and pledging that “those with the broadest shoulders should bear the heaviest burden,” the focus appears to be on high-net-worth individuals and non-domiciled taxpayers.

As the Labour Party have consistently promised no rises to income tax, national insurance and VAT, rumours of a potential ‘wealth tax’ are circulating, alongside discussions about increases in the main rate of Capital Gains Tax (“CGT”) and a renewed examination of Inheritance Tax (“IHT”).

As the government grapples with the challenge of balancing fiscal responsibility with economic growth, the implications of these proposed measures could significantly reshape the financial landscape for affluent taxpayers in the UK.

This article delves into the key speculations surrounding the Budget and the potential impact on the nation’s economy and its wealthiest citizens.

Non-Dom Reforms

Although the non-dom regime is confirmed to be replaced with a new residence-based regime, we still do not know how this is going to be put into effect. The abolition of the remittance basis and the implementation of a new four-year foreign income and gains regime is a key change that will affect many non-domiciled individuals in the upcoming tax years.

We hope to gain further clarification on the residence-based regime and the tax liabilities, including IHT liabilities, on non-domiciled individuals in the Budget.

Capital Gains Tax

Currently, profits exceeding the annual exemption of £3,000 from the sale of assets such as investments, businesses, second homes, or buy-to-let properties, are subject to CGT at up to 20%.

Profits from selling properties that are not an individual’s primary residence are taxed at up to 24%.

A lower rate of CGT (10% on a lifetime limit of £1 million) may also apply where individuals sell shares in certain businesses or assets used in certain businesses. Business Asset Disposal Relief (“BADR”) is a less generous iteration of its predecessor, Entrepreneurs’ Relief, and therefore BADR may be seen as one of the easier reliefs to remove, given the now more limited benefits, and that it, per HMRC estimates, costs the Treasury c£1.5 bn per annum.

The CGT annual allowance has faced many reductions in recent years, dropping from £12,300 to just £3,000 since the 2022/23 tax year. It is difficult to envisage a further reduction in the annual allowance at this time.

There are several options available to Chancellor Rachel Reeves as to how to further reform CGT. One possibility is to equalise the rates at which CGT is charged to income tax rates, meaning that investors could be liable to tax at up to 45% on both income and capital gains. This approach would result in the UK having one of the highest rates of CGT in the world.

An alternative to the rather extreme approach above would be to implement a single fixed rate for capital gains that is higher than the current rates but lower than the highest income tax rate (e.g., 30%).

Other options available to the Chancellor may include the reintroduction of tapering or indexation for long-term gains and heavier taxation on short-term gains (similar to how gains are taxed in the USA) or a limit of the benefit available as a result of commonly utilised exemptions, such as establishing a cap on private residence relief.

Another proposal which has been suggested is to introduce a limit on the uplift of the base cost of assets on death to the value at probate, although care would need to be taken as to how this is implemented to avoid double taxation to CGT and IHT.

We should also note the comments from the Chancellor regarding the taxation of carried interest (a certain type of receipt of private equity executives). Currently taxed at a higher rate of CGT of 28%, it is almost certain that the rate will be increased, potentially to income tax rates.

Inheritance Tax

IHT is applied at a rate of 40% on the value of an estate that exceeds the nil rate band, which is currently set at £325,000. We have discussed how the nil rate band operates in a previous blog, you can access it here.

There are already inevitable changes to IHT in the pipeline, given the upcoming changes to the legislation around an individual’s domicile, which will allow the Chancellor to overhaul the operation of IHT in its entirety. It may be a good opportunity to reintroduce progressive rates of IHT, such that the liabilities on smaller estates are reduced, and larger estates pay more.

Firmly in the firing line are the main IHT reliefs, including potential limits to relief under Business Relief and Agricultural Relief, and removing the IHT exemptions for certain pension pots. It would be surprising to not see mention of these, if not in October, but in a Budget in the near future.

Wealth Tax

Some think tanks have proposed the concept of a 1% wealth tax, similar to taxes imposed on net wealth elsewhere in Europe (e.g., Switzerland and Luxembourg).

It seems unlikely that such a tax would be implemented in the United Kingdom however, due to controversy and the unfair burden that it can impose on individuals who possess valuable properties but earn modest incomes.

The introduction of a wealth tax has not proved to be incredibly effective in other countries; Spain having introduced theirs in 2022 and only raising €632 million. Founder of Tax Policy Associates, Dan Neidle, recently commented on the likelihood of a wealth tax being introduced to the UK on the Financial Times’ Money Talks podcast; “Almost all the proposals we see for a wealth tax are from lobby groups and NGOs, and they’re not serious proposals, it’s political showboating.”

In our view it is far more likely that IHT and CGT will be the focal point for personal taxation in the Budget.

Concern for HNWIs

Understandably, HNWIs find themselves increasingly anxious with the potential changes looming on IHT and CGT. As political rhetoric emphasises taxing those with greater means, many worry about the effect such measures will have on their current financial position and future investments. Increased scrutiny on non-domiciled taxpayers further complicates matters, as they await clarity on how upcoming reforms will affect their tax liabilities.

Ultimately, the evolving economic environment, coupled with proposed tax alterations, threatens to reshape the financial realities for HNWIs in the UK, prompting them to reconsider their taxation profile, and ultimately where they are resident in light of potential upheaval.

If you have any concerns regarding your personal tax position and any potential changes to your liabilities, please feel free to contact us today at hello@sanctoras.com and have a discussion with one of our Associates regarding tax planning and how any changes that arise following the Budget will affect you.

Understanding UAE Corporate Tax: Key Insights for Businesses

Since the UAE Corporate Tax (CT) regime was announced in January 2022, there has been a great deal of uncertainty and ambiguity for businesses across the region. In this article, our Sanctoras UAE Tax Specialist, Charlie Kelleher, will go through the basics of the new framework to help businesses understand their obligations, as well as leverage potential benefits.

‍When did UAE Corporate Tax take effect?

While the UAE Corporate Tax Law took effect on June 1, 2023, businesses with a financial year running from January to December didn’t see their first tax period start until January 1, 2024. This staggered introduction meant that businesses had time to prepare. However, the additional complexity highlights the need for business owners – and their advisors – to stay on their toes to ensure timely registration, avoid penalties and achieve compliance from the start.

‍Corporate Tax registration: timing is crucial

Ensuring your business is registered for Corporate tax in the UAE is essential. It is vital to note that a company’s UAE tax registration deadline depends on when its trade licence was issued, not necessarily the year of issuance. Here’s a breakdown of the registration deadlines:

Registration Deadlines UAE Corporate Tax

Any juridical person that is a Resident Person, including those based in Free Zones, and is incorporated, established, or recognised under UAE laws on or after March 1, 2024, must apply to register for Corporate Tax within three months from the date of its incorporation, establishment, or recognition.

‍Competitive Corporate Tax rates

The UAE offers a globally competitive tax regime. The Corporate Tax rate is 0% for taxable income up to AED 375,000 and 9% for income exceeding this threshold. However, businesses must be aware of adjustments to taxable income due to various rules, including interest deductibility limits, restrictions on charitable contributions, and caps on entertainment expenses. Understanding these nuances is key to effective tax planning.

‍Understanding UAE Free Zones and their impact on tax planning

– What is a Free Zone in the UAE?

The UAE offers investors over 40 Free Zones, including 26 in Dubai, where expatriates and foreign investors can fully own their businesses. These zones are known for their advanced infrastructure and tailored services, aimed at streamlining operations and minimising the time and effort required to run a business.

– What is a Qualifying Free Zone Person (QFZP)?

A QFZP is essentially a company or business entity established within a UAE Free Zone and operating within a UAE Free Zone. However, merely being a business in a Free Zone doesn’t automatically give you access to the tax concessions. In order to qualify as a QZFP, and access the beneficial 0% Corporate Tax rate, the entity must meet certain criteria.

– What criteria must entities meet to be a QZFP?

To qualify as a QFZP, entities must meet the following conditions:

1. Maintain adequate substance in the Free Zone
2. Not have elected to be subject to Corporate Tax
3. Ensure non-qualifying revenues do not exceed the de-minimis requirements
4. Comply with the ‘arm’s length principle’ and transfer pricing documentation
5. Preparing Audited Financial Statements in accordance with the law
6. Meet any other conditions as may be prescribed by the Minister
7. Derive qualifying income*

*Qualifying income includes the following:

• Manufacturing, processing, and distribution of goods or materials
• Holding and managing shares, securities, and ships
• Reinsurance, fund management, and wealth/investment management services, subject to regulatory oversight
• Headquarters, treasury, financing, and leasing services to related parties, including aircraft leasing
• Logistics and ancillary services related to the above activities

‍Please note: if you are a QFZP and generate non-qualifying income, that portion will be taxed at the 9% rate, while your qualifying income will remain subject to the 0% rate. This is contingent upon meeting the de-minimis requirement, which stipulates that non-qualifying revenue must not exceed 5% of total revenue or AED 5 million, whichever is lower. Additionally, if you are a Free Zone entity with non-qualifying income that breaches this threshold, your entire income will be taxed at the standard 9% rate.

‍Who is subject to UAE Corporate Tax?

• UAE-incorporated entities, including free zone entities.
• Foreign entities that are effectively managed and controlled from the UAE.
• Individuals engaged in business activities within the UAE.
• Other persons specified by a Cabinet decision.
• Non-resident entities may also be subject to UAE corporate tax if they have a Permanent Establishment (PE) in the UAE, derive UAE-sourced income, or have a nexus in the UAE, such as deriving income from UAE immovable property.

‍What exemptions and reliefs are available?

Certain types of income are exempt from corporate tax, these include:

• Dividends and profit distributions from UAE and foreign entities can be exempt if they meet the participation exemption criteria: at least 5% ownership, a 12-month holding period (or intent to hold), and the subsidiary is subject to tax at a rate of at least 9% in its home country.
• Income from foreign permanent establishments (PEs) under certain conditions.
• Income earned by non-residents from operating aircraft or ships in international transportation, subject to specific conditions.
• Moreover, small businesses with revenue under AED 3 million can elect to be treated as not deriving taxable income, benefiting from small business relief and reducing their compliance burden.

Are Capital Gains included in taxable income?

Yes, Capital Gains are included in taxable income. Capital Gains and Capital Losses on ownership interests (‘Participating Interest’ as mentioned above) in an entity (‘Participation’) are tax-exempt if they meet all of these criteria:

1. The ownership stake is at least 5%,
2. it’s held for 12 months or intended to be,
3. the Participation is taxed at a minimum rate of 9% in its country or territory.

Can tax losses be carried forward and offset?

Businesses in the UAE can carry forward tax losses indefinitely and offset them against up to 75% of taxable income in future periods, provided they meet specific conditions. However, losses incurred before the implementation of the UAE CT regime, before becoming a taxable person, or from exempt income cannot be offset.

Corporate Tax grouping

Companies in the UAE may form a tax group, which allows them to be treated as a single taxable entity, provided they meet certain criteria such as 95% ownership, a common financial year, and uniform accounting standards. This option can simplify tax filing and reduce administrative costs by consolidating financial statements.

Financial statement requirements and compliance

All taxable persons in the UAE must maintain financial statements in accordance with International Financial Reporting Standards (IFRS). Certain entities, depending on their Free Zone status and if they are deemed a Qualifying Free Zone Person’ may also be required to prepare audited financial statements. All mainland entities are required to prepare audited statements. Records must be maintained for a minimum of seven years.

Tax filing and transfer pricing

Corporate tax returns and payments are due nine months after the end of the tax period, with no requirements for preliminary or advance filings. Additionally, transactions with related parties and connected persons must meet the ‘arm’s length’ standard to ensure fair market value, a requirement that also extends to Free Zone entities to maintain their QFZP status.

Navigating the new Corporate Tax Landscape

Navigating the UAE’s Corporate Tax landscape requires careful planning and a deep understanding of the regulatory framework. To avoid penalties, businesses must stay informed and compliant.

For expert guidance tailored to your business needs, contact Charlie Kelleher at Sanctoras: charlie.kelleher@sanctoras.com

After spending almost two months over the past year in Bali and Thailand, I have witnessed first-hand the thriving communities of digital nomads in these locations. The COVID-19 pandemic has significantly accelerated the shift towards remote work, making the freedom to work from anywhere increasingly accessible. This shift has led to a surge in temporary and semi-permanent relocations among nomadic workers, who often seek better infrastructure, education, healthcare or simply idyllic beaches! However, this lifestyle comes with complex tax challenges which must be navigated carefully.

What is a digital nomad?

A digital nomad is a geographically mobile individual who adopts a lifestyle of remote work. They often seek out destinations with beautiful scenery, vibrant co-working communities and a reliable internet connection. The flexibility offered by remote work has provided opportunities for these people to experience new countries and their cultures, enriching both their personal and work life.

Important tax considerations for digital nomads

Tax residence rules around the world

‍Tax residence rules differ significantly across countries, posing challenges for nomadic workers. It is also possible (and increasingly common) to be resident for tax purposes in more than one country at the same time. 

Touching on tax residence in the UK, Spain and Germany

‍Most commonly, you are considered a tax resident if you spend more than 183 days per year in a country. For instance, in the United Kingdom, Spain, and Germany, this 183-day rule is applied. Additionally, Spain considers you a resident if your primary economic interests are there, while Germany considers you a resident if you have an available place of residence that you use regularly. The UK may also treat you as being tax resident if you spend as few as 16 days in the UK if you have a number of ties to the country – it can get very tricky very quickly.

Tax residence rules in the United States

In the United States, determining tax residence involves a more complex formula. If you are present for at least 31 days in the current year, the formula also counts one-third of the days present in the previous year and one-sixth of the days from the year before that. If the total equals or exceeds 183 days, you are considered a tax resident for the current year. As the US operates at both Federal and State level, you may also be resident in a particular State depending on that State’s rules. Spending time in certain cities, like New York? You could end up being subject to Federal, New York State and New York City taxes!

Tax residence rules in South Africa

South Africa uses a combination of criteria to establish residence. You must spend at least 91 days in the current tax year and 91 days in each of the preceding five tax years. Additionally, your total days spent in South Africa over these five years must equal or exceed 915 days.

Tax years vary by country, complicating matters further. For example, the UK’s tax year runs from April 6th to April 5th the following year, unlike the calendar year used by many other countries.

Double taxation treaties

‍If you become a tax resident in more than one country, double taxation treaties between the relevant countries are crucial to consider. These treaties determine which country has the primary right to tax certain income and gains received by individuals, companies and other entities, and ultimately are in force to prevent being taxed multiple times in different territories on the same income/gains. Tax treaties do not cover all taxes, and in some cases (particularly in the United States), State and City taxes are often not covered by treaties, and may be payable regardless of whether Federal taxes are payable in a territory.

Taxation at source

‍Many jurisdictions levy taxation at source (similar to the deduction of tax on salaries in the UK through the PAYE system) on services performed within their country, regardless of residence. This can include remote work undertaken for clients in another country, which may still be subject to local taxation.

Practical steps digital nomads can take to avoid tax surprises

• Track your travels and maintain a running total of days spent in each country, as well as what you are doing in each country on any given day (particularly if you are working). This will help you manage your travel schedule and reduce the risk of crossing residence thresholds. Additionally, any day counts are generally not a ‘target’, and buffers should be built in to account for any unexpected delays or travel cancellations.
• Keep detailed records of your travel, including passport stamps, flight itineraries, and accommodation receipts. These documents can be crucial if you need to prove your residence status in any particular territory. Maintaining a diary is also helpful, even using a standard calendar app on your phone.
• Before spending extended periods in a new country, consult with a tax advisor who understands the specific rules and regulations. They can provide insights tailored to your situation, as well as considering potential implications for your employer (if relevant).

Triggering unintentional tax liabilities

‍Should you inadvertently incur tax liabilities and find yourself subject to a tax enquiry, it is essential to immediately obtain professional guidance and address the situation without delay. Engaging with tax authorities in a clear and timely manner can help minimise penalties and potentially lead to a more favourable outcome.

The right approach to managing taxation for nomadic workers and digital nomads

Navigating the tax landscape as a nomadic worker is complex, but manageable with the right approach. Understanding the rules, keeping detailed records, and seeking timely professional advice are essential steps to avoid unwelcome tax surprises. It is worth noting that it is often advisable to appoint one person to facilitate cross-border discussions.

This article is the first in a series which will delve deeper into the intricacies of tax issues for geographically mobile individuals.

Over the coming months Sanctoras will publish several articles exploring:

• Obtaining visas and immigration considerations for digital nomads
• Changes in residence status 
• Filing requirements (such as those for non-resident landlords)
• A brief overview of domicile considerations

For further information or to keep in touch with updates please contact us at hello@sanctoras.com or connect on LinkedIn and Instagram.

What is ATED?

ATED is a yearly levy imposed on residential properties owned by entities other than individuals, such as corporations, partnerships with corporate members, or collective investment schemes (including unit trusts). 

At what value are properties subject to the ATED charge?

Currently, the charge is levied on properties valued at £500,000 or more. Entities falling under ATED regulations are liable for an annual property tax determined by the property’s value.

On what basis is the charge calculated? 

The charge for the fiscal year until 31 March 2024, is calculated based on the property’s value as of 1 April 2022, or the acquisition date if later. This will also be the case for the subsequent three years. 

When should valuations be conducted?

Ideally, for residential properties owned prior to 1 April 2022, valuations should have been conducted as close to this date as possible.

Who can undertake a value assessment for ATED purposes? 

 

The assessment should reflect the property’s open market value. While a formal valuation isn’t strictly mandated, engaging a property professional is advisable to ensure a robust and reasonable figure. HMRC guidance specifies that the valuation must be a precise amount rather than a range.

When should the ATED return be submitted for the fiscal year up to 31 March 2025? 

30 April 2024.

Are there exemptions and reliefs from ATED charges?

Many companies will not have to pay the ATED charge, which is a flat annual fee based on the value of the property – for example, properties let wholly to third parties or under construction may be exempt from the charge. However they are still required to file an ATED return, and may incur penalties for late submission.

How should we apply for relief on ATED charges?

Certain exemptions and reliefs are accessible from the ATED charge, including provisions for legitimate property developers or investors leasing to third parties. However, all relief claims must be included in the return, either through a comprehensive ATED return or a simplified form termed a Relief Declaration Return. Online filing for the ATED return will be available starting from 1 April 2024.

‍When should I settle any ATED taxes for the fiscal year until 31 March 2025?

30 April 2024.

What are the applicable charges for the period 1 April 2024 to 31 March 2025?

What are the penalties for late submission of ATED returns?‍

We hope that you have found these simple FAQs useful. If you prefer to speak to a member of our team to discuss your a specific ATED return please email us hello@sanctoras.com

Having recently celebrated 10 years working in tax, I realised that I never had the pleasure of dealing with tax matters prior to the launch of Statutory Residence Test (SRT) regime, the introduction of the SRT pre-dating the start of my career by about 6 months. Never have I had to deal with the concepts of determining whether someone was “Ordinarily Resident”, or the rather confusing “Resident but not Ordinarily Resident”.

Luckily for me, my clients and fellow advisors the SRT brought to an end much of the uncertainty around an individual’s residence. Prior to April 2013, whether one was resident or not was mostly determined by alignment of the facts of a person’s situation to countless tribunal and court cases decided over decades.

Determining UK residence

And so, effective 6 April 2013, the SRT was born, and with it came certainty. Thresholds for day counts written into statute allowed for taxpayers (and advisors!) to accurately determine, from year to year, whether an individual was likely to be resident for tax purposes in the UK or not. With the complexities and consequences of other legislation which relies on an individual’s residence, such as temporary non-residence and the deemed domicile rules, having certainty matters.

From April 2025, an individual’s residence will also determine their domicile and, as a knock-on effect, their exposure to UK Inheritance Tax. The requirement for certainty will then be all the more important.

The SRT is built on the broad notions that it should be harder to break one’s UK residence than to commence a UK residence, and that the more ties one has to the UK (through family, accommodation, or work), the fewer number of days one can spend in the UK before becoming resident.

Step-by-step

Working through the SRT flowchart allows a taxpayer to determine firstly whether they are automatically non-UK resident, either by virtue of day counts or working full time overseas. If none of these tests are met, then a determination of whether they are automatically UK resident, again, by virtue of a day count, working in the UK or having a home in the UK. 

‍What if the tests are not met? 

If none of the above tests are met, they must consider the matrix of the number of ties they have with the UK, and the number of days spent in the UK under the Sufficient Ties Test, which considers the taxpayer’s family, accommodation, work and presence in the UK. At the end of the test, the taxpayer should have affirmation over their residence status for that tax year.

Although the SRT isn’t perfect (a statutory definition of “Home”, amongst other things, may make life a little easier!), it is certainly more perfect than what we had previously and the single case that we have seen since 2013 has been focussed on a single concept of the SRT (A Taxpayer v HMRC, concerning what is an exceptional circumstance).

Thank you SRT for over a decade of day counts and ties

Happy 10 and a bit birthday SRT, thank you for over a decade of day counts and ties, of meticulously recording working hours and keeping hotel receipts. May you live a long and helpful life!

Keen to get an initial indication of your status? 

Take our interactive Statutory Residence Test https://srt.sanctoras.com/.

Please note that the result of this test is for an indication only, please seek specialist advice on your individual circumstances.

If you want to discuss anything covered in this article, please contact Richard Thomson-Curtis, or anyone in the Sanctoras team via hello@sanctoras.com.

This blog is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

It follows, therefore, that there will…be a particular moment in time at which his domicile changes if he acquires a domicile of choice which replaces his domicile of origin.

Before that moment, his domicile will have been his domicile of origin.

After that moment it will be his domicile of choice.

Locating the moment may be a difficult question of fact.”

Mr Justice Lewison, Gaines-Cooper v Revenue and Customs Commissioners. [2007] BTC 704‍

‍Definition of domicile

The legislation sitting on my desk, now running to some 20,000 pages in length, has over doubled since HMRC first insisted that “Tax doesn’t have to be taxing” in 2002.

Yet nowhere in those 20,000 pages will you find a definition of “Domicile”. Domicile is a general concept in English common law that has been adapted into use in tax, but it is also relevant for family law, succession, divorce and more. It broadly means the place where an individual considers they are from, and where they feel is home. In the UK, every individual has a jurisdiction in which they are domiciled and can only be domiciled in one jurisdiction at a time (unlike the concept of residence for tax purposes, whereby it is possible to be resident in more than one country simultaneously).

Although we refer in this article to ‘UK domicile’, we technically mean being domiciled in one of the three legal jurisdictions that make up the United Kingdom: England & Wales, Scotland, and Northern Ireland. We use ‘UK’ here as shorthand, as there is currently generally no difference for UK tax purposes (although whether a taxpayer was domiciled in England & Wales or Scotland was recently considered by the First-tier Tax Tribunal in the 2023 case of  Strachan v HMRC). It is worth bearing in mind that it may make a very significant difference in other areas of law.

‘Domicile’ may also have a different meaning in other jurisdictions; here, we talk only about the position in the UK.

‍Why domicile matters

If one is not domiciled in the UK, this gives individuals access to a different basis of taxation than individuals who are UK domiciled.

As well as only being subject to UK Inheritance Tax (IHT) on UK situs assets, non-domiciled individuals can also access the remittance basis of taxation, broadly meaning that only income and gains which are brought to or used in the UK are subject to tax in the UK. There is a charge for longer-term residents (starting at £30,000 per annum), but can result in significant income and gains being protected from UK tax.

UK resident and domiciled individuals do not have this benefit, and are subject to UK tax on their worldwide income and gains, and their worldwide assets are subject to UK IHT.

There are currently four ways an individual may have a domicile for UK tax purposes:

‍Domicile of origin

A domicile of origin is acquired from an individual’s father at birth (or mother, if their parents are unmarried). Most individuals born in the UK to UK parents will have a UK domicile of origin.

‍Domicile of dependence

Until the age of 16, an individual’s domicile follows that of whom they are a legal dependent (generally their father if their parents are married, or their mother if unmarried, or their father has died). If the adult acquires a domicile of choice elsewhere, the domicile of their dependents will also change.

Prior to 1974, the domicile of married women followed that of their husband. Thankfully that rather archaic notion was changed with effect from 1 January 1974 and since, a married woman’s domicile may not necessarily be the same as her husband’s.

‍Domicile of choice

A domicile of choice is effectively the abandonment of an individual’s domicile of origin and the establishment of a new domicile in a separate territory of the individual’s choice. As domicile is effectively an individual’s permanent home, there is a substantial burden of proof required to evidence that they have abandoned their domicile of origin, and established a new domicile of choice.

There are many tax cases concerned with an individual’s domicile of choice, Gaines-Cooper, Udny, Bullock, Shah, Coller, and Henkes to note a few. The list of domicile cases stretches towards, if not past 100. As such, what exactly constitutes a domicile of choice has been crafted and re-crafted by judges over the years, and as no one case’s fact pattern is identical to the next, there is no checklist or definitive threshold. Therefore the facts must be considered in the round. HMRC guidance says that “A wide range of evidence has to be examined in evaluating intention. No single act or circumstance is determinative; all facts, including apparently trivial ones, have to be considered.”

These facts may include having wills drafted under the law of that country, acquiring citizenship, voting in elections, social and business ties, intentions for retirement, property, burial arrangements, length of time spent in a place, the list goes on. Although some factors may carry greater weight than others, no single factor can be relied upon in isolation.

‍Deemed domicile

Individuals who have been resident in at least 15 of the previous 20 tax years are deemed to be domiciled in the UK for all taxes.

An individual who was born in the UK with a Domicile of Origin, acquires a Domicile of Choice elsewhere, but resumes UK residence can also have their UK domicile ‘revived’ for tax purposes whilst they remain resident in the UK.

Breaking a deemed domicile in the UK requires being resident outside of the UK for at least six complete tax years (although for IHT purposes, if the individual is not intent on returning to the UK, an absence of three years would break their deemed domicile).

‍Here is a scenario for you:

It is feasible for an individual to have been domiciled in the UK under several of the above methods.

John was born in the UK to a father who had a UK domicile of choice.

John has a domicile of origin in the UK

John’s father died when John was 5 years old, and he returned to Portugal with his mother, where his mother subsequently revived her Portuguese domicile of origin.

‍John loses his domicile of origin in the UK, and gains a domicile of dependence in Portugal. At age 16, this becomes a domicile of choice in Portugal.

Now an adult, John travels around the world but finds work in London, and has been resident for tax purposes in the UK for 25 years. John considers the UK to be home and is considered to have acquired a domicile of choice in the UK.

Following the changes introduced in Finance Act (No 2) 2017, John is deemed domiciled in the UK under Condition A, as a Formerly Domiciled Resident (and will be deemed domiciled in the UK at any point when he is resident in the UK). 

‍If John’s father had not been domiciled in the UK at the time of John’s birth, John would instead be deemed domiciled in the UK under Condition B, as he has been resident in the UK for more than 15 of the previous 20 tax years. ‍

The future of domicile

HMRC are particularly active in challenging domicile statuses at present. Domicile enquiries can be somewhat intrusive, with questions on intentions, assets, and family being quite probing. As the basis of proof of domicile is a “balance of probabilities” test, rather than a “beyond reasonable doubt”, it is important, if attempting to break one’s UK domicile, to ensure that as many factors are aligned in supporting that claim.

It isn’t hard to imagine the future of domicile changing drastically over the next decade. The appetite to change the domicile rules may be slightly higher, now that Portugal has recently made a change to their Non-Habitual Residents Regime

The Labour Party in particular have been fairly vocal in their desire to reform the non-domicile regime, but there hasn’t been much detail as to what that may look like. As we get closer to an election here in the UK, and as party manifestos are published, we should get a better idea.

As I write, it is nine months since the implementation of changes to the divorce and dissolution taxation rules (April 2023); rules which were designed to simplify the divorce process and achieve fairness and clarity.

‍What are the real world impacts of the rule changes? 

Overall a welcome change, but at Sanctoras we are not particularly seeing any direct impacts as yet – though these impacts may not be borne out until cases progress beyond a year.

Broadly, the feeling is that the changes will have widespread benefit for the more simple cases, but are unlikely to make significant differences to already stressful proceedings in the complex, multi-jurisdictional cases we tend to be instructed in. Unfortunately, the changes to the rules have certainly not solved the issues around working out complex tax issues at the start of the divorce process and throughout negotiations, which are critical to assisting the parties, their lawyers and the court in reaching a final settlement.

Potentially, we may see more activity regarding the Capital Gains Tax changes after 6 April, as by that time couples who separated in the previous tax year should feel the direct benefit of not having quite so much time pressure to transfer assets – though no doubt most parties will still want to conclude proceedings as soon as possible to move on with their lives.

A reminder of the key changes which came in in April 2023:

• Potentially indefinite deadline

Under the new rules from 6 April 2023, transfers of assets between separating spouses or civil partners are now treated as “no gain/no loss” transfers for CGT purposes for an indefinite period, provided the transfers are made pursuant to a formal divorce agreement (including an Order made by consent). This means that the transfer is deemed to occur at the original cost of the asset, thereby deferring any CGT liability until a future disposal.

• The ‘three-year’ rule

The changes allow transfers made between the parties other than under a Court Order until the end of the tax year three years following separation. A couple who separated on 1 May 2023 will therefore now have until 5 April 2027 to benefit from the no gain/no loss transfer provisions (in effect, almost four years since the actual date of separation).

This three-year period, however, will end if the Court pronounces decree absolute or issues a final order. Any subsequent assets being transferred between the parties would therefore need to be included in the formal court-approved agreement to continue to benefit from tax-neutrality.

• Accurate record-keeping

It is crucial to emphasise the importance of maintaining accurate records of all asset transfers, including the original cost and acquisition dates. This information will be vital for future CGT calculations when the assets are eventually disposed of.

Check out our previous article detailing the taxation changes.

‍High value, international or complex divorce cases

No matter which taxation specialist you or your team choose, it is vital that this specialist collaborates closely with the multidisciplinary team involved in your divorce. Professionals such as family law solicitors, financial planners, should be in regular contact to ensure an holistic and comprehensive approach to the parties’ financial well-being.

This is particularly relevant in international, high-value or otherwise complex cases, where specialist advice – often across jurisdictional borders – is paramount. We urge clients to obtain advice at the earliest stage, as whilst there has been some relaxation and simplification matters can still turn out to be rather complex. 

Recent complex cases at Sanctoras: 

• Discovering the true value of assets in high value divorce
• Highlighting historical tax inaccuracies
• Avoiding confrontation by working with both parties
• Applying UK tax law to overseas divorces
• Coordinating complex cross-border advice across England, US, South America and Spain

Need specialist guidance?

Please contact me, James Heathcote to discuss your own specific circumstances – or those of your client – in confidence. If you would like to understand more about my professional CV relating to divorce, I will be happy to share this with you.

Not ready to reach out to us?

Please take a look at the Separation and Divorce pages of our website.

Effectively managing significant family wealth requires a multifaceted strategy, one important facet of this can be the family office.

In today’s world it is not uncommon to see family members – and family assets – spread across the globe. These assets are commonly held within a variety of ownership structures, from trusts to companies, with some significant assets even being held personally. Having effective oversight of family assets is key to ensure that the family wealth is managed responsibly and sustainably for generations to come.

What is a family office?

It is essentially a structure, often a company, set up to facilitate the day-to-day administration, as well as the long term management of a family’s wealth and interests.

‍Are family offices all set up in the same way?

No, and they shouldn’t be.

In our view, it is as simple as this: If you have seen one family office, you have seen one family office.

The idea behind a family office structure is that it is very far from a one-size-fits-all solution. An effective family office should be tailored to meet the specific needs and intentions of the family for whom it has been created, taking into consideration a range of factors including wealth levels, tax implications, family dynamics, reputational concerns, location of family members and assets, ownership structure of assets (whether personally or via a family trust) and the long-term objectives of various family members.

‍How does a family office support those with family wealth? 

A family office helps in striking a balance between wealth creation and succession planning for family members spanning different generations. Through this, families are empowered to define a clear purpose and create a lasting legacy. 

A family office structure importantly promotes professionalism in wealth management, which is of utmost importance for families engaged in international affairs. 

‍What does a family office do?

Broadly speaking, a family office may advise on and take responsibility for areas such as: 

• tax planning;
• trusts and family investments;
• establishing and maintaining various entities both domestically and globally;
• succession planning (including Shari’a-compliant succession);
• global mobility;
• family governance;
• immigration and visas;
• philanthropic opportunities;
• banking and investments.

Many family offices also work with professional advisors to ensure that tax and legal obligations are adhered to, and that any filing obligations are met in a timely and efficient manner.

‍Thinking about you and your family – frequently asked questions

Is setting up a family office right for you? 

There are lots of elements to consider. Whilst many private client firms may look only at a person’s level of wealth to make this decision, at Sanctoras we find it most effective to look at your life as a whole and the benefits to you in terms of your vision for the future. 

We take into account a spectrum of elements such as: the current complexity of your investments, assets and business interests, the values which guide you, the vision you have for your wealth and the vision you have for future generations, your philanthropic aims, family dynamics, your mindset.

Aren’t family offices only for those families with over £50,000,000?

No. At Sanctoras we think it’s less about seeing the family in terms of their net worth, and more about looking at their life, and their objectives for a structure, as a whole.

A family office structure may not be appropriate for many, but for those where there is a requirement, we don’t consider that a particular level of wealth should be a decisive factor in establishing a family office.

Is there a set structure for a family office?

No. As we have said above “if you have seen one family office, you have seen one family office”.

Your family office can be structured to suit your family, your wealth levels, your intentions for the future and taking into account the complexity of your assets.

Family offices can range from a single-person operation, often employed within a family business, to a multi-site, multi-national, multi-staff set 

Don’t family offices cost tens of thousands to set up and run?

They don’t have to. 

For those families with very complex needs (such as requiring day-to-day, hands-on support, tailored investment advice and detailed tax advice), it is likely that more staff, with specialised skills may be required to support the family. As such fees may be higher.

For families with more simple requirements (e.g., the family only has cash to manage and/or invest), the services offered by a family office are likely to be more straightforward and, as a result costs are likely to be lower.

‍Does having a family office involve a loss of control over business interests and personal matters? 

If there are any assets you don’t want to lose control of, there is no requirement to pass ownership or control over to a family office structure. 

The structure of your family office (whether through a single family office or multi-family office), and the assets it controls should be structured how you want it, and how best suits you.

‍Should I go for a single family office or multi-family office structure?

The benefit of a single family office is that it would be established and its structure would be set up exactly for your family’s needs and values. It’s investment philosophy would be tailored to your family only. It would also serve your family as its only client, meaning that your point of contact would not have other clients to service. As a result, a single family office operation would generally be more expensive to set up and operate.

A multi-family office would have, most likely, expanded from what was originally a single family office which has opened its client base to non-family clients. As a result, the business would be more established, and may be more appropriate for families with less complex requirements. As a result, the cost of using the services of a multi-family office may be lower. However, the services you would receive (such as investment philosophy), may not be tailored to your families exact requirements.