Page last updated at 14:29 GMT, Monday, 5 October 2009 15:29 UK

Q&A: How to become a tax exile

By Ian Pollock
Personal finance reporter, BBC News

Tracey Emin
Heading for Provence in the new tax year?

The artist Tracy Emin has said she may move to the south of France, partly to avoid paying the new 50% top rate of tax when it starts next April.

She will not be the first person to move away to pay less tax.

The Rolling Stones moved to France for a while in the early 1970s.

More recently, formula one driver Lewis Hamilton moved to Switzerland, attracted partly by its willingness to cut special tax deals for the very wealthy.

And about six million UK citizens live abroad, many in places where the income tax rate is lower than in the UK, such as the many pensioners in Spain.

What are the rules?

The rules are not what they used to be. In fact, they are not really rules at all, but guidance from HM Revenue & Customs (HMRC), rather than hard-and-fast laws.

Until April this year, everything hinged on your physical presence in the UK.

If you moved abroad, you could largely avoid UK taxes on your income, so long as you did not come back to the UK for 183 days or more in any one year, and did not spend an annual average of 91 days or more here, over four years.

The guidance also said that the days you spent travelling into and out of the UK did not count towards those totals, allowing some people to come and go too frequently, abusing the system.

New guidance published in April has changed that.

Time spent travelling does now count if you are in the UK at midnight on those days.

And the Revenue may challenge your status if you still have strong connections with the UK while claiming to be resident abroad.

"The Revenue may try and say you were still resident and tax you as such because of the uncertainty about the rules," warns John Whiting, tax policy director at the Chartered Institute of Taxation (CIOT).

"The more complex your affairs are, and the more you keep coming back, the more difficult it is," he adds.

How strict is the new guidance now?

The emphasis is now on your remaining links with the UK, says Ronnie Ludwig at accountancy firm Saffery Champness.

If you want to be sure you will not be regarded as UK tax resident you need, in effect, to emigrate
Ronnie Ludwig, Saffery Champness

He says the Revenue may still try to tax you if you have too many fingers in too many pies back here in the UK.

"The big issue is having a property for your use, even if you pay rent, or if you have any economic interest here other than investments," he says.

"That could be if your main banking arrangements are still here, or if you have a share in a business in the UK or have UK credit cards or even mobile phones.

"Even being a member of a golf club can be fatal to your plans," he says.

"If you want to be sure you will not be regarded as UK tax resident, you need, in effect, to emigrate," says Mr Ludwig.

What taxes might someone actually avoid?

If you move abroad, then income earned outside the UK will no longer be taxed by the UK, but by the tax authorities of your new home country.

You will also avoid paying UK national insurance, and if you stay away for five tax years, any capital gains tax too.

But any income still earned in the UK will continue to be taxed by the HMRC, including interest on savings or investment, rental income, or profit on selling your paintings.

Your worldwide assets will also still be subject to UK inheritance tax if you die, even if you have been living in the South of France, unless you can become what is known as "non-domiciled," which is hard to do.

What new taxes will I pay abroad?

That all depends on the tax regime of your new home so checking it out with expert advice is vital.

The legal position is usually more difficult to assess than the tax rules
Stephen Herring, BDO Stoy Hayward

Some countries have much lower taxes than the UK, others much higher.

France, for example, is not known for being a low-tax regime.

It has better tax allowances for people who are married and have children, but it has a wealth tax.

Mr Ludwig points out that if you sell your UK house after moving to France, the capital gain you make will influence the French income tax band you will fall into, which may negate any expected savings.

Someone who moves there and then retires may find that a lump sum paid by their pension scheme is taxed, whereas it might be tax-free in the UK.

You may also find you have to pay local taxes, as well as national ones, and laws on inheritance and owning property can be very different too.

"The legal position is usually more difficult to assess than the tax rules," says Stephen Herring, tax partner at accountancy firm BDO.

Are there any drawbacks?

If you take good tax advice, both here and abroad, you should avoid paying tax twice, as the UK has more than 100 double-taxation agreements with other countries specifically designed to avoid that.

"You need to make sure you are actually resident in your new country to gain the protection of the double-taxation agreement," warns Stephen Herring.

If you are rich, most countries will welcome you with open arms, and of course within the EU, there are no restrictions on moving around anyway.

Putting yourself in a regular position with the UK tax authorities is simple.

When you leave the UK, you fill in form P85 which starts the process, and then fill in form P86 if you want to move back to the UK.

But that does not mean that a move abroad to avoid UK taxes is without drawbacks.

"You have got to accept it is not just the amount of tax, but a complete lifestyle change - it's a big emotional as well as a financial consideration," says Ronnie Ludwig.

"People need to realise that the commitment to moving is much higher than before."

Stephen Herring at BDO agrees with that.

"You need to consider the impact on your lifestyle - this will make a big impact if you like going to Wimbledon, Henley and Glyndebourne."

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