Bye bye billionaires

 Sir Jim Ratcliffe the UK's wealthiest person, with personal wealth at £21 billion has announced that he is quitting the UK for Monaco. Ratcliffe owns 60% of his company Ineos which he founded in 1998.


Unlike the US, the UK does not tax its citizens (UK passport holders). Instead, it taxes its people on a combination of factors which now makes up ‘residence’, and a completely different, but related concept of ‘domicile’.


Also, unlike the US the UK does not charge an ‘exit’ tax when you leave. If Ratcliffe were a US citizen he would be treated by the IRS as having disposed of all his assets on which he would need to pay capital gains tax on the uplift.  The UK does not tax anyone who leaves the UK, unless they come back within five years.


By becoming a non UK ‘resident’ Ratcliffe will therefore be able to save income tax at a maximum rate of 45% on all his income and capital gains at 20% (28% on residential property) on all gains.


However, becoming a non-UK resident is not as easy as taking the next ferry out of Dover.


As from 1st April 2013, ‘residence’ has become ‘statutory’ which sets out a four-step process – as set out in brief.


Step one – if Ratcliffe spends 183 days in the UK in any one year, he will be treated as UK resident for that year and charged to income tax and capital gains tax on all income and gains made during that year. This means that Ratcliffe needs to be out of the UK for more than six months, which means he can spend 2/3 days every week in the UK and fall outside this test.


Step two – Ratcliffe will be treated as non-resident if he spends less than 16 days in the UK in the year. This he may find difficult if he wants to continue to run his UK company


Step three – will apply if Ratcliffe wishes to keep a home in the UK and wants to spend a period of 91 consecutive days in the UK. Ik doubt if he needs to spend three months in one stretch in the UK – so this test will not be a problem.


Step four is where it starts to get tricky. Under this rule, Ratcliffe will continue to be taxable in the UK, if he has ‘sufficient ties’ in the UK. If he wants to spend 2 days a week in the UK he can only have two ‘ties’ in the UK, a ‘country tie’ i.e: he has been tax resident in the UK in any one or more of the previous tax years and a 90-day tie, more than 90 days in the UK in either or both of the previous two years. But, he must not have a child at school in the UK, or a contract of employment in the UK, or a home in the UK.


Therefore, he needs to make some radical changes to his work and home life to get out of the UK income tax and capital gains tax net.


To get out of the inheritance tax net on death, which is 40% of his entire wealth on death, he will need to take a different approach. The connecting factor for inheritance tax is not ‘residence’, but ‘domicile’ which is a different legal concept. Ratcliffe will be UK domiciled, if his father was UK domiciled at the time of his birth, which means did his father at the time of his birth treat the UK as his home country or at the time of his death, does he treat the UK as his ‘home’country?


Ratcliffe is on record as being a 'lover of Britain', so proving that he has changed his ‘domicile’ may be impossible to get past HMRC – so to escape inheritance tax he needs to accept that he is within its scope, but get out of it using a combination of reliefs. What he would need to look at carefully, is spouse relief, gifts made more than seven years before death and business property relief for his shares in Ineos.


If I were advising Ratcliff I would also encourage him to look at ways the Treasury could change the ‘connecting facors’. For example it could scrap the above tricky rules and follow the US model. He should therefore think about obtaining a foreign passport, such as in Cyprus or Malta and relinquish his UK passport.  One third of British billionaires have now moved to a tax haven which means 6,800 Britons now live offshore and control their empire, of over 12,000 UK firms from low tax jurisdictions.


With this number of billionaires escaping UK taxes, my guess is that it will not be long before the UK switches to a US style of taxation, which if action is not taken now, could scupper Ratcliffe’s well-oiled tax avoidance plans.


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