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  • Tax nomads: Rolling stones gather no moss… and no tax liability?

    26 February 2021

    Andy Wood

    Introduction

    ‘A rolling stone gathers no moss’ says the old proverb.

    Its meaning being that a person who does not settle in one place will not accumulate wealth, status, responsibilities, or commitments.

    Of course, at least 50% of these might be seen as positively advantageous! 

    But are there other advantages of being a ‘fiscal rolling stone’?

    Indeed, this is a question being asked more and more in these unusual times. Particularly as many jurisdictions now seek to attract the ‘digital nomad’ to their shores – whether as a means to make good losses suffered in tourism or part of a wider land grab for internationally mobile wealth.

    So, is there more than just better weather on offer?

    What’s the plan?

    The plan is rather appealing.

    Swapping your home office desk to working from the beach? Swapping the grey skies and bitterly cold wind for a tropical climate?

    Sign me up.

    Indeed, with the improvements in technology, and perhaps a change in attitude to remote working, the practical side of being an overseas, digital worker has never been easier to achieve. 

    Traditionally, the tax nomad model has been to split one’s time between a number of carefully chosen countries, moving on before falling to being resident for tax purposes in the current jurisdiction.

    I think, in theory, it is possible to wander the world, moving on before the relevant tax authority asks you to join their little club.

    However, I am a cynical man. My feeling is there is an inherent danger of arguing that you are not resident for tax purposes– and that is that you end of with multiple jurisdictions chasing you for their ‘fair share’!

    So my view is to find a low tax jurisdiction to make your home base and establish residency there (more on this later). But this is likely to help on tax and more mundane things like being able to open a bank account.

    To summarise, our cunning plan is two pronged:

    • Dis-establish UK residency by reference to the Statutory Residency Test; and
    • Create a ‘home base’ in a favourable jurisdiction

    Dis-establishing UK residence

    The first aim is to ensure one is no longer resident for UK tax purposes.

    The Statutory Residence Test (“SRT”), with effect from April 2013, replaced the unsatisfactory, and frankly preposterous, position that meant one had to rely on a patchwork of case law.

    There are three tests and they apply as a waterfall. If one finds safety in the first then there is no need to go on to the next. If not, it is only then that one moves to the next.

    The three tests are as follows:

    1. Automatic overseas test: if this test is satisfied then the taxpayer is conclusively non-resident;
    2. Automatic residence test: if this test is satisfied then the taxpayer is conclusively UK resident;
    3. A sufficient ties test: if neither of the above tests are satisfied then one resorts to a day-counting test

    This article is not focused on the SRT, so a detailed exploration of this subject is a little off topic. However, generally, speaking, these tests will limit the amount of time one can spend in the UK and claim to be non-resident.

    The statutory residence test is not always easy to apply. However, what it perhaps lacks in simplicity it does, generally speaking, provide a greater degree of certainty than under the old rules. Of course, there are exceptions!

    Tax implications of being non-UK resident

    Where one is non-UK resident for tax purposes, then one should only have an exposure to UK tax on UK source income. For example, on UK rental income.

    This position is further narrowed by ‘disregarding’ certain UK income sources (including dividends from UK companies) from tax where the recipient is non-UK resident. 

    Further, one will only be in the scope of UK capital gains tax on the disposals of UK real estate, whether directly or indirectly held.

    For both income and capital gains tax purposes, there are anti-avoidance rules which might create tax liabilities where the individual subsequently becomes UK resident within 5 years (and one should never underestimate how long 5 years is).

    Choosing a home base?

    Assuming one is not going to continually move from one jurisdiction to another, then one next needs to choose a tax base. This is the place where one is putting a flag in the ground and saying ‘yep, this is my home’.

    Of course, you might use this as a jumping off point to visit other countries (and note, one would not want to become resident in those countries).

    However, constructing a tax base where one is liable to tax does not necessarily mean that you rolling stone dreams have been thwarted.

    There are many jurisdictions around the world where one might become resident for tax purposes but can broadly live tax-free from much of your foreign income – only suffering local tax on local source income.

    For example, one can qualify under Cyprus’ non-domicile regime if one spends as little as 60 days a year in the UK. Generally speaking, income derived outside of Cyprus is not taxable in Cyprus.

    Barbados is a more recent popular destination for digital nomads due to its special ‘Welcome’ visa. Again, only Barbados source income is subject to local tax along with foreign income and gains to the extent it is enjoyed on the Island.

    One could also become resident in Portugal and avail oneself of the Non-Habitual Residence (“NHR”) regime. Again, this broadly provides for a 10-year exemption on certain foreign income and gains. I have previously written an article on NHR in a previous issue.

    As I’m not a travel agent, I’ll stop there.

    Employer beware!

    Finally, an employer cannot simply leave its employees to set up and start working remotely from a beach hammock without the fear of any consequences.

    They will need to ensure that they deal with their employee properly from a payroll perspective. However, in addition, they will need to ensure that the employee does not inadvertently create any taxable presence in the country in which they are staying.

    Conclusion

    To conclude, it is certainly possible to be a tax nomad. However, my preference is to actually put a flag in the sand somewhere and create a tax home base. My view is that this will assist in mitigating the chances that you have multiple tax authorities on your tail which might be the case where you claim to have no tax residence at all.

    Further, such a strategy will allow one to more freely open bank accounts and purchase other financial products – financial institutions generally don’t like global citizens of no fixed abode. 

    Even so, and obviously depending on your circumstances, it should be possible to limit one’s tax liabilities.

    Hopefully, unlike the Rolling Stones song, this will give you some satisfaction.

    If you have any queries about tax nomads, international tax, or tax matters in general, then please get in touch.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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