Stephanie Pierce
Welcome everyone, I am Stephanie Pierce and I will be your host today. Today we are discussing marriage and civil partnerships and how to prepare for its opportunities and challenges in the real world. Today, I am joined by my colleagues Stuart Adams, a Legal Director in Private Tax and Wealth Planning; Fran Rance, a Managing Associate in the Immigration Team and James Rees, a Managing Associate in the Family Team. So, today we will be going through our scenario and we will be considering Jamie and Alex. We have kept the names deliberately neutral and will be using gender-fluid terms throughout this webinar.
As you can probably tell from this slide, Jamie and Alex meet in Singapore, which is incidentally where Mishcon de Reya opened an office last year. Jamie is originally from Germany and is a German citizen. Alex is from Singapore and is a Singapore citizen. Neither have any connections to the UK. Jamie’s net worth is approximately £20 million. Alex’s net worth is approximately £5 million. They each own cash investments and properties in Germany and Singapore, respectively. Jamie and Alex decide that they would like to move to London. This decision was made post-Brexit. So, I think the first question must go to Fran, our immigration expert. What are the options for Jamie and Alex to move together to the UK if they are unmarried?
Fran Rance
So, there are many different immigration categories and the best option will depend on the couple’s exact circumstances, what they plan to do in the UK and their long-term goals. In this scenario, the most flexible visa category for the couple may be the investor visa and that’s because it’s not tied to any particular job or role in the UK and so would allow the couple a high degree of flexibility. It also offers main applicant a fast-track route to indefinitely leave to remain in the UK, also known as settlement or permanent residency. The applicant must have access to at least £2 million in cash funds at the time of the application or have already invested £2 million in the UK in investments permitted under the immigration rules. They will also generally be expected to evidence the source of their investment funds. The investor visa is just one option and there may also be other options which apply, for example, if one of the couple has a job offer from a UK company they may be able to apply for a skilled worker visa. As the couple are unmarried, in order for either Alex or Jamie to be included as a dependent, they must be able to demonstrate that they are in a relationship that is akin to marriage. And the way the Home Office ordinarily expect that to be demonstrated is for the couple to have been living together for two years and be able to provide documents to evidence that. If you’re married or in a civil partnership you would just need to provide evidence to show that and perhaps one piece of evidence to show you’re currently living together. In terms of the relationship, there are also important considerations to take into account from a family law perspective. So, I’ll hand over to James to discuss those.
James Rees
Irrespective of your original nationality on whatever immigration basis you come to the UK, once you’ve been living here for 12 months the English Family Court is likely to consider that it has jurisdiction over your marriage on the basis that England has become your spouse’s – you or your spouse’s habitual residence. In circumstances where London has earned a reputation as the divorce capital of the world, that always needs to be a factor in any decision to relocate to the UK. A further complication which everyone should know about is that even if someone has already been divorced in their native country and then come to the UK, if their ex-spouse is also able to establish certain jurisdiction criteria they can effectively make a further financial claim in this country against you their former spouse. This is called a Part Three claim and it essentially provides for a top-up award by the English Court if the Court considers that the financial settlement received in the party’s native country was insufficient.
Stephanie Pierce
And so, turning to a personal tax perspective, Stuart are there any tax issues that Jamie and Alex should consider before arriving in the UK?
Stuart Adams
In the UK, since 2013, we’ve operated a statutory residence test. And what this does is it allows you to work out your tax resident status for a given tax year. If Jamie and Alex have been or will be in the UK for 183 days or more in a tax year, then they will be UK tax-resident for the entire tax year. The next thing that’s worth looking at is the special rules for UK residents who have a permanent home or also known as a domicile abroad. When UK residents have a permanent home or domicile outside of the UK, they may not have to pay UK tax on their foreign income and gains. Individuals who are UK tax-resident but are non-domiciled and are not otherwise deemed domiciled for UK tax purposes, they’re entitled to use a special basis of taxation which we know as the remittance basis. And this effectively means that although UK income and capital gains are taxable in the UK, non-UK income and gains are not taxable unless and until those funds are bought into the UK or used in the UK. The other thing which I should comment on is a concept of clean capital. So, assets which do not represent or derive from non-UK income and gains, this is what we call the so-called clean capital, can be brought into the UK without triggering a UK income tax or capital gains tax charge. There are a number of other things that Jamie and Alex should consider and I’ll just give you the headline points. The first thing is how investment should be selected and managed. Some investments are just not suitable for UK-resident non-domiciled individuals. They should also consider whether their investment-holding entities or structures are suitable. They should consider whether there’s scope to rebase their assets prior to the commencement of their UK residence for capital gains tax purposes. And finally they should consider whether any changes need to be made to their employment arrangements.
Stephanie Pierce
Jamie purchases a property in London for £2 million. It is purchased in Jamie’s sole name with the intention that Jamie and Alex will live their together when they move to the UK. Alex is not contributing to the purchase price or mortgage payments but will contribute to general living costs. Are there any family issues to consider with this arrangement?
James Rees
The starting point really is to consider the position from two different scenarios; whether the parties are married or unmarried. The first thing to just flag and to scream from the rafters is that there is no such thing as common-law marriage in this country. It’s probably the most widely-held misconception out there. If the parties are unmarried and the property is bought in one party’s sole name, they will be treated as the legal and beneficial owner unless the non-owner can evidence alternative financial contribution and the intention behind it. If the parties are married, it’s slightly simpler because the Family Court has the power to override legal ownership. So, irrespective of who bought the property in the first instance, the ourt has the power to vary ownership and transfer a part or all of the property to the non-owning party. So that also needs to be a factor when you decide to marry.
Stephanie Pierce
Stuart are there any other tax issues that Jamie should consider on the purchase?
Stuart Rees
When it comes to purchasing personal homes for UK-resident non-doms, there isn’t much flexibility. So, in some cases the best approach is for the house to be purchased by the individual. Consideration should definitely be given by Jamie to taking out some bank borrowing for the purchase because that can be secured by a mortgage on the property and the bank debt should then be deductible from the value of the house for inheritance tax purposes. The other thing that he needs to take into account is stamp duty land tax. Stamp duty land tax applies to non-residents in the same way that it applies to UK residents. However, from the 1st of April of this year, stamp duty for overseas buyers is going to include a 2% surcharge.
Stephanie Pierce
So, we move on further in our scenario. Two years later, Jamie decides that he wants to transfer half of the property to Alex. By this time, the property is now worth £3 million. Are there any tax or succession planning considerations for this transfer from Jamie to Alex?
Stuart Rees
Jamie can give a share of the property to Alex even if it’s standing at a gain because there’ll be no capital gains tax payable because of principal private residence relief. It’s a full exemption from capital gains. As long as he spends at least 90 days in the home for each tax year that he owns it, it again will qualify for the relief. The second tax is inheritance tax and a share of the property gifted by Jamie to Alex would not be immediately chargeable to any inheritance tax and it would constitute what we call a potentially exempt transfer and what that means is, if Jamie survives a period of seven years after he makes the gift, the asset is no longer treated as his in value terms and it effectively passes out of his estate. The third and final tax I mentioned is stamp duty land tax. We need to consider whether or not there’s a mortgage on the property because it might be Jamie’s idea as I mentioned. to try to mitigate his inheritance tax exposure by taking a mortgage. And if there is at the time that he transfers to Alex and Alex takes on part responsibility for that mortgage, there may be a charge to stamp duty land tax.
Stephanie Pierce
So, we move on in our scenario to marriage. Jamie and Alex decide that they want to make a lasting commitment. They aren’t sure whether to get married or to enter into a civil partnership. They are also flexible as to whether to get married or enter into a civil partnership in the UK or abroad. Is there any difference between marriage or civil partnership? And as a follow-up question, is there any difference between getting married in the UK versus getting married abroad?
James Rees
There is very little to distinguish between civil partnerships and marriage. You need to make absolutely sure whatever you’re entering into is going to be legally binding. The other factor is obviously if you are getting… if you are from an international background and you’re getting married abroad and you’re getting a prenup, you also need to consider other jurisdictions that may have an interest in your marriage i.e. you could get divorced there. So, you also need to make sure that the prenup takes into account the other jurisdictions where you have a link to.
Stephanie Pierce
So, we move on in the life of Jamie and Alex, who do get married/have a civil partnership. They go on to have a child but sadly after two years of marriage, they make the decision to separate and divorce. Jamie moves out of the family home in June and agrees that Alex can keep the family home in London. By this time, they have lived in the UK for four years. Turning first to James, can they agree this and are there any issues with this?
James Rees
So, let’s deal with the children issues first. The English Family Court will not intervene in children issues unless the parties require it and make an application for it to become involved. Turning to the finances, obviously the parties have now been here four years so we would say that the English Court clearly has jurisdiction to deal with the breakdown of this relationship. Absence of prenuptial agreement which says, which says otherwise, the starting point is that each party is entitled to 50% of the wealth built up during the marriage. If that is not enough to allow a party to re-house and maintain a comfortable lifestyle, the non-matrimonial assets such as pre-acquired wealth and inheritance can be factored in.
Stephanie Pierce
So, through all of this we have to remember that Jamie and Alex are of course in the UK on the visas they acquired right at the beginning of this scenario. So, Fran are there any immigration issues on Jamie and Alex’s separation and divorce?
Fran Rance
Whoever is the dependent for visa purposes will need to apply for a new visa and they should also inform the Home Office when the marriage ceases to subsist. So, the options that are available to the dependent would very much depend on what’s going on at their life, in their life at that moment and their particular circumstances.
Stephanie Pierce
So, that is the end of our scenario but of course we turn now to Q&A. The first one says that since 2013, there is a statutory residence test. What was the rule before this? And I think this is a question for Stuart.
Stuart Adams
It was a lot more difficult to try to determine one’s residence before 2013 because principally the mode of determining it was through case law and through sort of HMRC guidance that was issued about the circumstances in which they would look at and which would give an indication towards residence. So, there are many fights that have taken place. So it is one of the principal reasons why we ended up with the statutory residence test because we just needed to have a very clear set of guidance, set of rules, that you could apply to a situation and come away with a very clear determination of whether or not you were resident.
Stephanie Pierce
If the couple in the scenario we looked at decide to put a Will in place under UK law, would they normally carve out overseas assets e.g. property in Germany, or include them in their Will?
Stuart Adams
There’s no guarantee that if you put in place a will in the UK, drawn in accordance with English law, in English form, that it would be a form that would be acceptable in a foreign jurisdiction. So, sometimes it is possible to put in place a UK Will which covers worldwide assets but you have to take care to make sure that you’ve liaised with relevant advisors in the other jurisdictions.
Stephanie Pierce
You mentioned that unmarried partners should have lived together for two years before they apply. Are there any exceptions to this?
Fran Rance
If you can show that say, you’ve been spending short periods of time apart and that’s for a good reason. So, an unavoidable work reason because of the nature of your career or perhaps you were taking care of an ill relative or it might be for religious or cultural reasons for example. Then those factors might be taken into consideration by the Home Office.
Stephanie Pierce
You have mentioned about the English Court making an order regarding the party’s finances on divorce, can that order deal with assets held abroad and if so, can it be enforced in another country if that is where the asset is located?
James Rees
The English Court will look at the party’s assets worldwide. The problem obviously any party faces in terms of enforcing an order is that an English Court order is just a sheet of paper. While it’s certainly enforceable within the United Kingdom, other countries don’t automatically recognise English court orders.
Stephanie Pierce
Is the 2% extra SDLT surcharge in addition to existing SDLT rates? So, is it in addition to the 3% additional property surcharge?
Stuart Adams
Yep unfortunately, it is so a non-resident for example who’s purchasing a property in the UK, typically they always or often fall into the additional rate anyway because they have a property or properties overseas already. So, when they purchase they expect to pay the additional three percentage points for an additional property on each of the bands and unfortunately yes this new 2% is on top of that. So, it would mean 5% on top of each of the bands.
Stephanie Pierce
So, thank you to the audience for joining us today and to our speakers for their insight and practical advice. If you have any follow-up questions please feel free to contact me or any of the panellists individually. Goodbye.
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