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If you are considering a permanent move from either the UK or the US to the Cayman Islands and want to know what your residency, tax or domicile status in your country of origin is, then this chapter will help you understand it. This chapter was written by tax and domicile experts specifically for the 2010 Cayman New Resident magazine and is written in easy to understand layman's terms.
Changing your UK residency & domicile status
If you are a UK resident and are considering a move or have just made a permanent move to the Cayman Islands (whether to work or retire) then knowing your tax status in relation to HM Revenue and Customs (HMRC) will be very important. Removing yourself from the scope of UK taxation may be harder than you think and will depend on the location of your assets, your domicile and your tax residence.
The following is a general overview on how to become a non-resident of the UK, how to change your domicile and some difficulties which may arise. Please note that the process can be quite complicated and if you want formal (or informal) advice on this, there are experts in the field who can help.
Becoming a non-resident of the UK
By way of Employment overseas
If you have a full-time employment contract with a Caymanian employer that states that you will be working at least 37 hours per week then you will be considered a non-resident from the day after you leave the UK. However, in general you must be absent from the UK and be employed in Cayman for at least one complete tax year and during your absence return visits should be kept to under 91 days per year. In this instance if your spouse chooses to remain in the UK it should not jeopardise your own non-resident status.
You will need to file a P85 form with HMRC which explains that you have left the UK and from this form they will work out the date that your UK residence ceased.
Documents required to prove residency has ceased
You may not be required to submit these documents but you should keep them on hand in case HMRC seek evidence of your non-UK residence claim.
> A copy of your employment contract
> Evidence that the trips back to the UK were for business or holiday and that all time spent does not breach the "91-day" rule
> A copy of your work permit
HMRC will continue to send you annual self-assessment forms for a number of years after you have left the UK.
By retiring overseas
If you are retiring to Cayman it is very important that there is evidence that you have made a distinct break from the UK. For up to three years after your departure HMRC can adopt a "wait and see" approach and will often send you annual self-assessment forms to fill in so that they can determine your tax status. If you are ever investigated then keeping documents pertaining to points (a) to (i) below will be key evidence which you may need to successfully prove you have made a distinct break from the UK.
If you do return to the UK periodically, it is important to be able to explain why you went home. For example, if you used to live in Bristol and you spend three months in Bristol throughout the year after you say you have left then HMRC may successfully argue that you never properly severed ties.
Incidentally if you are planning to leave the UK then it is advisable to go at the end of a tax year and if you have to return then return at the beginning of a tax year.
Evidence that will likely be examined by HMRC include:
> The number of visits back to the UK and the purpose of each visit
> Where you stayed when returning for visits
> The retention of property which is available for your use
> Is the property rented
> The location of your family
> The location of valuables, personal effects and documents
> The type of residence you have in Cayman and whether you own it
> Where your children are educated
> The timing of your leaving the UK
Requirements for proving your move is permanent
> At the time of leaving the UK your intention must be that you will live abroad permanently or at least for three years.
> Your spouse and minor children should also cease UK residence.
> A main residence should be purchased in Cayman and your UK residence sold or rented on a long term basis. Incidentally the Cayman residence should be commensurate with your status and wealth and should have the look and feel of a main residence.
> You should not break the "91-day" rule
Notes on the 91-day rule
Provided you have made a distinct break from the UK, if you spend more than 91 days in the UK per year averaged over 4 consecutive years, HMRC may treat you as UK resident thereafter (or before this time if it is your intention that you will spend more than 91 days per year in the future). Even if you spend close to 91 days each year in your first 4 years abroad then it is likely that HMRC will look at your residence position closely and may assume you did not make a distinct break and assume you have never left. Please note that days of travel to and from the UK are counted as relevant days if you are in the UK at midnight of the relevant day. (You should be aware that if you spend more than 183 days in the UK in any tax year you will be treated as UK resident in that tax year.)
Domicile
It is important to note that even if you have become a non-resident of the UK that it is your domicile status which will determine whether you are liable to UK Inheritance Tax (IHT). Many individuals assume that because they are non-UK resident that they are also non-UK domiciled and this is certainly not the case! If you wish to avoid UK IHT on your worldwide assets then you must change your domicile. If you are non-UK domiciled you will only be liable to IHT on assets located in the UK.
There is no specific form to fill out to explain that your domicile has changed, however in your annual tax return there is a section which asks you to talk about your domicile.
Determining your domicile status
> You cannot be without a domicile and can only have one domicile at a time
> Your domicile is usually where your permanent home is
> Your existing domicile will continue until a new one is acquired
> Domicile is distinct from your nationality or residence
> A wide range of evidence has to be examined in evaluating your intentions to change your domicile
There are four types of domicile:
Domicile of origin
You will have acquired a domicile of origin at birth and you will generally be regarded as having adopted your father's domicile (unless your parents were not married at the time of your birth, in which case you would adopt your mother's domicile). A domicile of origin will continue throughout life until a domicile of choice is acquired.
Once you have acquired a new domicile of choice, your domicile of origin, although displaced, does not disappear, and will come back into operation when any other domicile of choice is voluntarily abandoned. If, for example, you manage to successfully acquire a domicile of choice in Cayman and then you return to live permanently in the UK (or elsewhere), your UK domicile of origin would revert.
Domicile of dependence
The domicile of a minor or a mentally disordered person normally follows that of the person on who they are legally dependent. An individual first becomes capable of having an independent domicile when they become 16 or marry under that age.
At the age of 16, an individual has the ability to change their domicile of dependence by choice but if no such intention is demonstrated, their domicile of dependency persists.
Domicile of choice
If you have become a Caymanian resident and wish to start the process of removing yourself from the scope of IHT then you must acquire a domicile of choice i.e. Cayman domicile.
The following actions must be taken:
a) First, you must actively sever ties with your country of origin (e.g. UK); and
b) Second, begin to actively acquire a new domicile of choice. Certain actions are indicative of the adoption of a new domicile of choice, e.g. making a will under the laws of Cayman, cancelling club memberships and acquiring a family home in the Cayman Islands.
A domicile of choice is notoriously difficult to acquire. In broad terms two key factors are required to acquire a domicile of choice in Cayman:
a) The intention to reside solely on a permanent or an indefinite basis in Cayman; and
b) Being physically present as an inhabitant in Cayman.
HMRC can request you to present strong evidence to show your intention to live in Cayman either permanently or indefinitely. It should be noted that simply living in Cayman for a long period of time, although an important factor, is not in itself enough to prove that a new domicile of choice has been acquired.
Proof of Domicile Change
It is important for your actions to show your true intentions. Therefore below is a list of suggestions on how to prove you want to change your domicile.
> Join clubs and social organisations in Cayman and resign from clubs and social groups in the UK. If you have demonstrated that you have an active social life in your new country, it is more likely to be considered your home.
> Try to build up a new social circle in Cayman and become part of the local community.
> Purchase a home in Cayman.
> It would be advisable to sell all private residences in the UK. The retention of a residence in the UK suggests an intention to live here at least some of the time. If you retain a property in the UK (or any other jurisdiction for that matter), your Cayman property should be of at least the same size and standing and preferably more substantial.
> Exercise any right to vote in Cayman. Do not vote or register to vote in the UK.
> Close UK bank accounts (where practical).
> Open and maintain a bank account, credit cards etc in Cayman.
> Ideally, sell UK investments. If this is not possible or feasible, try to reduce them to a smaller percentage of the overall portfolio.
> Acquire new investments in Cayman. It will suggest a link to the new country.
> Do not retain directorships of UK companies. As far as possible reduce business interests in the UK.
> Whilst not imperative, we recommend that you make a will under the laws of Cayman. This suggests that your assets will be primarily in Cayman on death, your trusted executor will be there together with your personal records. It is also often recommended to buy a burial plot in Cayman although this should not be considered a strong argument in isolation.
> The evidence of friends, neighbours, business contacts, etc. can be critical. You should conduct yourself in such a way that would support the fact that your move to Cayman was permanent.
You should retain all evidence to support your change of domicile.
Domicile Change Issues
● You do not have permanent residency in Cayman
Due to the nature of Cayman's immigration laws and the fact that the vast majority of workers will be subject to the seven year roll-over policy, it may be virtually impossible for individuals to maintain that they are in Cayman permanently or indefinitely. Such a claim can readily be made only if the individual has permanent residence in Cayman.
● You have lived in Cayman for years and then move
It is important to note that you could live in Cayman for 20 years and then decide to move to, say, Cuba. If this occurred, then as soon as you step on the plane to fly to Cuba, i.e. move, your domicile of origin in the UK would revert. So it is important to recognise that once you have acquired a domicile of choice in Cayman, any move to live elsewhere could undo that domicile of choice immediately.
● You have several homes
You may live in Cayman but have property elsewhere (e.g. US and France) and spend time in Cayman, the US and France. HMRC may try and argue that you cannot decide where you intend to live on a permanent basis and therefore that you retain your domicile of origin in the UK.
● Deemed domicile
For IHT purposes the HMRC delays changing your domicile until at least three years have passed from the date that you left the UK. This is particularly important if you wish to create a trust. If you create a trust within this period then you will still be deemed domiciled in the UK and any assets transferred to the trust will be subject to IHT. Many people are caught out by this rule and inadvertently trigger IHT charges when they could easily have been avoided by getting the timing of the creation of the trust right. It needs to be borne in mind that the three year period starts to run from the day you acquire the new domicile of choice in Cayman and this may not coincide with the day you become resident in Cayman.
If formal (or informal) advice is required on this subject please contact Paul Hotchkiss on Email: photchkiss@kpmg.co.im.
us taxation of american citizens or green card holders moving to the cayman islands
Leaving the US to move to the Cayman Islands can be a big step for many people. However, there is one bit of your former life in the US that will remain virtually unchanged. US citizens or green card holders are subject to US taxation on their worldwide income even when they are not living in the US. This may sound like bad news to the US person moving to Cayman. However there is a bit of good news regarding taxation. Qualifying US persons living and working abroad may be eligible to exclude a certain amount of their foreign earned income from their US taxable income. If a person meets the requirements discussed below, they should be able to take advantage of the following:
> A foreign earned income exclusion of a fixed dollar amount, and
> A housing exclusion for excess housing costs.
In order to qualify for the exclusions, an expatriate working in the foreign country must:
a) Have a 'tax home' in the foreign country throughout the period of residence or physical presence, and
b) Meet either the 'physical presence test' or the 'bona fide resident test'.
Tax Home
A tax home can be defined as:
a) Principle place of business or employment, and
b) Must be located in a foreign country to qualify for the exclusion.
Physical Presence Test (PPT)
After it has been determined that the taxpayer's tax home is in a foreign country, the taxpayer must meet either the physical presence test or the bona fide residence test to qualify for the exclusion. The physical presence test (also known as the PPT) requires that a US citizen or resident be physically present in one or more foreign countries for at least 330 days (approximately 11 months) during any period of 12 consecutive months.
The rule is simple but very precise. A qualifying day means a period of 24 consecutive hours beginning at midnight and ending the following midnight. In computing the minimum of 330 full days of presence in foreign countries, all separate periods of presence during the period of 12 consecutive months are totaled. If an individual travels from one foreign country to another over a route a portion of which is not within any country, and if the travel not within any country is less than 24 hours, the individual is deemed to be within a foreign country during the period of travel. A person in transit between two foreign countries can stop off in the United States for less than 24 hours and still have the travel day counted as a foreign day. Intent to stay or return and the nature and purpose of the stay abroad are irrelevant.
Any period of 12 consecutive months during which an individual satisfies the 330-full-days requirement, even though the period may comprise a part of a longer period of presence in a foreign country or countries, is permitted.
In Summary:
> The purpose of the taxpayer's stay abroad is irrelevant.
> Partial days in a foreign country do not count as foreign days.
> Days need not be consecutive. The number of days can be interrupted by periods during which the taxpayer is not present in a foreign country or countries.
> Presence in any foreign country qualifies; accordingly, the 330 foreign days need not be in the taxpayer's tax home country.
> The 12-month period may begin any day of the calendar month. It ends the day before the calendar day 12 months later.
The 12-month period may begin (end) before or after arrival (departure) in a foreign country.
> Taxpayers may use two back-to-back or overlapping 12-month periods to qualify the entire tax year for physical presence.
Because of the preciseness of the PPT, a careful record of dates and times of travel along with appropriate, documented support should be kept updated at all times.
Bona Fide Resident Test
To qualify under this test, an individual generally must be a US citizen who has established a bona fide residence in a foreign country or countries for an uninterrupted period that includes an entire calendar year. A calendar year is January 1st through December 31st. Other periods of 12 consecutive months do not fulfill the requirement (i.e. as for the PPT). US residents who are not citizens (resident aliens) may be able to qualify under this test if they are eligible for treaty benefits.
Bona Fide Residency is determined on a case-by-case basis. Following are some of the important factors to consider when using the bona fide residence test:
a) Intention
b) Purpose of trip
c) Nature of stay
d) Length of stay
Exclusions are available for a part-year bona fide resident in the year of arrival and departure once the entire year test is met. That is, if the taxpayer arrives in a foreign country in June of 2009, the first qualifying period is January 1st to December 31st 2010 and thus, does not end until December 31st 2010. However, once this test is met, an exclusion is available for June through December 2009.
Temporary visits such as vacations, holidays, and business trips to the US will not interrupt foreign residency. Also, as a general rule, transfer from one foreign location to a different foreign location does not interrupt foreign residency.
An individual is not considered a bona fide resident of a foreign country if he or she:
a) Makes a statement to the authorities of that country that he or she is not a resident thereof, and
b) Has earned income from sources within the country that is not subject to income tax as a resident of that country.
Foreign Earned Income Exclusion
To be considered foreign, earned income must be received as compensation for services performed in a foreign country. It is the place where personal services are performed that determines whether the income is foreign; not the place where actual payment for the service is made. If compensation for services performed abroad is received in (or from an employer in) the United States, that compensation is treated as a foreign source. On the other hand, if an individual performs some services in the United States, the compensation received for these services is treated as U.S.-source income not eligible for exclusion. When it is not possible to determine accurately what portion of an expatriate's compensation is for US services, total compensation is allocated between US and foreign sources on the basis of business days.
Housing Exclusion or Deduction
In addition to the foreign earned income exclusion, expatriates also may elect to claim an exclusion for the "housing-cost amount," which is the actual foreign housing expenses for the calendar year in excess of a base amount. This exclusion is separate from the foreign earned income exclusion and requires a separate election. Housing expenses include rent, utilities (except telephone), insurance, residential parking and repairs, but not mortgage interest and real estate taxes, which are deductible as itemized deductions. Housing expenses must be reasonable and are not deductible to the extent they are lavish or extravagant under the circumstances.
Housing costs do not include the cost of buying a house, principal payments on a mortgage, depreciation, purchased furniture, domestic labour or cable television. The base amount is equal to 16% of the salary of a US government employee at grade level GS-14, Step 1. This base amount is adjusted annually as federal pay levels change. If an individual qualifies under the bona fide residence or physical presence test for only a portion of the year, the base amount is prorated on a daily basis.
Summary
A common misunderstanding of US citizens and green card holders living in the Cayman Islands is that they do not need to file US income tax returns if their earned income is less than the foreign earned income and housing exclusions discussed above. This misconception is entirely untrue. US citizens and green card holders living in Cayman must file a tax return and make an affirmative election regarding the exclusions even if their earned income is less than the exclusion amount.
For more information on the foreign earned income and housing exclusions you can contact Douglas Harrell on dougharrell@kpmg.ky.
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