Buying a boat to use abroad – think tax

Congratulations – if you’ve bought or are about to buy a boat.

If you’re taking your boat abroad, to avoid expensive mistakes, you’ll need to be aware of and abide by the VAT requirements, which, particularly after Brexit, can be complex.  But the good news is that there are various reliefs you can take advantage of legitimately saving significant amounts on your purchase.

Jim Suswain from our VAT and customs team, outlines the basic VAT position regarding the use of a boat and looks at the potential for eligible owners to utilise VAT and duty reliefs.

Chris Ryan also looks at the residency and tax implications for individuals who are thinking about living abroad.

Yacht ownership and VAT

The default position for any vessel being sailed in the UK or the EU is that it must either be in ‘free circulation’, often referred to has having ‘VAT paid status’ [VPS] or be operated under a VAT and Customs relief (if available).

Exportation and importation

When a boat crosses a customs border this creates a ‘chargeable event’, as when a boat leaves one jurisdiction (e.g. the UK) and enters another (EU) it is being exported from the former and imported into the latter. At the point of exportation in the above scenario the UK VPS held by the boat is lost and upon importation into the new territory, import VAT (and potentially duty) are payable on the boat.

However, this is not the end of the story…

VAT and duty reliefs

There are a number of VAT and duty reliefs available to eligible yacht owners that can:

• suspend the need to pay import VAT and duties in a particular territory,
• reinstate VPS in a territory where it was previously held, or
• transfer VPS status from one territory to another should the owner’s residency status change

Conditions must be met for a yacht owner to legitimately claim one of these reliefs and the owner’s residency status forms one of the conditions.

VAT free sailing for UK residents in the EU – what a relief!

It is now possible for an owner resident in the UK to both purchase a boat and operate that boat within the EU customs territory without paying any VAT.

Buying and using a boat under such circumstances should be carefully planned as this could result in some restrictions and operational requirements on the use of the vessel and will have implications for how the boat can be sold.

Any ambiguity over an owner’s residency status, or future intentions for an owner to move and change residency should be considered and addressed prior to purchase.

Changes to UK residency and the UK tax implications for expatriates

If you’re thinking about living abroad, either full time or part time, it is essential to understand the changes to UK residency and the associated tax implications for individuals considering such a move. Chris Ryan, Senior Tax Manager in our Private Client international team outlines the factors expatriates need to appreciate before they move overseas.

Statutory residence test

The Statutory Residence Test (SRT) determines the UK residency status for individuals and consists of three distinct tests: the Automatic Overseas Test, the Automatic Residence Test, and the Sufficient Ties Test.

Each test evaluates a set of criteria, including the number of days spent in the UK and the individual’s connection to the UK. Expatriates must be aware of these tests to ascertain their tax residency status and any tax implications arising from it.

UK tax position of non-UK residents

Generally, non-UK residents are subject to UK tax on their UK-sourced income, while foreign-sourced income falls outside the scope of UK taxation. However, it is important to note that some exceptions exist under double tax treaties or other specific legislation.

For non-UK residents, there are exemptions that exclude sources of UK income to non-UK resident individuals. Liability to tax on UK source income for non-UK residents generally includes rental income from UK property, profits from a UK trade or business, and employment income if work is conducted in the UK. However, the taxation of such income can vary depending on individual circumstances and applicable exemptions.

Capital gains tax (CGT) is another area of consideration for non-UK residents. If a non-UK resident disposes of UK assets such as UK property, they are generally still subject to CGT. There are however, some important exemptions including disposal of UK shares and specific rules may apply.

The UK has entered into double taxation agreements (DTAs) with several countries to relieve individuals from the burden of double taxation.

Temporary non-residence

The temporary non-residence (TNR) rules apply to individuals who leave the UK to live abroad and during their time overseas, they realise certain income or gains and thereby escape UK taxation. These rules are most commonly seen in the context of capital gains tax, but they also have application to certain receipts subject to income tax.

The rules will apply if the individual leaving the UK has been UK-resident for at least four of the seven years prior to the date of departure from the UK, and they become UK resident again within five years of that date. If an individual returns to the UK within 5 years, then they may be subject to UK tax upon their return, regarding income or gains realised during their period of temporary non-residence.

Domicile status

An individual’s domicile status can greatly impact their UK tax position. Domicile is generally determined by an individual’s permanent home or intentions, and it can have significant consequences regarding UK taxation, particularly for UK Inheritance Tax (IHT).

Before becoming a non-UK resident comprehensive tax planning is crucial. This includes looking at your longer-term intentions around your move overseas and how this may affect your UK IHT position on your worldwide assets.

An individual who has moved overseas and starts to build considerable wealth located in their new country of residence, can still find themselves in the scope of UK tax.

The rules concerning UK residency and the UK tax implications of moving abroad are complex and professional advice should be sought if you are considering a move overseas.