Thank you to Binyamin Radomsky, CPA (Isr), ACA (UK), Partner, Aboulafia Avital Shrensky & Co, Jerusalem, for contributing this article.
Welcome to Israel! Making Aliyah can be a daunting prospect, and all the more so when you’re entering a new tax regime, i.e. that of Israel.
This article is to help you consider some of the issues from the UK point of view, although we will touch on some of the Israeli aspects. It goes without saying that bespoke advice should be taken for each individual circumstance.
Leaving the UK
So, how do you go about informing HMRC (Her Majesty’s Revenue & Customs – the UK tax authority) that you have left?
For those people who are not otherwise filing tax returns (e.g. pensioners, employees), this can be done by submitting form P85. If you were employed, attach your P45 to the form so that the tax man can give you a refund for any overpaid tax in the year in which you are leaving (they can do this even before the tax year has ended).
If you are filing UK tax returns, you will need to do so for the year in which you left the UK. On the non-residence pages, you will need to claim the split year treatment, and give the exact date of your departure. In subsequent years, you can (presumably) claim non-residence for the entire year.
Will I Still Pay UK Tax?
Once you become non-resident, only UK-earned income remains subject to UK tax (rather than worldwide income, as was the case previously). This includes rental income, onshore bank interest, dividends from UK companies and pensions from UK payers (although see later on for some nuances on pensions). For those still required to file tax returns, the regular tax deadlines (i.e. 31 January for filing returns & 31 Jan/July for payments) still apply.
Determining If You Are Non-Resident
HMRC recently overhauled the previous methods for determining residency, and have now made them much more formulistic.
The easiest way to ensure that you are non-resident in the UK is to be present in the UK for less than 16 days in any year.
For many people, that is unrealistic. As such, they fall into the “sufficient ties” test. These rules say that, depending on how many ties you have with the UK, you are limited to a certain number of days in the UK in order to retain your non-residence status.
For those making Aliyah, there are 5 tests:
- Family test – if your spouse and/or minor children remain UK resident
- Accommodation test – if you own a property that is available for your use, and you stay there at least one night during the year. OR you have a place available at your (grand)parents or (grand)children and stay there at least 16 days during the year.
- Work test – if you work at least 40 days in the UK during the year. For these purposes, a work day is defined as 3 or more hours
- 90 day test – if you were present in the UK for at least 90 days in either of two preceding tax years. This is inevitably relevant in the first two years post-Aliyah.
- Country test – if the country in which you were present for the most midnights during the year was the UK
The maximum number of days that you can be present in the UK, whilst still being considered non-resident in the UK, is as follows;
- 4 or 5 ties – 45 days
- 3 ties – 90 days
- 2 ties – 120 days
- 1 tie – 182 days
Aliyah Tax Planning
There are some very obvious tax planning measures that you can take, such as opening up bank accounts in offshore jurisdictions. Banks in the Isle of Man or Channel Islands (for example) are within the UK banking system (so the regular account numbers and sort codes that you are used to), but outside the scope of the UK tax system.
It would also be worthwhile checking whether your ISA accounts are still relevant for you. They were perfect whilst living in the UK (due to the tax exemption), but since you can now expand your exemption into other jurisdictions, it may be worthwhile liquidating the ISAs and investing elsewhere. This is likely to be especially true for cash ISAs where the interest rate is likely to be very low.
Many people will have built up pension pots over the years. These are subject to significant taxes upon withdrawal or death, so other options should be considered. For larger pots, this is likely to include QROPS – effectively exporting your pension to a foreign jurisdiction. If this may be relevant to you, please take advice from regulated specialists.
Under the terms of the Double Tax Treaty between the UK and Israel, UK pensions received by Israeli residents are taxable in one country or the other – but not both. What this means is that during the 10-year exemption period in Israel, you are able to waive the right to exemption from tax on some or all of your pensions; thereby subjecting them to Israeli tax, but excluding them from UK tax. This can often be relevant for situations where QROPS is not an option, but nonetheless significant tax savings can be made.
Capital Gains Tax
Under UK domestic law, non-residents who sell UK-based assets are exempt from paying UK capital gains tax. The one exemption being residential property (not your principal private residence) which is subject to some form of capital gains taxation as of 5 April 2015.
The exemption applies provided that you remain non-resident for 5 years post-emigration. And I would therefore normally suggest that you hold off from selling assets (commercial property, share portfolios etc.) until the start of the UK tax year after Aliyah (i.e. wait until 6th or 7th of April post Aliyah).
Inheritance Tax (IHT)
An important issue facing many is that of Inheritance Tax (IHT). This is payable on all UK assets regardless of status – but for UK domiciles, is also applied to offshore assets at the time of death. Domicile is a much more undefined concept, and relates more to where you see your ultimate “home.’
There are a number of steps that you can take in order to help prove that you have moved your domicile out of the UK and into Israel. For example:
- Making Israeli wills
- Giving up UK burial rights [and purchasing Israeli burial rights]
- Giving up UK memberships (shul, golf & other club, volunteer organizations) and taking up equivalents in Israel.
That being said, for IHT purposes, one is considered domiciled if they were resident in the UK for 17 of the last 20 years of their life. As such, it is necessary to establish non-residence for at least three years. Please note that the rules will soon be changing, and so for new olim it will be necessary to establish non-residence for five years before it will be possible to be non-domiciled for IHT purposes.
Once You’re In Israel
Now that you are living in Israel, ensure that you understand what your obligations are to the Israeli tax authority. Whilst there is a 10-year exemption for new olim on their non-Israeli income, it is important to take bespoke advice for your individual circumstances, as there are numerous rules and caveats that could change the picture.
Binyamin Radomsky, CPA (Isr), ACA (UK)
Partner, Aboulafia Avital Shrensky & Co, Jerusalem
© February 2016