Becoming a Perpetual Traveller The primary focus of this article is on the whole area of becoming a perpetual traveller (PT) - that is to say to avoiding all direct taxation by the simple expedient of not living permanently in any jurisdiction that would seek to impose taxes of this nature upon you. This report also includes a number of current news items relating to the use of offshore tax havens. THE THEORY The theory behind becoming a PT is that by avoiding living in one place you never become liable to tax anywhere. There is a certain romance to this concept but you should not assume that just because it is promoted by "dreamers" it isn't a practical option. There are now, literally, over a million British expatriates of whom, clearly, a large percentage would count themselves as PTs. Undoubtedly, these individuals enjoy a far higher standard living than virtually anybody else in the world, thanks to the fact that they don't pay tax. A REALITY CHECK There are various problems to becoming a perpetual traveller which need to be addressed: 1. If you are a UK-domicile then you will remain liable to inheritance tax unless you do something about it. 2. If you are a citizen of certain other countries - such as the United States - your tax liability follows you all over the world unless you do something positive about it (such as renounce your citizenship). 3. If you spend too long in any one place you can easily become liable to tax there. Some jurisdictions are extremely aggressive about claiming individuals as tax resident. 4. It isn't as easy as you may think NOT to live somewhere. Unless you have no family, no friends, and no business interests you'll want to have some roots. ADAPTING PT TO YOUR OWN NEEDS The really attractive idea behind becoming a perpetual traveller is the concept of not paying any tax, anywhere. In fact, you don't necessarily have to keep moving in order to achieve this benefit. For example, if you become resident in Antigua you can spend as little as one month a year there in order to benefit from the highly advantageous tax system. Actually, the Antiguans are so relaxed that you probably don't even need to be there for that one month. And, because Antigua has negotiated double tax treaties with many other countries around the world, being a resident there will afford you a certain amount of protection wherever it is you do decide to spend your time. The point is that rather than becoming, literally, a perpetual traveller it is probably much more practicable to adapt the PT theory to your own actual requirements. YOUR INCOME Perhaps the first and most important issue to deal with is that of your income. If you can afford to live on your unearned income then you have absolute freedom. But if you still need to work - even if there is a great flexibility about how and where you work - then this needs to be addressed before you start considering other aspects of becoming non-resident. It is increasingly common nowadays for entrepreneurs, professionals, and consultants to leave the UK for tax and lifestyle reasons. Assuming you don't have sufficient income to live without working your choices are: * To continue to earn your money from a UK source... whether it is from an existing business, professional practice, or as a consultant. * Start a new enterprise or new job somewhere overseas. Dealing with the logistics of setting up a new business in another jurisdiction is somewhat beyond the scope of this particular article but we can briefly look at continuing to work in the UK (or rather continuing to earn money from the UK) even if you are resident overseas. Under these circumstances the things you need to watch are as follows: * You don't break the residency rules. This basically means that you shouldn't spend any more than 90 nights in the UK during any one tax year. * You don't actually supply any services in the UK. E.g. if you work as a consultant make sure you actually do the work overseas. This in turn means you should never invoice for visiting clients in the UK and you should never charge direct expenses to UK clients. * If you own an existing UK business then you need to sell or transfer your business holdings offshore or to come up with an alternative method of extracting profits. With regard to the last one of these points you will almost certainly require specialist advice. If done correctly it should be possible to transfer or sell your business without any tax liability. What you don't want is a static business (such as a shop) generating a profit or income in the UK that you want to take directly abroad because there would be no tax advantage since the Inland Revenue would tax it anyway. Instead you need to restructure so that at least part of your profits or income comes to you tax-free. For example, you might sell the business to an offshore company who in turn would be able to extract the profits by way of perfectly legitimate consultancy fees. By whatever means it is vital that you ensure that income can flow out of the UK tax-free. Indeed, we would reiterate the point that an offshore company can invoice a UK business for services without incurring UK tax providing those services are performed overseas and not in the UK. Finally, it is also worth pointing out that when you become non-resident you should sever as many links as possible with the UK and, in particular, you should try not to act as a director for any UK companies. NOT LIVING ANYWHERE As a PT your objective is to not live in any one place long enough to fall into the tax net. So how long do you have to stay somewhere before you become liable for tax? The answer depends very much on the jurisdiction. Within the EU, France and Germany are keen to claim individuals as tax resident if they do much more than holiday there. The UK will clearly claim you (presuming you are UK domiciled) if you stay more than 90 days; whereas the Spanish or Irish governments are much more relaxed and barely seem to care at all. Normally, however, you can assume that you can stay up to six months a year in any one country (excluding the UK) before you will be considered resident. However, as we have already explained, not being a resident somewhere has its problems. If you can't point to a place where you live you open yourself to the possibility that a country where you are spending time (but don't want to be resident) may claim you. It is a very real problem; and it is compounded by another issue: many governments are uncomfortable about the idea of welcoming visitors into their jurisdictions who can't point to a home or residence somewhere else - no matter where it is. It will make the Inland Revenue unhappy, to. If they are losing you they will be interested in knowing where you are going. If you don't say where you are going they may assume that you are actually still in the UK. Our recommendation is, therefore, that instead of leaving the UK and becoming a perpetual traveller you leave and become resident somewhere that won't tax you. In fact, you may be best-off picking a jurisdiction where you actually pay a small amount of tax but where, as a result, the tax authorities will always speak up in your defence. CHOOSING A RESIDENCE If you decide to become a perpetual traveller having ironed out the whole issue of where your income is going to come from, you next need to decide where it is you want to spend your time and - if it isn't in a tax haven - where you are going to become legally resident. Supposing, for example, you wanted to spend a lot of time in the United States. The most logical thing would be to become resident for tax purposes in a central American country (such as Belize); one of the Caribbean jurisdictions (such as Antigua) or even Canada (where, if you become a citizen, they currently give you very favourable introductory tax breaks). If the reality is that you are going to want to spend as much time as possible in the UK then as already mentioned Ireland, Spain or else somewhere like Malta or Cyprus would probably be best for you. We mention Ireland a lot in TSR because it has an unusually favourable tax climate for those wishing to leave the UK. Basically the situation is that if you move to Ireland and you are not Irish-domiciled you can: * Bring in capital and spend it tax-free. * Avoid tax on your worldwide income providing you don't spend it (e.g. remit it) to Ireland. There are two exceptions with regard to income. You pay tax on income earned in the UK and income earned in Ireland itself. If you do have UK-earned income then all you have to do is re-route it and blend it elsewhere - through an offshore company, for instance. Another benefit of becoming resident in Ireland is that it is easy to get backwards and forwards to the UK and there are no passport controls. There is definitely a hardcore of UK ex-pats living in Ireland who subtly flaunt the 90 day rule by travelling backwards and forwards between the two countries under a false name - in order to avoid the Inland Revenue searching the passenger lists and proving that they were in fact in Britain when they shouldn't be. At any rate, when deciding which jurisdiction to make your tax residence you need to consider: * The general tax climate. * How your worldwide income will be treated. * The situation with regard to income tax, capital gains tax and inheritance tax. * Whether there are any conditions of residence. * What the cost of residence will be. * What impression it will make on others. Many people do not wish to appear to live in a tax haven. If you move to Spain, Cyprus or even Ireland you can say you've done it (even if it isn't true) because you love the place. No one who has ever visited the Isle of Man would ever by residents that they had moved there because they liked it. On the whole, residents of places like the Isle of Man are clearly only there for one reason. It may help to consider a real life example. One of the editors of a sister publication - Jim Storm - divides his time between Ireland (five months), Australia (3 months), the UK (his full 90 days), and the United States (one month). Legally he is resident in Ireland and declares a modest income every year (£12,000) which is sufficient to cover his day-to-day living expenses and which does not expose him to a very large tax bill. Any other money spend in Ireland is capital introduced from overseas and therefore not taxable. The Irish tax authorities give him protection against any other jurisdiction who may wish to claim him - not that this has ever been relevant. He says himself that it is not a lifestyle which would suit everybody - but his family commitments and business interests make it ideal for him. A SINGLE ADDRESS If you do decide to become a perpetual traveller then we strongly recommend that you set up a single communications point for your post, email, telephone messages and so forth. This is best done in whichever country where you establish your legal tax residence. OTHER ISSUES There are a number of other issues which need to be addressed if you decide you are going to become a perpetual traveller. These are: * How you hold your investments. This is particularly true with regard to UK-held investments since you will wish to minimise withholding and other forms of taxation. * How you hold your property. Please note that it is possible to hold property in the UK via offshore companies and thus reduce your tax bill very substantially (if not avoid it altogether). We will be covering this in a future issue of TSR. * Who is likely to challenge you. Consider carefully which tax authorities or legal entities may challenge your non-residence and perpetual traveller status. Consider how you will deal with such a challenge before it comes. * Do you wish to change your domicile. A change of domicile will clearly mean that you may be able to avoid UK inheritance tax. On the other hand it is also possible to avoid UK inheritance tax by transferring all your assets outside the UK and thus putting them beyond the scope of the Inland Revenue. Then again, if all your beneficiaries are resident in the UK removing the assets will not necessarily help them. Clearly specialist advice is necessary in this regard. FURTHER INFORMATION There are of course a large number of accountants who specialise in the tax affairs of British expatriates. One firm, however, has consistently offered advice in this particular area. It is a matter of editorial policy never to make a specific recommendation. However, we do believe it is worth getting in touch with this particular group since they also offer a large amount of free information. The company is called Wilfred T Fry Ltd and there address is Crescent House, Crescent Road, Worthing, Sussex, BN11 1RN. Their telephone number is 01903 231545 and their fax number is 01903 200868.