The principal forms of doing business in the United Kingdom are as follows:
'Sole traders' are self-employed individuals who are trading. Whether a person is trading in comparison to making investments is not set out in the legislation and is the subject of considerable case law in the United Kingdom. There are 'badges of trade' that provide guidance to determine whether they should be taxed as running a business or simply making investments. As noted in the section on income tax, a sole trader is charged to income tax on their chargeable trading income along with their other sources of income.
A partnership exists if more than one person is carrying on a business with a view to making a profit. There is, however, no statutory definition of a partnership, and HMRC will look at the substance of the arrangement rather than the legal form. For tax purposes, a partnership is transparent and not an entity that is separate and distinct from the partners (but see limited liability partner below). Taxable profits are computed for the partnership and then allocated to the individual partners in accordance with the profit sharing ratio.
There are a number of different types of partner. Common examples are (i) full partner: also referred to as an 'equity partner' where the individual shares fully in the profits and losses of the partnership and takes an active role in running the partnership; (ii) salaried partner: a person who is held out to be a partner but is actually on a fixed salary rather than having the advantage/risk of a share in all the profits and losses; (iii) sleeping partner: a partner who takes no active role in the partnership but shares in the profits/losses; (iv) limited liability partner: a type of partner introduced in 2000 where the partnership itself is a separate legal entity and the partner's exposure to losses is limited.
A company is a separate legal entity from the people who control it or work for it. A business run by an individual or partners (above) can be incorporated into a company at any time, and a completely different tax regime will apply (see the Corporate summary for more information).
Treatment of trusts
Trusts under English law have evolved over several centuries. They can be divided into 'express' trusts, which are expressly created by deed or will, and 'implied' trusts, which are imposed by law or equity. Express trusts are used by individuals for a wide range of purposes, including the control of the use and destination of property, provision for those incapable of holding property for themselves, concealment of beneficial ownership, provision of benefits to employees, and charitable and educational trusts. The tax treatment of trusts has undergone significant changes, and there remain few tax advantages to transferring property into trust. They, however, continue to be used by UK resident individuals as part of the management of their wealth.
The rules changed in 2008 concerning UK resident but non-UK domiciled individuals who receive capital distributions from non-UK trusts. Prior to 6 April 2008, a capital distribution could be made to a non-UK domiciled individual resident in the United Kingdom without crystallising a CGT charge. However, such a distribution since 6 April 2008 is 'matched' with capital gains arising within the trust and will be taxable in the United Kingdom if a distribution is made to the United Kingdom or benefit received in the United Kingdom by the individual. The rules are complex and specialist advice should be sought in this area.
Changes to the taxation of IHT ten-year charges and exit charges for relevant property trusts
Non-relevant property held within relevant property trusts will no longer be taken into account in the IHT ten-year charge and exit charge calculations. This applies to IHT events after 18 November 2015 and will simplify calculations, and, in some cases, reduce tax payable.
Where property is added to two or more relevant property trusts on the same day, all of the added property will be taken into account in the IHT calculation for each trust. This measure is aimed at preventing the use of multiple trusts planning. The measure will apply only in respect of trusts created on or after 10 December 2014 (or earlier trusts where property is added on or after 10 December 2014).
There have also been minor amendments to the legislation concerning the commencement date of a settlement where the spouse has a prior life interest and the legislation concerning distributions from will trusts within two years of death.
Unless an individual is a national of the European Economic Area (EEA) (excluding Bulgaria and Romania), one may require immigration permission before one can begin an assignment in the United Kingdom. The United Kingdom has a points based system that contains five ‘tiers’ under which overseas nationals may obtain immigration permission to come to work in the United Kingdom. The most common category for assignees is Tier 2.
Under Tier 2, a sponsoring company in possession of a sponsorship licence will issue a ‘certificate of sponsorship’ to an assignee, and the assignee will then apply for entry clearance (a visa) to come to the United Kingdom to work for that company. In order to qualify under Tier 2 (intra-company transfer), which will mean that the UK company will not be required to show that it has searched for a suitably qualified worker for the role that the company wishes the assignee to undertake in the United Kingdom, the assignee must already have been working for the company for 12 months in another location. Entry clearance must be obtained before the commencement of one’s assignment from a British Embassy/Consulate in the assignee’s country of residence. An individual will be refused entry to the United Kingdom if they do not have the appropriate documentation before travelling.
In recent years there have been major changes to the UK immigration system, including the imposition of certain restrictions to the Tier 2 (intra-company transfer) category and a quota on the Tier 2 (general) category, the category for individuals who have not worked for the company previously overseas or who have worked for it outside the United Kingdom for less than 12 months.
Complex statutory rules come into play whenever a mixed fund (i.e. an account containing more than one type of income or gains of more than one tax year) is used. Before becoming UK resident, an individual should consider establishing separate bank accounts outside the United Kingdom to segregate existing pre-assignment capital. In addition, an individual might establish different bank accounts for offshore investment income and earnings that arise after the individual has become UK resident, as this will help to identify the source of funds remitted to the United Kingdom and will help to minimise UK tax liability. As the mixed fund law is extremely complex, we recommend that specialist advice be sought in this area as early as possible.