Cruising around the world – can it really reduce your tax bill?

The post-COVID world looks very different for many workers. Many are now choosing to work not just from home instead of the office, but in some cases, an entirely different country. Most are searching for a better work/life balance, escaping the rising costs of living in the UK, or simply guaranteed sunshine.

The significant number of remote workers has led to one cruise liner ‘going the extra mile’ and offering an extended world cruise, as long as three years, effectively allowing those onboard to travel the world, continue to work remotely, but at the same time, potentially escaping taxes worldwide. In other words, becoming ‘Digital Tax Nomads’.

This is an interesting approach and one which will no doubt sound very attractive to many, offering a comfortable and unique working environment with the chance to travel to 135 different countries. Sounds like a win win, but as ever, the devil is always the detail.

Before you board – UK Tax Residence & current tax impact

UK tax residence will, in most cases, result in an individual being taxed on their worldwide income, no matter where that is. Non Residence allows exemption from UK tax on overseas income and gains, hence why a three-year cruise, whilst breaking UK tax residence could be very attractive to many.

Residency differs from country to country, but is largely determined according to the amount of presence in that country per tax year. The UK is no different and HMRC’s Statutory Residency Tests are used to determine residence for UK tax purposes.

The tests take into account of time you spend in the UK, if you work in the UK and /or homes or connections you have with the UK. Maximum days allowed in the UK before being considered tax resident can vary significantly according to personal circumstances, anything from 16 to 182 days.

Breaking UK Tax Residence – rules to consider

It follows that if a UK resident chooses board a three-year world cruise, with the intention to achieve non UK tax residence, whilst also planning to visit the UK if the opportunity arises, they should take professional advice to provide certainty on maximum UK days allowed each tax year, according to bespoke circumstances.

For example, if we assume an employee chooses to board this cruise ship for three years, but continue to work remotely onboard for their existing UK employer, then to qualify for the HMRC non residence test connected to working overseas, they will need to ensure they do not return to the UK for more than 90 days each tax year. Of those 90 days, no more than 30 days can be spent working in the UK and there must also not be a break of more than 30 days where they do not work overseas.

This may seem relatively easy to achieve, but if the cruise sails close to, or around the British Isles, there is a chance passengers will be spending time and / or working ‘in the UK’, even without stepping off the ship, given the definition of UK includes the UK territorial sea, which extends for 12 miles offshore.

In addition, how easy will it be to continually work overseas without a 30 day break, especially since the cruise will be offering many and varied ports of call and excursions which, lets face it, with a trip like that, you wouldn’t want to miss out on.

There are other HMRC tests to establish a claim for non UK residence which may be more generous in terms of day limits, but they all must be strictly adhered to. The smallest change in circumstances could lead to unexpected UK tax residence for that tax year, which could also impact any non residence claim in the preceding / following tax years.

Splitting the tax year of departure – is this possible when not resident elsewhere

An individual is either resident or non resident each tax year, but there is a facility to split the year into overseas/UK parts, allowing overseas sources to be removed from UK tax. The associated conditions for split year on leaving the UK are particularly prescriptive. Out of the three available cases to claim, two are connected to either the individual or their partner working sufficient hours (full time conditions as outlined above) overseas and the remaining condition insists on giving up any UK home and either tax residence or presence every day in another country within six months, or have a home in that country within six months. This latter case would be almost impossible to achieve for those seeking to become Digital Nomads, ie even if they successfully give up their UK home, they would not be present or resident anywhere else in the world.

Temporary Non Residence – Anti Avoidance

The UK do have anti avoidance legislation in place, which essentially taxes capital gains on assets sold when non UK resident, which were held prior to leaving the UK. This applies where the period of non UK tax residence is less than five years. So in terms of escaping UK capital gains tax on pre existing assets sold when out of the UK, then whilst this cruise may last three years, individuals would be required to either extend this cruise for another two years, or relocate elsewhere/stay outside the UK for that time.

This 5 year rule applies to some sources of income as well as gains, eg pension drawdown, close company dividends, or life assurance gains. Again, we would recommend that appropriate advice is taken ahead of leaving the UK assuming such sources are likely to be paid out when non UK tax resident.

Tax Residence Elsewhere?

The assumption is that the cruise will continue to move around the world over this 3 year period, spending minimal time in various global jurisdictions. It would be prudent to identify the planned time in each area/jurisdiction, simply to ensure that wherever the ship sails/docks, there is no potential overseas residence issue.

Tax Havens – Floating or otherwise

For those who have the flexibility to work anywhere in the world, there are several options in terms of mitigating their worldwide tax liabilities.

There are still some islands or countries which provide individuals and businesses full tax exemption. But this requires tax residence and many of these havens can be relatively remote or lack the facilities for required lifestyle choices.

An exclusive cruise liner, which can offer its guests every luxury and outstanding service, whilst ticking off an unbelievable bucket list of locations, will definitely be top of the ‘tax exemptions’ list for many.

If you are considering a long term worldwide cruise, or relocation to another jurisdiction and would like to fully understand the tax impact, please get in touch with Lynn Gracie, Rebecca Morrison, or your usual AAB contact.