Are you liable for UK tax whilst living abroad?
If you’re not tax resident in the UK and as long as you’ve been non-UK tax resident for more than five years, your UK tax exposure is limited. All of your overseas income and gains will be outside of the UK tax net. However, you’ll still need to pay UK tax on any income which arises in the UK. So, for example, if you’ve kept hold of a home in the UK which you’re renting out, you’ll face a UK tax bill for any income generated from this. You’ll also need to bear in mind that any gain which comes about if you sell or dispose of UK land and property is still chargeable to UK tax even as a non-UK tax resident.
Is it best to tie moving to the UK with the end of the UK tax year?
In an ideal world, it can be helpful to tie in your move with the end of the tax year, but of course this might not be practical for work or personal reasons. Generally, a useful tool called split-year treatment can be used. This allows the UK tax year to be split into two parts: one where you are non-resident and one where you are UK resident. As a result, for the non-UK tax resident part, provided you have held this status for more than five years, your liability to UK tax will continue to be limited to sources of UK income only and gains arising on the sale or disposal of UK land and property.
Does moving part way through the tax year affect your Income Tax status?
An example of how you can become UK resident before your return to the UK
A good example, and one which is common for many British expats, is if you have a rented property overseas, which you lease on a 12-month rolling contract, and a home in the UK which you don’t let, and which you can use at any point. If you’re planning on moving back to the UK in September, and your lease on your rented property overseas ends in May you might choose to move into a temporary place rather than renew your 12-month term. The result is that you no longer have a home overseas, and your main property is in the UK. As a consequence, you will be treated as UK resident (and potentially chargeable to UK tax on your worldwide income and gains) from the date in May when you started to have your only home in the UK.
What about expats that have lived overseas for less than five years?
If you’ve been overseas (and non-resident in the UK) for less than five years, but were UK resident for four out of the seven years before leaving, you’ll be classed as temporarily non-UK resident. The temporary non-residence rules are complex; it could be the case that capital gains arising while you were non-tax resident and some sources of overseas income and some sources of UK income which would otherwise be excluded from UK tax for a non-tax resident, may be charged to UK tax in the year of your return to live in the UK.
What special rules for termination should expats be aware of?
There is an important tax rule relating to employment termination, which it’s worth being aware of if you’re returning to the UK. If you receive an overseas termination payment, and are UK resident at any point in the same tax year that you become entitled to it, that payment will be subject to UK tax even if it only relates to your overseas employment. There are a couple of ways to avoid this; by being tax resident in a country with an applicable double taxation agreement and ensuring you remain non-UK tax resident when the contract was terminated or ensuring your contract ends in a tax year when you are fully non-UK resident.
What is a termination payment?
A termination payment or gratuity generally means a redundancy payment or end-of-service bonus. As noted above, split-year treatment can’t be used for offshore termination payments, so to keep it out of the UK tax net you need to ensure your contract ends at a point when you will be fully non-UK resident for the entire tax year.
What documentation should expats moving to the UK have in place before moving?
If you plan to claim split-year treatment it will be useful to ensure you have a copy of any overseas rental agreement, your employment contract and any information or communications about your gratuity payment, including correspondence from your employer. In addition, if possible, you may wish to obtain a certificate of tax residence for your overseas country too.
Should expats sell their properties before moving?
Selling your UK property before returning home can be useful from a tax perspective, especially if you are relocating to a new area. As a non-resident you can sell a UK property based on its value at 5 April 2015, rather than the original amount you paid for it. This can reduce your Capital Gains Tax bill. You’ll need to secure a valuation from an estate agent and ensure you have the paperwork including the completion statements, for the purchase and sale. However, if you have previously lived in your UK property as your main home further advice is needed as it may be possible to increase the amount of Capital Gains Tax relief on a future sale by reoccupying that former home as your main residence when you return to the UK.
What should expats do about offshore bonds and investments?
Different rules apply to investments depending on your residence status, so it’s usually sensible to review your investment portfolio before you return to the UK to consider whether or not actions need to be taken before you become UK tax resident. Any offshore investments, such as a bond, may benefit from being sold while you are non-resident, so that you can avoid UK tax on any gains you’ve made. It’s important to seek advice from your financial adviser to ensure this is the right decision and you don’t attract exit penalties or other charges. There is a very penal UK tax regime for bonds that meet the definition of being ‘highly personalised’. It’s very important to check your bond status with your financial adviser to ensure yours isn’t classed as such.
What considerations should be in place for contractual savings plans?
If you have a savings plan it’s important to understand what it offers; the term describes lots of financial products including pensions and life insurance policies. If you’ve been non-resident for more than five years, and the assets in your plan stand to make a gain, it’s worth considering whether to sell them to avoid UK tax. If they stand to make a loss, it’s worth keeping hold of them to lessen future capital gains. Do seek advice on any decision concerning savings plans so that you are clear on the options available to you.
Considerations for investments in stocks or exchange traded funds via offshore brokerage?
The same rules apply as with savings plans; as long as you’ve been non-resident for over five years you should consider selling any assets standing at a gain before returning, and hold onto those standing at a loss. These actions give you the best outcomes from a tax perspective.
What happens when starting new employment upon a return to the UK?
You usually don’t need to take any action yourself, as your new employer will advise the UK tax authorities that you’ve returned. Do bear in mind that it’s important to report any change of address to HM Revenue & Customs so that you don’t miss any communication. It’s important to check that your new employer is using the right code to deduct tax at source from your employment income. A tax adviser will be able to help you with this.
Telling HMRC about your return to the UK
You’ll need to note any return or claim for split-year treatment using your Self-Assessment Tax Return. This is filed on 31 January following the end of the tax year. So a return on 5 April 2021 (the end of the 2020-21 tax year) will mean you won’t need to submit your Tax Return until January 31 2022.
What tax allowances can be taken advantage of once you’ve moved home?
There are a number of tax allowances available once you’ve returned to the UK. Most are generally available on a ‘use it or lose it’ basis each year, so it’s worth being familiar with the most useful ones. One of the most effective allowances are ISAs (Individual Savings Accounts) which enable you to save up to £20,000 a year tax free. Other allowances include a Capital Gains Tax exemption of £12,300 every year, a tax-free dividend allowance of £2,000 and a savings allowance which can be £1,000 for interest income.
When should expats consider taking tax advice?
If you are planning a return to the UK, our Guide offers useful information about what you might need to consider.
To discuss any aspect of your return to the UK, please contact your nearest office.
Would you like to find out more?
We are here to help with your tax planning requirements. For more information, whatever your circumstances, please contact us today.