There is an awful lot to think about when organising your move back to the UK. Finding a home, choosing schools for children, moving pets and arranging work are just the tip of the iceberg. With so much to consider it is important not to take your eye off the ball when it comes to tax. As well as considering the tax obligations and liabilities for leaving your overseas country, you must think about your UK tax position for your return too.
Whilst living overseas you are classed as non-resident, and your liability to UK Income Tax and Capital Gains Tax is limited. Generally, you are only taxed on your UK sources of income and the sale of UK land and property. From the day you become UK resident (and if the UK is your home country you are also UK domiciled – a complex tax definition that we can help you understand) you will be liable to UK Income Tax and Capital Gains Tax on your worldwide income and gains. Therefore, understanding the date UK residence is triggered, and you become fully liable to UK tax, is extremely important.
PLANNING THE DATE OF YOUR RETURN
In the year you return to the UK the default position is that you are classed as UK resident from the previous 6 April; the beginning of the tax year. In reality, it is unlikely to arrange matters so that your return to the UK coincides with the beginning of the tax year, especially in these uncertain times. So, if you return to the UK partway through the tax year is there a way to preserve your non-UK resident status, and save tax, until the actual date of return? Thankfully, there may be. Provided certain conditions are met it is possible to split the 6April to 5 April tax year into two parts. In the first part you remain UK non-resident with all the benefits that entails and then in the second part of the tax year you become fully UK resident. We call this ‘Split Year Treatment”.
Split Year Treatment sounds good but the conditions are, unsurprisingly, detailed. In addition, there could be five different cases of Split Year Treatment that can apply in the year of your return, all with different requirements. And just to make things even more complex, some of those five cases of Split Year Treatment take priority over others. To give an example, one treatment makes you UK resident on the date you start to have a home in the UK. Another means you become UK resident on the day you start working full time in the UK. It could be that both apply to you. If so, you need to know which takes priority as you will become UK resident from that date. It is entirely possible to accidentally trigger UK residency, and UK tax liabilities on your worldwide income and gains, weeks or even months before you return to the UK. Picking up the pieces afterwards is a painful process and it is distressing to learn you have to pay tax on overseas earnings that you thought were safe from the hands of the UK tax authorities. Many people have experienced this and the one thing they had in common was they did not seek any tax advice before their return to the UK.
POINTS TO CONSIDER WHEN PLANNING A RETURN
So, when it comes to tax, what do you need to do before you return to the UK?
- Understand the date you will become UK resident and fully within the UK tax net and the actions you need to take before that date.
- Consider whether or not the tricky ‘Temporary Non Residence’ rules will apply to you. These measures may apply if you have been non-resident for less than five years. If they are applicable, capital gains made while you have been overseas could attract tax in the year you return to the UK.
- Review your investments and assets, and consider selling those standing at a gain before you become UK resident to avoid UK Capital Gains Tax charges when you come to sell. Seek specific advice for UK land and property as these are treated differently than other assets.
- If you are not UK domiciled specific tax reliefs are available after you have become UK resident. You may need to take action to take advantage of these before you return to the UK. Therefore, if you are unsure of your domicile status do seek advice to clarify that before you become UK resident.
- Be aware that the disposal of UK land and property needs to be reported to HMRC and any tax paid within 30 days of disposal. Such disposals are subject to UK Capital Gains Tax irrespective of your UK residence status.
- Note that if you have a UK property, it is only the gains made after 5 April 2015 which attract UK tax. Therefore, there may be an advantage to selling a UK property while you remain UK non-resident.
- Be aware that if you still own a UK property that used to be your main family home, you may be able to save on Capital Gains Tax if you sell it, or if you live in it again after you return.
- Formulate a UK tax-efficient investment strategy for life in the UK. Consider who should own income-producing assets to make use of any allowances and lower rate tax bands. Consider that there are allowances for dividends, interest, capital gains as well as tax advantaged Individual Savings Accounts (ISA’s).
- Seek specific advice for your overseas employment income so that you understand the UK tax that may be charged on any bonuses and share awards you may receive as legacy payments from your overseas employments.
- If you receive a termination payment from your overseas employer care is needed. That termination payment could be charged to UK tax if you are UK resident at any point in the tax year your employment contract is terminated. Specific UK tax advice should be sought.
- Understand your reporting requirements to the UK tax authorities.
- If you have not already done so, understand your exposure to UK Inheritance Tax (IHT) and how that possible tax charge can be reduced. UK IHT can be as high as 40% on your estate (over the allowance which is currently £325,000). A way to reduce IHT may be to make lifetime gifts to your intended beneficiaries. You may be able to make these gifts free of UK Capital Gains Tax while you remain UK non-resident, so returning to the UK is a good time to start thinking about IHT as well.
- Review your Wills and ensure Powers of Attorney are in place and registered with the relevant authorities.
- Finally, please do be aware that, as well as UK tax implications, there may be tax implications elsewhere for you too, including for the country you are leaving. Please consider your tax exposure in other relevant overseas jurisdiction too.
We have been helping British expatriates with all areas of tax planning for over 120 years. If you would like our assistance with any tax planning, wealth planning or estate planning needs we would be delighted to help you.
Peter Webb, International Tax Manager