This guide covers some of the key UK tax issues affecting British expats who are returning to the UK. Returning expats have many opportunities to plan to mitigate their UK tax exposure, provided that such planning is undertaken well in advance of their move to the UK. Wilkins Kennedy have substantial experience in working with returning expats. This guide does not cover tax issues for non-UK domiciled individuals coming to the UK.
An individual’s UK tax residence status will be decided under the UK’s Statutory Residence Test (SRT), which applies from 6 April 2013. From our experience in working with expats, we are aware that many long-term expats are still not fully familiar with the changes in the residency rules introduced by the SRT.
An individual is automatically treated as UK resident if they spend at least 183 days in the UK during the tax year, which runs from 6 April in one year to 5 April the following year. If they spend less than 183 days in the UK, there are other tests which look at where their home is, if and where they work, what ties (or connections) they have to the UK and how many days they spent here during the year. If the person comes to the UK partway through a tax year and is tax resident in that year, it may be possible to claim split year treatment so that they are only treated as UK resident for part of the year from arrival onwards.
One of the following five split year cases may apply (cases 1 to 3 are omitted as they relate to individuals leaving the UK):
Starting to have a home in the UK only.
Starting full-time work in the UK.
Ceasing full-time work overseas (only applies to those who have recently been UK resident).
The partner of someone ceasing full-time work overseas (see case 6).
Starting to have a home in the UK.
The split year rules can be extremely beneficial and help to protect pre-arrival income and capital gains from tax in the UK. However, they are also very detailed and do not protect all types of income and gains, so it is easy to be caught out. In many situations, it is advisable to return to the UK in a new tax year rather than relying on split year treatment.
Richard has been employed by a Hong Kong company for many years and is tax resident in Hong Kong. He is now 65 and plans to retire to the UK. His last day in his current employment will be 31 August 2020, immediately after which he intends to return to the UK. Richard will be automatically UK resident in 2020/21 as he will spend at least 183 days in the UK in the tax year.
Unfortunately, Richard will not be able to claim split year treatment under the ‘ceasing full time work overseas’ case as one of the conditions for this case is that he must have been UK tax resident in one of the four tax years before his year of return. However, with careful planning, Richard may be able to ensure that he qualifies for split year treatment under the ‘starting to have a home in the UK’ or ‘starting to have a home in the UK only’ cases.
Returning non-UK residents have a planning opportunity to ‘wash out’ capital gains prior to arrival by disposing of assets with inherent capital gains before their return.
It is not possible for individuals who have been temporarily non-UK resident (generally taken to be a period of less than six complete tax years) to wash out gains on disposals of assets which were acquired before they became non-UK resident. Such gains will be taxed in the UK in the year of return.
There are also certain types of income which are caught by the temporary non residence rules, so individuals who are likely to be caught by these rules (not outside the UK for six complete tax years) should take specific advice on how they apply before returning to the UK.
The opportunity to wash out gains arises because UK resident and domiciled individuals are taxable in the UK on their worldwide income and capital gains, while non-UK residents are taxable in the UK only on the following:
Non-UK residents who are not caught by the temporary non-residence rules can therefore dispose of assets which do not fall within the limited exceptions without UK tax consequences.
If assets are bought and/or sold in foreign currencies, the spot rates at the date of purchase and sale are to be used to calculate the sterling cost and proceeds. Where exchange rates have moved between purchase and sale, this can significantly affect the resulting gain or loss.
Investments with inherent losses should generally be retained until after returning so that the losses can be offset against capital gains which are taxable in the UK.
When calculating capital gains on UK property disposals by non-residents, it is possible, subject to a person’s circumstances, for the cost of residential property to be rebased to its 5 April 2015 value and for commercial property and certain property-related investments to be rebased to their 5 April 2019 values. If the rebased cost is higher than the original acquisition cost, this will be beneficial for the individual as it results in a lower capital gain or higher capital loss arising.
An NRCGT return must generally be submitted within 30 days of the completion of the sale. Any tax liability is generally payable by the same date, although this can currently be deferred to 31 January following the end of the tax year for taxpayers who are required to submit an annual self-assessment tax return.
The payment deadline is expected to reduce to 30 days after completion for all taxpayers disposing of UK land and property from 6 April 2020 onwards.
There is a 30 day ‘bed and breakfasting’ rule for the reinvestment of proceeds from a sale of shares or securities into the same shares or securities. Where an individual reinvests into the same holdings within a 30 day period, the sale is matched to the future purchase and the attempted washing out of the inherent gain is ineffective.
Shirley has been working as a consultant in Hong Kong and has been resident there for the past 7 years. She is now planning to return to the UK and has flexibility on her return date. Shirley is single and holds the following worldwide assets:
Shirley’s tax adviser has suggested that she undertakes the following planning in the current tax year when she is non-resident throughout and returns to the UK in 2020/21, all subject to appropriate financial and investment advice:
Many returning expats hold a property in the UK which they may have bought while working overseas (either as an investment or as a place to stay while visiting the UK) and which they intend to occupy as their home on return.
For CGT purposes, a disposal of a person’s principal private residence is generally exempt, although the exemption is restricted if the property was not occupied as their principal private residence throughout the entire period of ownership. This is often an issue for expats who have bought their UK home whilst on overseas assignment and there is a potential exposure from the time of purchase to the time of occupation as their home. If there is a substantial inherent gain, it may be that this can be washed out prior to arrival.
Such properties need to be reviewed prior to return as there could be significant capital gains tax exposure which could be mitigated through pre-arrival planning.
Francesca is due to be returning to the UK on 6 April 2020, having worked overseas for 20 years. She owns a UK property which she bought 10 years ago and which she intends to occupy as her home on return. The property has a large inherent gain (although there has been minimal increase in value since 5 April 2015).
If Francesca occupies the house as her principal private residence and then sells it some years later, she should benefit from principal private residence relief for the proportion of the capital gains which arose during her period of occupation. However, the time apportioned part of the gain which arose when she was non-UK resident and not in occupation will be subject to capital gains tax. If the potential tax exposure is significant, Francesca may wish to consider disposing of the property while non-UK resident to wash out the inherent gain.
Earnings received while non-UK resident are only taxed in the UK if they derive from the UK. Overseas earnings are not taxable on non-UK residents. Returning expats can help to protect their overseas earnings from UK tax by the following:
There is a particular trap where a non-UK resident receives a termination payment from a former employer. Where this happens and they become tax resident in the same year, there is currently no provision in the legislation to exclude the termination payment from UK tax, even if split year treatment applies. In some cases, it may be possible to rely on a double tax treaty between the two countries concerned, but this may not be effective.
Planning the time of arrival in the UK may be essential in certain cases to minimise tax.
There are a number of tax risks and opportunities associated with a return to the UK and carrying out a review some months before arrival (and preferably early in the tax year prior to arrival) can identify actions which should be taken in advance of the move.
Should you wish to enquire further into these areas please get in touch with your normal Wilkins Kennedy contact or a member of our tax team.
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