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If you are relocating to the UK temporarily or returning permanently after time overseas, becoming UK resident must be planned carefully. The UK has a complex tax system, so good planning will help limit your exposure to UK tax and protect your wealth.
If you are leaving the UK to move overseas, either to work or to retire, you will need to take steps to remove yourself from the UK tax system and understand all the benefits that being a British expatriate can offer. It’s also important to understand any expat tax implications and reporting requirements that might affect you in the overseas country where you choose to move to.
Planning a move to the UK
Our professionals have helped thousands of individuals relocate to or leave the UK. We also have first-hand experience of a move overseas, as some of our team have moved abroad to work in one of our overseas offices, before returning to the UK. To find out more download our guide to returning to the UK.
Residence and domicile
For British expatriates, or those spending a significant period of time overseas, residence and domicile will become familiar and important terms. Your residence and domicile status will ultimately determine how much UK tax you will pay.
Your residence status will affect how you are treated when it comes to Income and Capital Gains Tax, whilst generally your domicile determines your exposure to Inheritance Tax. Generally, and in its simplest form, residence relates to where you live and domicile relates to where you were born.
Determining domicile can be complex, especially if you want to change your domicile of origin (where you were born) and establish a domicile of choice (usually to a country where you have decided to settle permanently). Specialist advice is always needed.
Why is my residence status important for UK tax purposes?
Your residence status defines how much UK Income and Capital Gains Tax you pay. The UK tax authorities are very strict about how you qualify for resident and non-resident status. The Statutory Residence Test lays out the necessary rules, which must be worked through to determine your residence status. You should also keep good records of how long you spend in the UK and overseas to help with any tax planning. This can be a very complex area of tax planning, and specialist help is usually very useful to guide you through the rules and exceptions.
Disregarded income
If you don’t have any other sources of UK income there are a handful of types of income which can be disregarded, and exempted from UK tax, if you are UK non-resident. These generally include:
• UK bank and building society interest, if received gross
• UK gilts, if received gross
• State Pension (not occupational pensions)
• UK dividends
Capital Gains Tax for expats
Capital Gains Tax (CGT) is charged when you sell or gift an asset, such as a property or shares. Annual exemptions are available, but generally CGT is calculated based on the tax year and your total income. If you have assets (perhaps a home or investments) which you have established whilst overseas it may be useful to sell or gift them whilst you are still non-resident to avoid CGT. The length of time you have spent abroad may also impact your exposure to CGT. It’s worth noting that the sale of UK land and property always falls in the CGT net regardless of your UK residence status.
When will I be seen as a UK resident?
This is a question which is difficult to give a simple answer to! Moving abroad to avoid UK tax is an outdated concept, and in recent years careful attention has been focused on those wanting to adopt or maintain non-resident status. Surprisingly you can be classed as a UK resident with as few as 16 days in the UK. On the other hand, you can be non-resident with as many as 182 days in the UK.
Residence is determined by working through the Statutory Residence Test – a framework put in place by HRMC to work out if you qualify for non-UK resident status. Non-UK residents are only potentially liable to UK tax on sources of UK income and may also qualify for exemption from Capital Gains Tax, so it’s an important step to keep you out of the UK tax net.
The test uses a framework of questions and tools which have to be considered by those seeking non-resident status every year. Essentially, the test divides taxpayers into three separate possible categories, each with their own rules:
1. Those considered automatically non-resident
2. Those considered automatically resident
3. Those who need to review ties with the UK and the amount of time spent in the country
Split year treatment
Helpfully, when returning to or leaving the UK you may be able to split the tax year into two parts. This is a very complex area of the legislation but allows you to split the relevant tax year (the year you return to the UK or leave it) into two separate parts – one when you are UK resident and one when you are non-resident. Split year treatment is a helpful tool as it allows you to maintain a UK non-resident status until a date within the tax year of your return – rather than simply becoming UK resident at the start of the tax year in which you come back to the UK. There are eight different situations or ‘cases’, each with their own specific criteria which are allowed, so seeking specific advice is always advisable.
What if I am a resident in more than one country?
It’s possible to test positive for UK residence using the Statutory Residence Test and also be tax resident in another country under local laws. If there is a double tax treaty (a technical term which basically means an agreement) between the UK and that other country and that treaty has ‘tie breaker rules’ your tax residence status will then be decided by those tie breaker rules. If you ‘tie break’ to the overseas country – rather than the UK – it may protect you from paying UK tax on your overseas income and gains. This is a very complex area of tax. A detailed analysis of both your residence status and any applicable tax treaty is always needed.
Do I need to tell HMRC when I come back to the UK?
Letting HM Revenue and Customs (HMRC) know you are returning to the UK is essential. In addition, understanding the date you become UK resident is important for tax reasons, and it’s worth noting that this date may be different to your actual date of moving so it’s important to be aware of the consequences. For example, if you buy a UK property ahead of moving back it may expose you to UK tax earlier than your actual, physical date of return.
What are my UK tax return filing requirements?
It is important to ensure that you meet your obligations to HMRC whether you are returning to the UK, and whilst you are overseas. If you receive any income from the UK – perhaps from property, savings, investments and dividends or foreign income – you must complete a UK Tax Return every year.
Personal tax allowance for expats
Most UK residents are generally entitled to receive a tax-free allowance every year. The Income Tax allowance is currently £12,500. However, non-UK residents will only be able to use this allowance if they are UK or EU citizens. It’s also worth bearing in mind that the entitlement for EU citizens may change depending on any deal agreed following the UK’s exit from the EU.
If you are part of a couple with different citizenships it’s important to consider whether or not both of you are entitled to a tax-free Income Tax allowance. If only one of you has that entitlement you may wish to consider restructuring your assets to make sure that any UK income is taken by the person who can benefit from the Income Tax exemption.
Getting the right financial planning in place will make your return to the UK or move abroad a much smoother process. With teams across the UK and overseas we can help support you before, during and after any international move. Please contact us to discuss your plans.
