When individuals leave the UK there is a lot for them and their family to think about. When considering the impact on finances, one key consideration is of course taxes for expats and how to plan so that the move is tax efficient.
In this article we consider some of the main tax issues that a soon to be expat taxpayer should consider in advance of leaving the UK.
Tax Residency Issues
The UK has a Statutory Residence Test (SRT) which determines whether or not you are UK resident for a tax year.
The SRT is useful as it allows individuals to plan the date they will become non-resident and how much time they can continue to spend in the UK on returns visits without accidentally triggering residency here. So the best of both worlds can be achieved.
The SRT contains three sets of rules which allow you to determine whether you are automatically non-resident, automatically UK resident or UK resident by virtue of a combination of your continuing ties to the UK and the amount of time spent here (“the sufficient ties test”).
The SRT also identifies when a “split year” will automatically apply when leaving the UK, splitting the UK tax year into a period of residence and non-residence.
There are 3 situations to which split-year treatment applies for someone leaving the UK.
- Case 1: Starting full-time work overseas.
- Case 2: The partner of someone starting full-time work overseas.
- Case 3: Ceasing to have a UK home.
If you are reliant on being non-resident for tax purposes and your residency situation is not clear cut, we recommend that you take tax planning advice from a suitably experienced tax consultant.
The Key Tax Benefits of Being Non-Resident for Tax Purposes
1. Income Tax
Your UK tax liability is limited to UK source income, non-UK income is not subject to UK tax.
The UK tax free personal allowance is available for non-resident individuals who are UK or EU citizens.
2. Capital Gains Tax whilst Non-Resident
Taxpayers are generally not subject to UK Capital Gains Tax (CGT). Individuals seeking to sell an asset with a gain may wish to delay the disposal until becoming non-resident.
The main exception is the disposal of UK property and land. Clearly this is particularly relevant to individuals that leave the UK whilst retaining ownership of their UK property.
A special set Non-Resident Capital Gains Tax (“NRCGT”) rules apply in this instance. There is a reporting and payment obligation to HMRC within 30 days of completion of a property or land sale. Penalties apply for non-compliance and we recommend that specialist assistance is sought as these special rules have a very favourable basis for calculating the potential UK CGT.
Capital losses realised by non-residents are not allowable. Individuals leaving the UK may wish to realise a capital loss prior to becoming non-resident.
3. Disregarded Income Rules
There is a limit on the UK tax liability for non-residents in receipt of UK savings and investment income.
This rule compares your tax liability under the normal rules with an alternative calculation in which you are not entitled to the personal allowance, but certain income is ignored or disregarded. If this alternative calculation produces a lower liability, your tax liability is restricted to this lower amount.
These rules present a planning opportunity for individuals that are due to receive a distribution from a UK company when non-resident and will often mean it is possible for the dividend to be paid without UK tax being payable.
It is worth noting that these disregarded income rules are not effective during a period of split-year non-residence.
4. Double Tax Treaties
If you live in a country which has a Double Taxation Agreement (DTA) with the UK, the UK’s right to tax UK income can be restricted under the terms of the Treaty. The DTA effectively overrides UK domestic law.
This is useful when considering taxing rights over savings income, pension income and employment income.
Other Important Points To Consider
1. Notifying HMRC of your departure from the UK
You should inform HMRC of your departure by completing the non-residence pages of your self-assessment tax return or on form P85 (‘leaving the UK’) if you do not complete a tax return.
2. Receiving UK rental income
If you continue to own and rent out UK property, your letting agent or tenant are required to withhold 20% tax from rental payments and to pay this over to HMRCV on your behalf.
You can receive your rental income without the deduction of UK tax if you submit form NRL1 to HMRC and complete a tax return going forward.
3. Claiming an income tax refund
If you do not file a UK tax return and you have had tax withheld on your income you can claim a repayment of tax if these savings should not have been subject to UK tax by submitting form R43 to HMRC.
4. Donations to Charity
Gift Aid donations are made net of 20% basic rate tax and the charity claims back the tax from HMRC. However, this relies on the donor being a UK taxpayer. If you are non-resident and not paying any UK income tax you could become liable to repay the tax claimed by the Charity to HMRC! So you should review all gift aid declarations you have in place.
5. Temporary Non-Resident
Special rules are in place to prevent individuals leaving the UK for short periods of time to realise capital gains or receive income.
You are defined as a temporary non-resident if:
- You have been resident in the UK during 4 of 7 tax years prior to departure and
- You have been a non-resident of the UK for 5 years or less (in practice you typically need to leave for at least 6 years).
The income or capital gains made during the period of temporary non-residence will be taxed in the year of return to the UK.
Broadly these rules only apply to income or assets which you owned or had an entitlement to prior to departing the UK.
6. Non-Residents and UK Inheritance Tax
You are liable to UK inheritance tax on your worldwide assets if you are UK domiciled (born in the UK to UK parents for example). Even if you left the UK many years ago and have been non-resident in the UK you could still be liable to UK Inheritance Tax if you have remained domiciled in the UK. This is why tax planning generally and inheritance tax planning specifically is so important.
A non-UK domiciled individual is only subject to UK Inheritance tax on assets situated in the UK.
Conclusion
Depending on your circumstances leaving the UK could present a tax planning opportunity and it is important to consider all of these issues to ensure you optimise your position.
If your tax affairs are particularly complicated or anything is unclear then you should always seek specialist inheritance tax planning advice from a personal tax adviser before making any decisions. For UK nationals relocating to Gibraltar, understanding taxes in Gibraltar should form part of that planning process.
This article was prepared by Jamie Favell.
Jamie Favell is a Tax Partner at Tax Advisory Partnership. His practice provides tax consultancy services to Private Clients in all aspects of their tax and business affairs. Their experience has an international focus, in particular taxes for expats and non-domiciled individuals moving to or leaving the UK. If you want to find out more, e-mail: info@taxadvisorypartnership.com; or visit their website: www.taxadvisorypartnership.com
Download your Guide
+44 207 998 0570