There are plenty of tax planning opportunities for people who return to the UK after a long period abroad but it is important that professional advice is sought well in advance of the homecoming
It is extremely common these days for individuals to live abroad either for work or pleasure but ultimately many return to the UK. There is a number of tax planning opportunities available to them prior to their return to the UK.
The 1998 Finance Act introduced legislation that makes it harder to realise capital gains tax-free during a period of non-residency from the UK. It is therefore very important that people look at their residence position and consider carefully their date of return to the UK so that that they do not fall foul of the new rules.
For individuals that have left the UK from 17 March 1998 and have been both:
• Resident for any part of at least four out of the seven tax years preceding the tax year of departure.
• Non-resident for less than five tax years between the tax year of departure and the tax year of return.
They will be taxed on certain gains and losses realised during the period of non-residency as if they accrued in the tax year of return.
As the provision is aimed at those emigrating to realise assets already held, there is a general exclusion for gains realised on assets acquired after the date of departure and before the tax year of return. However, there are certain acquisitions which are excluded from this which include transfers between spouses, interests in trusts, and gains from pre-departure assets that have been rolled over into the cost of new assets acquired when non-resident. It is therefore critical that the timing of the return to the UK is of principal importance when considering your tax planning and in some cases it may need to be delayed to the start of the next tax year.
An individual"s liability to UK tax depends on whether or not they are resident, ordinarily resident and domiciled in the UK and it is worth outlining the basic rules that govern these.
A taxpayer is always regarded as resident if they are:
• In the UK for 183 days or more in a tax year.
• In the UK for an average of 91 or more days per tax year, taken over a period of four years. Days of departure and arrival are ignored.
An individual is regarded as ordinarily resident from the date of arrival if:
• They are coming to the UK permanently.
• They intend to remain in the UK for at least three years.
• They are a short return visitor who intends at the outset to be in the UK for 91 days or more per year over the next four years.
Domicile is a general law concept and some of the main points to consider when claiming to be non-UK domiciled are:
• You are normally domiciled in the country where you have your permanent home.
• You cannot be without a domicile.
• You can only have one domicile at any given time.
• Your existing domicile is presumed to continue until it is proven that a new domicile of choice has been acquired.
• Domicile is distinct from nationality and residence.
Given the complexities in deciding on an individual"s domicile it is important to consult professional advice.
An individual who is resident, ordinarily resident and domiciled in the UK will pay income tax and capital gains tax on their worldwide income and gains.
postponing the return
If it is likely that the days limit will be breached in the year of return, a person should consider having a holiday, as it is the date of return that is important not the date the individual leaves their old residence.
If an individual has been non-UK resident for a period exceeding five years they should take steps to increase the base costs of their assets for capital gains tax purposes.
The UK capital gains tax identification rules are such that it is no longer possible to "bed and breakfast" shares. Until the changes in the 1998 Finance Act it was possible to sell on one day and repurchase a day later to achieve the uplift in the base cost. Under the new rules acquisitions within 30 days after the disposal are matched and the individual is still left with the lower base cost. One way around this problem is for one spouse to sell their shares and their spouse to acquire these. An actual sale and acquisition must take place through the stock market as a simple transfer or sale between spouses will not give the desired effect.
In addition such an individual should not realise any capital losses prior to their return as these are not available to be carried forward to be set against future gains. Any losses should be realised after UK residency has been resumed.
If the expat has acquired a domicile of choice in a different country from the UK they may have some scope for some tax planning to shield offshore assets from the UK inheritance tax net. This is a complex technical area and professional advice would obviously need to be taken on this.
As far as income tax is concerned an individual returning to the UK will be deemed to be resident from the date of return and any income received thereafter will be charged to UK income tax. Where an expat has bank accounts abroad they should close these accounts prior to the return to the UK so that any interest accruing is paid and credited to the account prior to the return to the UK and not after the date of return.
In some cases expats may have shielded assets through offshore companies while abroad and this may lead to problems in trying to achieve the uplift in the capital gains tax base costs. It is possible for companies in some offshore jurisdictions to make a distribution of assets by way of dividend so that the asset is removed from the offshore company into the individual shareholder"s name. This achieves an uplift in the base cost and if the company is in a jurisdiction which does not charge stamp duty, such as the British Virgin Islands, there would be no stamp duty payable thereon if structured properly.
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