If you are a British expatriate planning to return to the UK, in order to lower your UK tax liabilities it’s important to seek advice and start planning before you leave your current country of residence. In Part 1 of this article I discussed income and capital gains tax; here I look at other issues you may need to consider.
UK Inheritance tax (IHT)
IHT is based on domicile not residence and so many expatriates remain liable because of their UK domicile. If you establish a domicile of choice outside the UK you should escape IHT, but this only applies if you have the intention to live in that country for the rest of your life.
Domicile is all about intention. To establish a domicile of choice outside the UK you must intend to live there permanently or indefinitely - i.e. have no intention of ever returning to the UK. If you do return, HM Revenue & Customs (HMRC) can argue that you never lost your UK domicile of origin as you could not have had an intention of never returning to the UK (even if you genuinely didn’t at the time).
If you have any structures set up on the basis that you had a domicile of choice outside the UK, and want to be sure your estate won’t unexpectedly be liable for IHT, you need to seek advice to establish the best way forward.
Whether or not you are a UK domicile, it may be possible to lower your IHT liability with careful planning and professional advice.
Pensions and QROPS
Advantages can often be created for returning expatriates with deferred UK pensions, pension plans in drawdown and those currently in Qualifying Recognised Overseas Pension Schemes (QROPS) should they return to the UK.
QROPS provide expatriates with various advantages over UK based funds. However they are normally recommended based on the fact that you are non-UK resident. If you return to the UK your QROPS will retain some of the benefits but others will be lost. There may however be steps you can take to still have your pension set up in a tax efficient manner.
Life assurance policies
Approved single premium life assurance policies, in which you can hold your choice of investment assets, provide tax advantages in many European countries. Taxation in the UK is also favourable.
If you are non-UK resident and later return to the UK, you might be able to take advantage of ‘time apportionment relief’. This is a unique tax break which only applies to life assurance policies. With this relief, you will only be liable to tax on the portion of the gain that relates to UK residence. The portion of the gain relating to non-UK residence is entirely tax free in the UK. This can be more advantageous than capital gains tax where you will be assessed on the whole gain if you are UK resident when you dispose of the asset, even though you may have been non-UK resident for a large portion of the time you held the asset.
Dependent on individual circumstance, there are also other ways to structure life assurance policies so that they are not only tax efficient in the country in which you are currently living but also once you have returned to the UK.
When will your UK residence start?
Your UK residence won’t necessarily start the day you arrive back in the UK to live. UK tax law does not have split tax years, so the strict legal treatment is that you are resident for the entire UK tax year of arrival.
There is, however, an Extra Statutory Concession (ESC) which can permit split year treatment for certain types of income and capital gains.
So if you arrive, let’s say, on 30th January 2013, you are likely to be considered tax resident from that date.
An ESC is usually granted by the UK tax authorities but if they believe the Concession is being abused, they will refuse it, therefore there’s no guarantee it will always be applied.
It’s possible to be UK resident at the same time as being resident in another country.
If you buy or rent property for your use in the UK while you are still resident overseas, to use as a base while visiting the UK while planning your return, HMRC could decide that your residence started earlier than you believe it did.
Unfortunately you cannot ask HMRC for a ruling. It will not normally engage in such correspondence, and the most it may do is confirm you will be tested. HMRC can investigate your tax returns several years after you start filing them and disagree with your start date at that point.
This system does not provide any certainty, so you need to take professional tax advice before you go and after you arrive to avoid any surprises down the line.
Since carrying out the necessary arrangements may take time it’s never too early to start planning for a return to the UK, even if you don’t have any immediate plans. Have a chat with an international tax and wealth management advisory firm like Blevins Franks to find out what options would be available to you.
By Bill Blevins, Managing Director, Blevins Franks
26th January 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.