If you are a British expatriate planning to return to the UK, in order to lower your UK tax liabilities it is important to seek advice and start planning before you leave your current country of residence. Part one discussed tax residence status, income tax and pensions, here we look at capital gains tax, inheritance tax and life assurance policies.
If you are a British expatriate planning to return to the UK, in order to lower your UK tax liabilities it is important to seek advice and start planning before you leave your current country of residence. Part one discussed tax residence status, income tax and pensions, here we look at capital gains tax, inheritance tax and life assurance policies.
Capital gains tax
Beware of the five year tax trap.
Currently, long-term non-UK residents do not pay UK tax on disposals of any UK assets, provided you remain non-UK resident for five complete and consecutive tax years.
This will change from April 2015, but only in relation to residential property, when tax will start to be due on gains made on the sale of property, regardless of your residence status. For other assets, such as shares, the current five year rule will continue to apply.
If you do return during this five year period, you will have to pay UK tax on the gains made on the disposal of UK assets. It is not proportionate to the time spent outside the UK, so you would pay the same tax rate, and on the same gains, if you returned after four and a half years as you would if you returned after one year. The length of time you owned the asset does not make a difference either.
You may find that any gains are taxable in the country you are living in. There may be a window of opportunity to avoid tax, but since this would depend on your circumstances, you need to take personalised advice.
If you are also liable to tax in the UK because you are returning within five years, you will get a tax credit in the UK for any tax paid in the other country.
Income tax
From 5th April 2013, you could also become liable to UK tax on large dividends received from a close company while non-UK resident, or large chargeable gains from an encashment of a life assurance policy, unless you have been non-UK resident for at least five complete and consecutive tax years.
UK Inheritance tax
UK inheritance tax is based on domicile, not residence. If you establish a domicile of choice outside the UK you should escape UK inheritance tax, 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 in another country you must intend to live here permanently or indefinitely. 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 did not at the time).
If you have any structures set up on the basis that you had a domicile of choice outside the UK, 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 inheritance tax liability with careful planning and professional advice.
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.
Since carrying out the necessary arrangements may take time it is never too early to start planning for a return to the UK, even if you do not have any immediate plans. This is a very complex area with many tax traps, so specialist advice is essential to ensure you get it right.
30 May 2014
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 should take personalised advice.
