Tax Guide for British Expats Returning to the UK
Many British expats often find themselves returning to the UK for a short period or indefinitely. Alongside several different elements to consider, it is essential that you plan for the costs that returning to the UK may incur. Complicated tax laws mean that your tax bills may be particularly high, especially if you have been living in a country where taxes are lower than the UK. The laws have also changed significantly in the last 10 years, so don’t rely on anecdotal evidence or advice – ensure that you have done your research before your return.
Step 1: Find out your UK Tax Status
Your UK tax status is influenced by whether you are a UK resident and/or UK domiciled. These are assessed by a series of tests, introduced by HMRC in 2013, called a Statutory Residence Test (SRT).
|UK Resident||UK Domicile|
|Being a UK Resident means that the UK is your current main residence. Residency is usually deemed by spending more than 183 days per calendar year in the country (this number may decrease if you have been abroad for more than a year). If you still own property in the UK, or if you buy one before moving back, you could be deemed a UK resident before you actually arrive in the country.||Being UK Domiciled means that you are not necessarily a current resident of the UK, but the UK is your permanent home.|
Unfortunately, both statuses have several technicalities and differences. For example, once you cease to use your foreign property as your main home, you could be classed as a UK resident straight away, even if you keep your overseas property. For certain taxation purposes (see below), your particular mix of residency status and domicile status will make a difference to what tax you have to pay. As a general rule, HMRC acquired the right to tax you on your income and gains within the UK as soon as you are seen to be a UK Resident, and can tax you on your worldwide income if you are UK Domiciled (barring double taxation agreements).
Step 2: Understanding the current UK Tax System
In the UK, the tax year runs from 6 April to 5 April. The main three taxes are:
Income Tax – a yearly tax on your annual income
Capital Gains Tax – a tax on your gains from your assets
Inheritance Tax – a tax on the assets handed down to your family upon your death
As the UK operates a worldwide tax policy, you are liable to pay tax regardless of whether you earn the money in the UK or abroad. If you were abroad for less than five years, then you may be liable to pay tax on certain income or gains during the period that you were abroad (but not on your salary).
If you are a UK resident, you are subject to Income Tax on your worldwide income and Capital Gains Tax on your worldwide gains.
When returning to the UK, the two biggest concerns may be Income Tax & Capital Gains Tax. These may be large sums of money that you were not expecting to pay and can significantly affect your finances when combined with National Insurance (usually 12% on your earnings over £166 a week). If returning for retirement, you may also need to think about assets that will take you over the Inheritance Tax limit.
Step 3: Planning for your return
Where possible, take the time to review your finances before even setting your departure date – understand what taxes you are liable to, and what plans you can put in place to ensure that you are financially ready for the move. You may benefit from speaking to an adviser with in-depth knowledge of the UK tax system to make sure you can make the most out of your finances.
It is always best to plan your return date around your tax planning. If you return to the UK part-way through the year and do not qualify for ‘split year treatment’, you will have to pay tax on your income for the entire tax year. If split year tax treatment cannot be claimed, then it is very important to look at when it is most tax efficient to return. While you often cannot decide where you are resident for tax purposes, you could plan to transition at a time that will minimise your tax liabilities in both the UK and your current home country.
As your investment(s) grow, you may wish to maximise your profits by moving your money around. Buying and selling funds directly may mean that you are required to pay UK Capital Gains Tax, so this is something to bear in mind.
If you have started your investment plan before returning to the UK, you should be able to claim a deduction against the gains you made for the time you held the investment as a non-UK resident, known as Time Apportionment Relief. A financial advisor can help you to calculate how much tax you are liable to pay with your Time Appointed Relief.
It is vital that you review your estate plans to ensure that everything is in order, considering inheritance taxes, succession law, probate, your will and any trust arrangements. Returning UK nationals are usually required to pay UK Inheritance Tax, so you may need to seek specialist advice. You should bear in mind the likely tax treatment of these property assets and the difference between disposing of them as a non-resident or resident of the UK.
If you had a pension abroad, it might be worth considering moving the pension back to the UK where it can receive favourable tax treatment and the government has created an accessible pension framework. Furthermore, having a domestic pension can remove holdups for you when you need to access your money and may minimise the annual reporting.
Depending on where you have been living, you might be entitled to refunds if your pension has already been taxed abroad. If you transferred UK pensions into a Qualifying Recognised Overseas Pension Scheme (QROPS) or made pension decisions based on taxation in your current country of residence, you will need to carefully consider your options. Any income drawn will be taxable in the UK, and the benefits will be restricted by British pension rules. You may also wish to use any surplus cash to boost pensions investment before returning to the UK. However, as above, seeking advice on this will prevent you from having any unexpected bills upon your return.
International Life Plans
Some international life plans such as life insurance and critical illness policies may remain tax efficient upon returning to the UK. It is important for you to research this or seek advice as to what is the best option for you, as any financial planning undertaken whilst non-resident in the UK may not still be suitable.
The final piece of advice is to ensure that all your UK Tax Returns are up to date. You should plan to file a tax return if your foreign income is above £300 p.a., or if you have any other income to report (e.g. dividends or salary). If you were abroad for less than a full tax year, you’ll still pay UK tax on foreign income for the duration of time you were away.
If you need more information, you can always contact us by using the form on the right on our tax services page.