Planning a return to the UK requires careful consideration, expert advice and, above all, time. A step-by-step approach enables expats to put in place the best strategies for a financially sound landing back home.
So, you’re finally returning to the UK. After years as an expat, you’re about to start life as a returnee. You’ll find that it’s one matter settling the family back home but quite another bringing your accumulated financial wealth onshore without losing great chunks of it to the tax man.
Expats planning their return journey will quickly discover that tax is the key issue for a successful homecoming. If viewed as an opportunity, rather than a penalty, the planning can take on a more positive prospect.
Expats working abroad under full-time contracts of employment which cover at least one full tax year have major tax planning opportunities when you are due to return home. All opportunities should be considered by individuals working abroad before you return to the UK as considerable advantages can be gained.
The definition of full-time is that you must have worked not less than 25 hours per week, with no material duties in the UK. By working offshore you already enjoy a number of tax advantages. For example, you will have been paying income tax at the often much lower local rate, and you would not pay any capital gains tax in the UK on any disposals made during that period of non-residence which might be subject to chargeable gains had you been a UK resident. This applies to gains realised on assets both acquired and disposed of whilst abroad.
Where a contract of employment ends prior to 5 April, you may consider taking a holiday in a non-UK country in order not to return to the UK until after the start of the next UK tax year.
Capital Gains Tax
If your absence from the UK is expected to last less than five complete tax years, you will have to begin planning for your homecoming much earlier than you might have supposed. Falling into this category you will have remained within the UK’s CGT net throughout the period spent overseas and any investment gains realised during your absence, by way of assets held at the time of your departure, will be fully chargeable to tax upon their return.
If you have been or will be absent from the UK for more than five complete tax years, the regulations have a lesser impact. If you intend to remain overseas, the best advice is to continue to make notes of all assets bought and sold.
Where wealth is accumulated abroad and invested in assets, the impact of UK CGT should be considered prior to a return to the UK. UK domiciled individuals are liable for CGT on chargeable gains if you are either resident or ordinarily resident in the UK in the year in which a gain is realized.
In the context of the CGT test, ascertaining residence is fairly straightforward. Ordinary residence requires a little more thought. UK CGT legislation specifically provides for gains made by individuals who are temporarily resident outside the UK. For assets held at the date of emigration from the UK, gains realised in a period of non-residence that does not extend to at least five complete tax years are taxable in the year of return to the UK.
Owners of stocks and shares will discover that planning a return to the UK requires a great deal of forethought as the event may not coincide with an optimum selling time.
Property
If you have invested in property, the position is again fraught with difficulties as selling before arriving back in the UK may incur losses rather than gains, or it may not be possible to complete a sale before the return home. Dropping the price to secure an early sale is not always the right answer.
It can work out that reducing the asking price proves more costly than if held out for the asking price and paid the CGT on the profit made.
For assets that are not readily realisable, it may well be worthwhile exploring the use of a trust to help improve the situation but costs and other factors may make this impractical unless the potentially taxable profits are particularly large. However, property investments can often justify the use of trusts as gains do tend to be significant.
Where UK property has increased in value over the years, you should begin exploring these options sooner rather than later, as it takes a while to deal with all the necessary paperwork.
To be fully effective, arrangements need to be in place prior to the 5th April preceding return. Leaving everything to the last minute can lead to disappointment. If you currently hold an offshore bank account, and considering moving back to the UK; you may want to seriously consider your some tax arrangements before you return.
Bed & Breakfast
Before returning to the UK, you can ‘bed and breakfast’ your offshore accounts. This is the process of closing an account to capitalise the interest and then re-open the same type of account with the proceeds, for the purposes of creating a distinct taxable event.
As a non-resident, you are exempt from UK Tax liabilities and would benefit from interest built up overseas.
Failing to do this would mean that all subsequent interest payments would be taxable even though some of that interest would have accrued while you were still non-resident for tax purposes.
Individuals are taxable on worldwide income for any tax year in which you are resident in the UK. Unlike CGT, however, a split-year concession exists, under which only income arising after the date of return is taxable in the UK.
If you are a tax resident in a country with a higher capital gain tax regime than the UK, you could consider making the disposals whilst stopping over in a country with a more friendly tax regime, before re-entering the UK.
You should realise gains in a tax year prior to your return. No split-year concession exists for CGT purposes, meaning that all gains realised in the tax year of return are taxable in the UK, even if realised prior to return.
Conversely, you should not dispose of any capital assets that are showing a loss since such losses if realised after you resume UK residence could be useful to set against future taxable gains.
For example, if you are holding any investments showing losses, then subject to normal investment considerations, it might be sensible to delay the sale of these particular investments until after your return to the UK. By taking this course of action, you can claim tax relief in respect of the loss incurred.
Deferred Interest Account/ Personalised Portfolio Bonds
An alternative interest payment strategy whilst non-resident is to hold your savings in a deferred interest account/PPB. With one of these accounts you choose when you receive the interest enabling you to defer the interest capitalisation date until a time of your choosing, thereby controlling when a taxable event occurs.
A consideration for deferred interest accounts or personalised portfolio bonds is the status of the accounts. Some accounts are considered to be highly personalised accounts that can contain direct equities and other assets. HMRC will consider these accounts to be not tax efficient and therefore the personalised portfolio bond is subject to an annual 15% deemed profit tax on all the investments within the bond regardless of the performance of the underlying investments.
There will be no liability to capital gains tax (and no deduction of CGT at source) on your offshore bond. This is a key advantage of a personalised portfolio bonds – as and when investments are changed within the bond wrapper, there is no liability to CGT. Tax is only payable when money is take out of the bond wrapper itself (i.e. you encash money for yourself) and then income tax is payable, not CGT.
Any income generated by the investments within the bond are not subject to tax at this stage. As with CGT it is only when money comes out of the bond that tax may become payable.
When you take money out of the bond it is subject to income tax. Hence, if you take any money out of the bond while a non-resident for tax purposes, then there will be no UK income tax to pay.
The advantage of a personalised portfolio bond is that you can take benefits when back in the UK and still benefit from the tax breaks of being abroad (with most offshore investments you need to encash before returning while still a non-resident in order to benefit from the tax savings).
The mechanics of this are fairly straightforward: let us assume you are abroad for 3 complete tax years and then return to the UK. After a further 7 years you encash the bond having been invested for 10 years. In this situation you will have to pay 7/10ths of the normal tax due. Hence you only pay tax in respect of the period you are a UK resident for tax purposes.
The amount of tax you pay will depend upon your income tax rate. If you are a higher rate taxpayer then you will pay 40% tax on the gain, if you are a basic rate taxpayer then you will pay 22%. If you are a basic rate taxpayer but the average annual gain on the bond takes you into the higher rate tax bracket, then you will pay some 22% tax and some 40% tax on the total gain. Note this is only if the average annual gain takes you into the higher rate tax bracket, not the total gain.
Finally – and very importantly – you have what are referred to as ‘5% allowances’. If you encash the bond in full when back in the UK you will pay income tax as above, albeit only on the proportion of the time you were in the UK. However, you can defer this tax by using the 5% allowances.
The 5% allowance means that you can take an ‘income’ of up to 5% of the original investment each year without incurring any tax charge at that time. This can be done for up to 20 years and the logic behind this rule is that the Inland Revenue consider the 5% allowances to be the repayment of your original capital rather than any income or gain as such.
You can also carry forward these 5% allowances each year. For example you can leave the bond untouched for 5 years and then take 25% of the original investment without any tax charge at that time. Please note the 5% allowances refer to 5% of the original investment, not 5% of the value of the bond at the time.
If you take more than the 5% allowance in any year, then you will need to pay income tax, but only on the amount by which you exceed the 5% allowances.
In Summary
Planning your finances before you return to the UK is essential to keep any potential tax bill low.
Crystallise your gain on non-tax efficient investments during the period of nonresidency Keep, if viable any investments that have made a loss Put any spare capital in to deferred interest accounts Make arrangements to take 5% if needed Check status of deferred interest accounts
If you have any questions about this article or about your return back to your home country then email us your questions or alternatively you can call us on +603 2713 5000.
