UK persons looking to return to the UK after a period of time ‘offshore’, and people who are moving to the UK, should be aware of a number of benefits which can smooth the transition of your investment portfolios. Although UK fiscal regulations are a wide-ranging and complex, we will try to simplify and provide clarity to make the rules work for you.
Resident but Non-Domiciled
Let us start with those moving to the UK for the first time as so called ‘non-domiciles’. These are people who will become resident in the UK but who will, at least not initially, take up citizenship.
Historically the UK has been extremely kind to those in this situation. Indeed, one might say that this has been a major driver of the UK economy, particularly London, as wealthy foreign nationals flock to invest, live and work in the UK.
The UK’s ‘remittance’ rule states only monies ‘remitted’ by a non-domicile into the UK from outside shall be taxed. This rule allows wealthy families to leave the majority of their wealth in offshore tax efficient structures, where is can accrue gross of tax in safety and security.
This generous situation has lost some of its attractiveness in recent years with a ‘remittance charge’ introduction. Now non-domiciles pay a flat rate fee on nominal worldwide income (which of course is still very attractive to most individuals) or forego this advantage and declare worldwide income to be taxed as a UK resident.
This is where tax planning gets interesting as these rules open up some opportunities for planning before becoming UK resident.
First, any investments which currently show considerable gain should be sold. Once a person is in the UK and the assets are moved onshore these assets could fall under the UK Capital Gains Tax code and be given no benefit for gathering most of the gain while the person was UK tax non-resident.
Second, although caution should be exercised here, it may be prudent to settle many assets into an offshore Trust. This means that the assets are not only possibly protected from Capital Gains and Income Tax, but they can be used to prevent a sizeable Inheritance Tax liability at some future point.
With respect to UK citizens returning to the UK after a period of time away, some of the above also applies although it should be remembered that it is highly likely that even an extended time away from UK will not change the fact that the UK citizens ‘deemed domicile’ will change. The UK citizen will have been, and remained at all times, UK domiciled and, this will be reinforced, by their return to the UK, so the remittance basis rule is not applicable.
That said, there are a number of other benefits to bear in mind prior to return.
The simplest advice is usually to sell any investment with gains, especially those not in a tax efficient structure such as a life insurance wrapper. Even with that structure, it may make sense to sell some investments, but only after taking specialist financial advice.
One factor which has tripped up many a returning expat is the fact that the UK does not split the tax year into resident and non-resident segments, so upon spending more than 183 days resident in the UK, one becomes tax resident for the whole year – another reason to consider planning in advance.
The amount of time spent outside from the UK in another important issue. If the person returning to the UK has been outside for less than 5 full tax years then it may not be possible to take full advantage of the ‘bed and breakfast’ rule where it makes sense sell investments prior to return to the UK.
UK tax questions are tricky by nature. Each person’s situation is unique. With new Russian tax residency laws coming into place, we are seeing an increased level of concern from clients regarding UK tax issues. AVC and our London based tax partners can help guide through the international tax planning maze.