UK Pensions: Tax Advantages of Flexible Drawdown for Non-Residents

People with UK pension assets are nowadays able to avail of the UK’s flexible drawdown regime for pensions, which generally makes the full value of the pension available from age 55, and if you return to the UK can create significant tax advantages once you are there.

Of course, this is taxable. However, if you are non-resident for tax purposes, although you might in future return to the UK to live, or indeed to another country, you may be able to receive the full value of your fund liability to UK tax and so without deduction of tax at source.

You will then need to declare the income on your foreign, for example Russian, tax return.

This enables you to invest the full value of the proceeds in a qualifying offshore bond, with tax free growth whilst you are outside the UK and then benefit from withdrawals of 5% per annum tax free when you are back in the UK. So a fund of £1m will facilitate income of £50,000 per annum free of tax once you are back in the UK.

Certain things are very important to ensure that the planning is done carefully at the outset. You need an NT (Nil Tax) Code applied to your initial withdrawal in the UK to start with. A;lso, you must be certain of your non-residence for tax purposes at the beginning of the plan. Of course, we can advise you on all of the steps necessary and deal with the implementation on your behalf.

Applying for an NT (Nil Tax) code?

If you’re a British national living outside of the Uk, looking to drawdown an income or currently drawing down an income from a UK pension scheme, then applying for an NT (Nil Tax) code will be of great importance. An NT code means you won’t pay tax on the same income in the UK and your country of residence.

Currently, if you do not have an NT code you would be on emergency tax in the UK. As a result, the tax would then need to be claimed back. Be aware that tax may also be due in the country you reside in.

Background

To start with, due to the Double Tax Agreement (DTA) between the UK and most countries in Europe and Worldwide (France, Spain, Russia to name a few)  you are able to receive your gross amount of funds drawn, in the Uk, from your pensionNote, for any expats in Europe this will still apply after Brexit, as these tax treaties were made outside of European Legislation.

How does the process work?

Next step is to complete the P85 form on HMRC website. Guidance for which can be found here.

NT Code final steps

You will then receive your NT (Nil Tax) code. As a result, from here on in the gross amount will be withdrawn from your pension. But remember, it is your responsibility to declare this income in the country that you are resident. You may still be required to pay tax on it.

How to tell if you are UK resident for tax purposes:

1. Statutory Residence Test (SRT)

The SRT came into effect on 6 April 2013.

The test allows you to work out your residence status for a tax year. Each tax year is looked at separately, so you may be resident in the UK in one year but not the next, or vice versa.

The SRT takes into account:

  • the amount of time you spend and, where relevant, work in the UK
  • the connections you have with the UK

It is split into the following parts:

  • automatic overseas tests
  • automatic UK tests
  • sufficient ties test
  • application of the SRT to deceased persons
  • split years

If you’ve been in the UK for 183 or more days you’ll be a UK resident. There is no need to consider any other tests.

You’ll be resident in the UK for a tax year and at all times in that tax year if:

  • you do not meet any of the automatic overseas tests
  • you meet one of the automatic UK tests or the sufficient ties test

Take the following steps to find out your residence status under the SRT:

  1. if you’ve been in the UK for less than 183 days in the tax year go to step 2
  2. if you meet any of the automatic overseas tests you will not be resident in the UK for that tax year. If you do not meet any of these tests go to step 3
  3. if you meet any of the automatic UK tests or the sufficient ties test, you will be UK resident for that tax year. If you do not meet any of these tests you will not be UK resident for that tax year

Your UK day count may be reduced to take into account days spent in the UK due to exceptional circumstances.

You’ll not be considered resident in the UK for the whole tax year if you do not meet any of the following:

  • the automatic overseas tests
  • the automatic UK tests
  • the sufficient ties test

2. Automatic overseas tests

There are 3 tests to consider.

2.1 First automatic overseas test

You’ll be non-UK resident for the tax year if you were resident in the UK for one or more of the 3 tax years before the current tax year, and you spend fewer than 16 days in the UK in the tax year.

2.2 Second automatic overseas test

You’ll be non-UK resident for the tax year if you were resident in the UK for none of the 3 tax years before the current tax year and spend fewer than 46 days in the UK in the tax year.

2.3 Third automatic overseas test

You’ll be non-UK resident for the tax year if you work full-time overseas over the tax year and:

  • you spend fewer than 91 days in the UK in the tax year
  • the number of days on which you work for more than 3 hours in the UK is less than 31
  • there is no significant break from your overseas work

A significant break is when at least 31 days go by and not one of those days is a day where you:

  • work for more than 3 hours overseas
  • would have worked for more than 3 hours overseas, but you did not do so because you were on annual leave, sick leave or parenting leave

If you have a significant break from overseas work, you’ll not qualify for full-time work overseas.

The test:

  • can apply to both employees and the self-employed
  • does not apply to voluntary workers or workers with a job on board a vehicle, aircraft or ship

3. Automatic UK tests

There are 3 tests to consider.

3.1 First automatic UK test

You’ll be UK resident for the tax year if you spend 183 days or more in the UK in the tax year.

3.2 Second automatic UK test

You’ll be UK resident for the tax year if you have, or have had, a home in the UK for all or part of the year and the following all apply:

  • there is or was at least one period of 91 consecutive days when you had a home in the UK
  • at least 30 of these 91 days fall in the tax year when you have a home in the UK and you’ve been present in that home for at least 30 days at any time during the year
  • at that time, you had no overseas home, or if you had an overseas home, you were present in it for fewer than 30 days in the tax year

If you have more than one home in the UK you should consider each of those homes separately to see if you meet the test. You need only meet this test in relation to one of your UK homes.

3.3 Third automatic UK test

You’ll be UK resident for the tax year if all the following apply:

  • you work full-time in the UK for any period of 365-days, which falls in the tax year
  • more than 75% of the total number of days in the 365-day period when you do more than 3 hours work are days when you do more than 3 hours work in the UK
  • at least one day which has to be both in the 365-day period and the tax year is a day on which you do more than 3 hours work in the UK

For full details see RDRM11300 onwards.

4. Sufficient ties test

Use the sufficient ties test to work out your UK residence status for the tax year if you do not meet either any of the:

  • automatic overseas tests
  • automatic UK tests

You’ll need to consider your connections to the UK, known as ‘ties’, to work out if your ties, taken together with the number of days you spend in the UK, will make you resident in the UK for that particular tax year.

If you were not UK resident in any of the 3 tax years before the one you are considering, you’ll need to check if you have any of the following:

  • a family tie
  • an accommodation tie
  • a work tie
  • a 90 day tie

If you were resident in the UK in one or more of the 3 tax years before the one you are considering, you’ll also have to check whether you have a country tie.

Each of the ties has its own set of conditions or qualifying criteria attached to them.