As far as the UK Inland Revenue is concerned, along with the Revenues of many other countries, you are considered to resident for tax purposes of you’re in the country for 183 days or more per tax year. Days of arrival and departure are ignored. Additionally, if you go and work abroad for more than one year, you must not be back in the UK for more than 91 days, on average, in any 365 day period, for the duration of your time abroad.
Another concept that many countries use is that of ‘ordinarily resident’. This is the country that is your normal home, year on year, with no big foreign excursions.
As such, you can be ‘ordinarily resident’ but not ‘resident’. This is where you move overseas (or just go on a very long holiday) for a short time period — a year or so. Even if you spend more than a tax year abroad, you can still be ‘ordinarily resident’ in the country that’s your normal home. Like all rules governing taxation, the categories are never hard and fast.
You can also be resident in more than one country at once, depending on how your time is split between them, and depending on what their Revenue rules are. Unless there is a double taxation agreement between the countries you are considered resident in, you could be caught twice for tax — so get some advice.
If you go and work abroad, you are considered not resident as long as you’re away for more than one full tax year, and you don’t spend more than 183 days in any one tax year back in the ‘home’ country or more than an average of 91 days per tax year over the duration of your years abroad.
The UK Inland Revenue, though, makes exceptions to these rules if you have to return to the UK for ‘compassionate reasons’ in a tax year. That means the death or serious illness of a loved-one. They will not sting you if you just exceed the limit through no fault of your own.
What about my spouse?
So-called ‘trailing spouses’ are considered by the Revenue to be non-resident under similar rules to the main bread-winner — that is, 183 days in or out of the country.
What if I move abroad permanently — buy a house, that sort of thing. Will I be caught in the UK tax net if I return to the UK regularly?
It depends how regularly. If you go abroad permanently, for a start you have to be able to convince the Revenue of it. Just buying a house is not enough, although it helps. You will still be caught for tax purposes if you return to the UK for more than 91 days per year overall.
Does this apply to all occupations?
No. some jobs come under special rules. These include civil servants, members of the armed forces, EU employees, workers in oil and gas exploration and sailors in the Merchant Navy.
So what is the difference between all this residency stuff and ‘domicile’?
For a start, watch out for this one because according to the Revenue’s own guidelines, “It is not possible to list all the factors that affect your domicile”. But basically, there are two ‘domicile’ concepts: One is where you have your permanent home (not the same as residency, since that is where you spend your time for tax purposes). The second is your ‘domicile of origin’, which is where your father’s permanent home was. So, you could have been born in France, but if your father was English, your domicile of origin is Britain.
They sound like the same thing!
Domicile and residency usually go together, it’s true. But for certain taxation purposes — the taxation of securities income, for instance, or for inheritance tax — your particular mix of residency, ordinary residency, domicile and domicile of origin will matter.
So I’m stuck with the domicile of my father whether I like it or not?
No, you can change it once you reach 16. But you have to convince the Revenue that you really have left the UK for foreign shores permanently. Just living abroad for a long time may not be enough.
In Summary
Generally, if expatriates work abroad for more than one full tax year, they become non-resident for tax purposes in their home country. This allows them to enjoy a number of tax advantages. For instance, normally they would not pay income tax in their home country and instead pay income tax at the local, often lower rate; they also avoid paying capital gains tax on any chargeable gains made on assets acquired and disposed during that period of non-residence. However, failing to plan ahead for a hasty departure could leave ex-pats with heavy losses.
Whilst expatriates often enjoy significant financial benefits working abroad, failing to transfer their assets out of the foreign country in the most tax-effective way could result in significant losses. Even if ex-pats are not immediately thinking of returning to their home country, political instability has led to an increase in the possibility of a sudden relocation and they should definitely be planning how their financial assets will be transferred.
Top Tax Tips
- If you return home before a full tax year has been completed, returning ex-pats should consider taking a holiday in a non-UK country to extend the period out of the country until after the start of the next UK tax year. Doing so will qualify them for non-resident status. Otherwise a concession has to be applied for in the UK to avoid paying UK rates of tax.
- Dispose of and reacquire any assets which are sitting at a capital gain immediately prior to returning to the UK. In this way the gain is crystallised during the period of non-residency, avoiding UK capital gains tax. All gains arising during the period of non-resident ownership would effectively be wiped clean. This could apply to stocks, shares and property.
- Do not dispose of any capital assets which are sitting at a loss since such losses, if realised after they resume UK residence, could be set against future taxable gains.
- Close any interest-bearing bank accounts and reopen them immediately before returning to the UK. This will crystallise the crediting of interest to the account during the period of non-UK residence.
- Whilst working abroad, open an offshore bank account where interest will be credited gross – i.e. with no UK tax deducted at source.
- Place your investments inside a collective investment bond, a fully UK approved vehicle that will allow you to take 5% per year as a tax free income for 20 years. What’s more, by planning NOW, any un-used years can be rolled forward. So say you structure correctly now, and return to England in 5 years time, that’s a huge 25% tax free income to be carried forward. And if your retiring, this structure means that should you ever need long term care in the UK, this particular type of savings vehicle cannot be touched by the government. Many, many people already in the UK are now using this as a great way to protect their assets.
