Illness and political unrest in the new country of residence, for example, are among the most common reasons we see people returning to Blighty in a rush. Deportations are rather less common. The recent turmoil in the Middle East prompted many British expatriates, particularly oil industry employees, to book their return flights to Heathrow in some haste.
Obviously, tax issues are not at the forefront of people’s minds when their personal safety and that of their loved ones may be at risk.
However, there are other occasions when returning expatriates do have a bit of time to prepare for their re-entry. In such cases, there are many arrangements to be attended to – as most expatriates are well aware – including new living accommodations and healthcare provision as well as, often, schools for children.
Where returning expats typically need the most help is in rejoining the ‘UK Tax Club’ – a ‘club’ where membership is required of all those resident in Britain, and which involves an annual membership fee that can be substantial.
The following general points apply only to those who will be UK resident and domiciled, as the position for those who are non-UK domiciled is even more complex, and a subject for another day.
Tax years
Tax in the UK is, of course, determined by reference to the tax year, which for individuals runs from 6 April to 5 April. Under the current tax rules, an individual is either resident or not resident for the whole of a tax year, wherever he or she may physically reside during that 12 month period.
However, by Extra Statutory Concession the tax year may in certain circumstances be split into periods of residence and non-residence, enabling some individuals, for example, to pay less tax than they would if they were deemed resident for a full year.
Advisers and their clients should be aware that this useful concession is expected to be put on a statutory footing when the Government introduces its Statutory Residence Test, probably from 6 April 2012.
Two basic actions to consider
When it comes to their taxes, returning British expatriates have two basic areas of action to consider – income tax and capital gains tax – within which there are subcategories.
1. Income Tax
Bank accounts: Tax is charged on interest based on the date that it is credited. For this reason, where possible, it is best to complete the generation of interest in one’s account prior to returning, though obviously this matters more when interest rates are higher than they tend to be now.
If interest has not yet been paid on an account, the classic way to generate payment outside of the regular payment dates is to close the bank account.
Offshore unit trusts and other gross roll-up funds: Expats who hold such products as offshore unit trusts and other gross-roll-up products are not obliged to pay tax on them until the income gain is “crystallised”. But where there has been a significant gain while the individual has been abroad, it is advisable to consider a disposal prior to returning home, in order to avoid the (presumably higher) UK tax that will be due eventually (unless the individual intends to move abroad again before cashing in his or her investment).
Conversely, if a loss would arise on disposal, then the investment should not be sold before coming back to Britain, as the loss created could not be used to offset tax, as it could once home again, and any re-acquisition would occur at a lower base cost.
Offshore insurance bonds: Offshore insurance bonds do in fact provide a form of relief for periods spent abroad on a time apportioned basis. So the decision as to whether to surrender before returning to the UK is not clear cut, and requires a crystal ball, or similar ability to see into the future, in order to determine the future value of the bond.
The rule of thumb, though, is that if it is likely that the bond will be surrendered in the near-ish term, then a surrender prior to return should be considered.
Earnings: Earnings present a much more difficult area for advisers, particularly where an employee continues in the employ of the same employer when he or she returns to the UK.
Generally it is preferable from an income tax perspective if the employee is able to obtain as much of his or her salary as possible prior to coming back to Britain. But if it is clear that the earnings relate to employment abroad, the receipt after the return to the UK should not be fatal.
2. Capital Gains
Shares and securities: if these are chargeable to Capital Gains Tax (CGT) – and offshore roll-up funds and offshore insurance bonds are not – then realising any gain prior to return is desirable .
Depending on timing, care may need to be taken if the same stock is re-acquired as a result of the so-called ‘30 day rule’, which effectively matches a subsequent acquisition within 30 days of a disposal, thus nullifying the earlier gain, and preserving the original base cost.
However, this rule does not require such identification where the person making the disposal re-acquires the same shares while not yet either resident or ordinarily resident in the UK.
Conversely, if the investment would realise a loss on the disposal, then it should be retained until after the owner’s return, so that the loss is then allowable against capital gains.
(As the above suggests, it is desirable that a portfolio of shares or Oiecs needs to be considered on a ‘line by line’ basis.)
It is also important to note that when calculating a gain for UK tax purposes, the cost and sale proceeds need to be stated in UK sterling terms. So where, for example, a US dollar asset is bought with US dollars, and subsequently sold for US dollars, it is necessary to convert the dollars into sterling at each of the relevant dates, using the exchange rate then in effect.
Thus, depending on the exchange rates at the time, a chargeable gain could still arise for UK tax purposes, even though there is a loss in the base currency.
There are, of course, numerous other potential investment and pension arrangements and tax matters that need addressing if an individual is to maximise his or her tax planning opportunities before returning to the UK. This is but a framework of the issues that must be addressed before an expat sets foot back onshore in Britain with the intention of remaining.
Above all, it shows the importance of ensuring that “tax” is added to an expat’s ‘to-do list’ while he or she is still a resident of Expatland, and not yet, again, a member of the UK Tax Club.
