UK anti-avoidance rules are designed to ensure that if a person becomes non-resident for a relatively short period of time, certain types of income, capital gains and remittances made during the period of non-residence will be taxed on them when they return to the UK. These are known as the temporary non-residence rules.
In addition, new rules due to come into effect from 6 April 2017 may affect the UK tax position of returning non-UK domiciled individuals who have been non-resident for less than six tax years, as well as returning individuals who were born in the UK with a UK domicile of origin but who have acquired an overseas domicile whilst non-UK resident.
Individuals affected by these rules should seek UK tax advice, preferably before they come back to the UK, to provide sufficient time for tax planning that may not otherwise be possible after UK residence has commenced.
An individual is regarded as a temporary non-resident if the following conditions are met:
- They were resident in the UK (and not also Treaty non-resident) in four or more of the seven tax years immediately preceding the year of departure, and
- They were non-UK resident for a period of five years or less.
Where the above conditions are met, certain types of income or gains received during the period of temporary non-residence are treated as arising in the tax year the individual returns to the UK, and charged to UK income tax or capital gains tax accordingly.
The following items of income and gains are affected:
- Capital gains on assets owned prior to the individual’s departure from the UK. Generally, assets acquired and sold during the period of temporary non-residence are not caught.
- Dividends from a UK or overseas close company (but not dividends that relate to overseas trade profits during the period of temporary non-residence), and loans to participators written off.
- Chargeable event gains, including on the redemption or maturity of life insurance policies or on excess withdrawals over the cumulative 5% allowances.
- Offshore income gains.
- Certain payments from pension schemes, including flexible drawdown withdrawals, lump sum payments from a UK pension scheme, and lump sums paid under an employer financed retirement benefit scheme (EFRB).
- Remitted foreign income (that arose in the year of departure or any earlier year where the income was subject to the remittance basis).
Overseas tax paid on the income or gains can usually be offset against the UK tax liability, up to the amount of UK tax payable.
Non-domiciliaries returning to the UK
From 6 April 2017, non-UK domiciled individuals who have been resident in the UK for 15 out of the past 20 tax years will be regarded as deemed domiciled in the UK. As a deemed domicile, their overseas income and gains will be taxable in the UK on an arising basis, and will not be eligible for the remittance basis of taxation. In addition, deemed domiciled individuals will be liable to UK inheritance tax (IHT) on worldwide assets.
In order to lose deemed domicile, it is necessary to become non-UK resident for at least six tax years.
Therefore, non-domiciled individuals, who, having acquired deemed domicile, leave the UK but resume UK residence within six tax years will be regarded as ‘deemed domiciled’ upon their return to the UK.
It is essential that individuals in this situation seek professional advice, preferably before they return to the UK. In certain cases, it may be possible to manage days spent in the UK to delay the start of UK residence for a period of time to satisfy the requisite six tax years of non-residence. A thorough analysis of the individual’s situation in relation to the Statutory Residence Test will be required.
If it is possible to achieve six tax years of non-UK residence, upon resuming UK residence the individual will not fall within the deemed domicile rules until after 15 years of residence in the UK. They would therefore be able to reset the deemed domicile clock and, for 15 years, be eligible for the remittance basis of taxation in relation to overseas income and gains, and UK inheritance tax would only apply to UK assets.
The timing of return to the UK can therefore be critical in determining the tax treatment of income and gains arising after commencement of UK residence, as well as liability to inheritance tax.
Depending on the individual’s circumstances, and how long they have been non-UK resident, it may be beneficial to create an offshore trust before becoming UK resident. Offshore trusts can be a useful means of sheltering income and gains from UK taxation, whilst at the same time protecting assets from UK inheritance tax, for the period of time the individual is UK resident.
UK inheritance tax – individuals born in the UK
From 6 April 2017, individuals born in the UK with a UK domicile of origin who subsequently acquire a foreign domicile of choice will be regarded as UK deemed domiciled when they become UK resident. This means that, for the period of time they are UK resident, they will be subject to UK tax on their worldwide income and gains on an arising basis and their worldwide assets (including assets settled into an offshore trust from which they can benefit) will be chargeable to UK IHT.
For IHT purposes only there will be a grace period so that inheritance tax will only apply to worldwide assets from the second year of residence in the UK.
After the grace period, assets settled into an offshore trust whilst the individual was non-UK domiciled will also be subject to trust IHT charges, at each ten year anniversary of the creation of the trust, and each time property leaves the trust.
It is essential that individuals who have returned to the UK, or are planning to do so, seek professional advice as soon as possible to assess the tax impact of resuming UK residence.
This is particularly important for the following categories of individuals:
- Individuals who have been non-UK resident for less than five years
- Non-domiciliaries who have been non-UK resident for less than six tax years, and who would meet the 15 out of 20 tax year rule when they return to the UK
- Individuals born in the UK with a UK domicile of origin who have acquired a UK domicile of choice during their period of non-UK residence
Ideally, individuals should plan well in advance to allow sufficient time to implement any tax planning recommendations or potential restructuring of assets.