If you’re a UK taxpayer considering a move abroad, it’s vital to understand the UK’s temporary non-residence rules. These rules can have a significant impact on your tax position, particularly if you’re planning to return to the UK within a few years.
What are the temporary non-residence rules?
In simple terms, the temporary non-residence rules are a set of anti-avoidance tax provisions that apply when a UK resident individual leaves the UK, becomes non-resident for a short time and then returns. Their purpose is to stop people from taking a short break from UK tax residence purely to avoid tax on income or gains.
These rules are long established, first introduced in 2013, and typically come into play when an individual becomes non-resident for less than five full tax years and then resumes UK residence.
When do the rules apply?
The rules only apply if you were UK resident in at least four out of the seven tax years before you left the UK and then become non-resident for fewer than five complete tax years.
If those conditions are met, and during your time overseas you realise certain types of income or gains, then these may be treated as if they occurred in the year of your return to the UK and taxed accordingly.
This can catch people out, especially if they thought that becoming non-resident meant they had escaped UK tax altogether and can trigger a sizeable tax liability.
What types of income and gains are affected?
The temporary non-residence rules can apply widely to income and gains, including:
- Capital gains on the disposal of assets that were acquired while you were UK resident.
- Certain income from companies, including distributions and loans written off.
- Certain pension payments, including lump sums from foreign pension schemes.
- Income from tax-deferred arrangements, such as employment-related securities.
One common example is where an individual sells shares or other investments while living abroad and realises a large gain. If they return to the UK within five years, that gain could still be taxed as if they had never left.
Plan ahead
If you’re thinking about moving abroad, it is crucial to plan ahead. Simply leaving the UK is not enough to guarantee non-resident status, and even if you do meet the statutory residence test, the temporary non-residence rules may still apply.
Hillier Hopkins recommends individuals:
- Know your residence status: Use the Statutory Residence Test (SRT) to determine when you cease to be UK resident and when you become resident again.
- Watch the five-year clock: If you want to avoid the temporary non-residence rules, ensure that you remain non-resident for at least five complete tax years.
- Time disposals carefully: If you’re planning to dispose of assets while abroad, seek advice about the timing and potential impact of the rules.
- Keep good records: Evidence of your movements, tax status overseas, and the timing of transactions can be critical in the event of an HMRC inquiry.
In addition to the income and capital gains tax considerations discussed above, individuals relocating overseas should also be aware that there may be Inheritance Tax (IHT) implications, particularly in relation to domicile and the location of assets. These issues are not covered in this article, but you can contact our expert below and we would be happy to advise on the potential IHT impact of moving abroad and how best to plan for it.
For more information contact our experts below.
