Paying less tax on earnings can be one of the key reasons for moving countries, but you should not assume that spending a few years abroad will make HMRC forget about you. In fact, it’s quite the opposite.
The number of British people living abroad is rising every year, official figures show, with approximately one in 10 Brits living overseas. And, whilst it is no secret that leaving Britain can create some tax issues, returning to the UK could trigger even more interest from HMRC.
Last year, HMRC introduced a statutory residence test, designed to provide greater clarity for whether or not individuals are UK residents for tax purposes.
But, the criteria for the residence test can be complex; particularly for people who are not in full-time employment. So, it is imperative that you are certain of your UK tax position before you begin the process of returning home.
If your status is not clear cut, then a lot of problems could arise. What needs to be established is whether an individual became non-resident for tax purposes or not.
Common considerations are the amount of visits you have made to the UK since leaving the country, along with any continuing connections with the UK during your absence – both of these could mean that, in HMRC’s eyes, you have remained a UK resident for tax purposes. In which case, HMRC will be prepared to demand the tax that you should have paid during the intervening years.
If tax planning was a factor in your decision to leave the UK then ensure that you have been a non-UK resident for at least five full years in order for the plan to be effective.
If you originally left the UK with tax planning in mind, make sure that you have been non-resident long enough for the original plan to be effective – usually you need to be non-UK resident for at least five full years.
If you held an offshore bank account set up before departing the UK and did not declare the income, you may suffer the consequences of this. The best practice is to put right such issues voluntarily before the taxman finds out that you are back in the UK.
If you have had tax issues at some point over the last 20 years you may be able to clear these up. But you shouldn’t assume that you can just return with a clean slate. The taxman is likely to be very interested in your overseas assets and, more importantly, how you obtained the cash to buy these assets. They even have a dedicated offshore coordination unit and specialist investigation teams, who use a wide range of data to spot and monitor suspected offshore tax cheats.
If you are UK domiciled, coming back to the UK will mean that you are going to be taxed on your whole worldwide income. In which case, it may be a good idea to close offshore accounts so that this income is not taxable in the UK upon your return. These accounts can be reopened at a later date, but you must declare any interest in the UK regardless of whether tax is deducted overseas or not. It may even be more tax-efficient to sell these assets before your return and placing the money into ISAs upon your return.
Once you have returned to the UK, you must remember to declare your overseas income on your tax return. HMRC have cracked down on offshore tax issues and they can easily identify UK residents obtaining overseas revenue. Over the next few years
Over the next few years a new system of automated information updates will see financial institutions across the globe report UK residents’ account information to HMRC. Almost 50 countries have registered so far. Global tax transparency is right around the corner!
Make sure you make sensible tax-advantaged investments. A tax exempt investment in your current location is not likely to remain tax-free when you reside in another country. Always check how your tax breaks are likely to be treated upon your return to the UK.
Equally, expat workers with share options from an international company should check out the tax advantages of exercising and or selling them before returning – the rules on this issue are changing in the UK from April 2015.
Obviously, there are many other tax issues to consider, from pension funds to inheritance tax on overseas properties. The best approach is to prepare well in advance and always work on the basis that HMRC is aware everything about your tax affairs and finances – because it probably is.