Amongst other impacts of Covid-19, British citizens working abroad may have to return to the UK as international firms reorganise their structures or end overseas secondments. Many industries and sectors including finance, construction, manufacturing, the media, arts and tourism have had the benefit of opportunities to operate in international territories in the "pre-coronavirus" globalised world. For many, these may come to an end given the global economic crisis that is now being faced.
Individuals affected should urgently consider the tax implications of returning to the UK. Here we consider some of the issues British nationals returning from abroad, perhaps prematurely to their original intentions, should be thinking about as part of their relocation plans. Some may have capital and assets amassed outside of the UK over years. Planning a return or relocation to the UK, in particular focused on tax efficiencies, and the practical steps to focus on including immigration options, is very important.
UK tax residency
Individuals returning to the UK may become UK tax resident for this tax year which began on 5 April 2020. This is determined by the Statutory Residence Test (SRT). The SRT is not a simple day counting exercise but is a series of tests which take into account other factors such as previous residency and connections to the UK as well as the amount of time spent in the UK. The number of days it takes to be tax resident in the UK tax year varies. If an individual spends 183 days or more in the UK in the tax year in question, he or she will be considered UK tax resident. It is also possible to become tax resident if spending 120 or 91 days but can be as low as 46, depending on the number of "ties" the individual has to the UK, for example house ownership.
HMRC has clarified that being asked by your employer to return temporarily to the UK due to Covid-19 is considered an "exceptional circumstance" and any days spent in the UK up to a maximum of 60 days can be ignored when counting days of presence in the UK. However, any other time spent here will count towards UK tax residency.
More information on the SRT and implications under Covid-19 can be found in our two articles; HMRC guidance issued to help non UK residents stranded in the UK and Coronavirus, UK tax and immigration.
Income tax and capital gains tax
The starting position for taxation of UK residents is that UK tax applies to worldwide income and gains. This is taxed on the "arising basis" meaning that UK tax is payable in the tax year that the income or gain arose on the asset.
The "remittance basis" is an alternative tax treatment that is available to individuals who are resident but not domiciled in the UK and have foreign income and gains. For those who qualify and choose to be taxed on the "remittance basis", UK tax would only apply to foreign income and gains brought into the UK. Whether an individual should elect for the remittance basis or accept the arising basis depends on the nature and amount of non-UK income and gains and what requirements the individual may have whilst in the UK. Professional advice should be taken to assess these options.
Generally however, Brits returning to the UK will most likely have retained or will re-establish UK domicile on their return and will unlikely have access to the special tax treatment under the remittance basis, which is really aimed at foreigners who are temporarily residing in the UK.
For Capital Gains Tax (CGT) a non-UK resident is generally outside of the charge to UK CGT for gains realised outside of the UK. CGT will not apply on the disposal of non UK situs assets unless an individual is non-resident temporarily or where an individual is disposing of UK residential real estate. In some circumstances, rebasing of UK assets (with significant unrealised gains) before becoming UK resident can reduce future exposure to CGT.
So for returning Brits, foreign income and gains will no longer be shielded from UK tax once they become resident. Where possible therefore, a review should be carried out in good time for any distributions and bonuses prior to a move, so that any opportunities for income and gains to be realised before becoming UK resident can be identified and acted upon. Equally in some cases, split-year treatment can protect foreign income and gains that have been realised in the tax year of return to the UK.
CGT on the disposal of homes in the UK should also be reviewed. Private Residence Relief (PPR) is an exemption to CGT for disposals of property that has been lived in as the main home throughout the period of residence. The application of the relief is more complex is cases where a home may have been temporarily let for periods and when the owner was not UK tax resident for the period. In addition, since 6 April 2020, an additional relief which previously extended the PPR rules in cases where a property has been a main residence and also let on the open market, known as Lettings Relief, has been withdrawn except in cases where the landlord shares occupation of the property with the tenant. Ex-pats returning to live in homes that were commercially let during their time living abroad should check the application of exemptions on a future disposal of property, as these could make a significant difference to any CGT liability.
Inheritance tax
How the UK inheritance tax (IHT) regime applies to an estate is determined by the domicile of the individual and the location of the asset.
Under English law, in general terms, domicile refers to the place an individual considers their permanent home. The current rate of IHT is 40%. An individual that is UK domiciled at the date of their death will be subject to IHT on their worldwide assets. Individuals who are not UK domiciled will only be subject to IHT on their assets situated in the UK, which also includes indirect interests in residential real estate. Individuals can also be "deemed domicile" if born in the UK and/or resident in the UK over a period of time. With careful advice, planning for either option can be achieved.
In some cases, a foreign domicile may have been established but this should be carefully assessed as the law will look at the intention of the individual as well as their residency and other connections. Where foreign domicile has been established, a review of any IHT planning opportunities in advance of any plans to relocate to the UK should be undertaken.
For those with spouses/civil partners that are not from the UK, the spouse exemption which allows for IHT exempt transfers of assets between spouses is significantly restricted when assets pass to a non UK domiciled spouse. IHT and estate planning is more complex for couples with mixed domicile positions and advice should be taken on factors such as how assets should be owned, effective Will preparation and the option to elect for deemed domicile treatment, for example.
Immigration
It is possible that British nationals returning to the UK will have spouses, civil partners or cohabiting partners and children or other dependants who they will want to bring to the UK. They will need to be advised on:
- EU Settlement Scheme applications: EU nationals applying for settled/ pre-settled status.
- Family visa applications: includes applying as a partner or a spouse of a British citizen or an individual with indefinite leave to remain/settled status.
- Indefinite leave to remain applications: a permanent residency application for individuals who have lived in the UK continuously for five years and have spent fewer than 180 days outside of the UK.
- Tier 1 investor visa applications: Foreign nationals can apply to settle in the UK after 5 years if they invest £2million as a minimum.
How can we help
We understand that these are challenging times and there are various complexities to consider when faced with a decision to return to the UK. Our specialist team can navigate through these issues advising on tax and residency planning, as well as providing assistance with immigration queries.
