Individuals leaving the UK

Key Issues and Planning Points

Duncan, I’m planning to take up full-time employment outside of the UK.  I have a number of job offers on different continents, what planning ideas do you have?

ANSWER – general comments – not to be construed as advice.

The tax position of individuals leaving the UK will depend substantially on whether they are leaving for a short absence only, to work or permanently (perhaps to retire abroad). In all cases it is assumed that the individuals, prior to leaving the UK, are UK resident and ordinarily resident.

(i) the absence from the UK and the employment abroad both last for at least one whole tax year and

(ii) during the absence any visits to the UK total less than 183 days in any tax year and average less than 91 days in a tax year over a maximum four year period.

Although there is no definition of full-time employment, generally speaking where the employment involves a standard pattern of hours it will be regarded as full-time if the working hours compare to a typical UK working week.

The UK treatment of income and gains for those who are treated as non-UK resident and non- ordinarily resident are as outlined in “Liability to income tax, capital gains tax and inheritance tax”.

Temporary non-residence

An emigrant remains in charge to CGT on the disposal whilst abroad of assets he acquired before leaving the UK until he has been neither resident nor ordinarily resident in the UK for at least five complete tax years – section 10A TCGA 1992. If the individual is non-resident for less than five complete tax years, gains and losses accruing to him whilst abroad on assets he acquired before leaving the UK are treated as accruing in the year of his return. Complete tax years of non-residence are termed “intervening years”.

These rules do not apply to an individual unless he was resident or ordinarily resident in the UK for some part of at least four of the seven tax years preceding the year of departure (sub-s(1)(d)).

The gains or losses treated as accruing in the year of return do not include gains or losses accruing on assets acquired during the period of absence (sub-s(3)). This however does not inter alia apply to:-

(a) assets acquired from the individual’s spouse (sub-s (3)(b));

(b) beneficial interests under settlements (sub-s (3)(c));

(c) new assets under roll-over and similar claims sub-s (3)(d);

(d) deferred gains (sub-s (4));

The section 10A is expressly made subject to the terms of Double Tax Treaties (sub-s (10)).

As a further measure ESC D2 was amended by Finance Act 1998 with the result that all gains realised in the year of departure or arrival are in charge for those years (ie. split year treatment does not apply) and the gains realised in the year of departure are assessable as gains of that year but the time limit for assessment is extended until two years after 31 January next following the year of return (S10A(7)).

Before 17 March 1998 (but continuing to apply to seafarers) where an individual left the UK but remained resident in the UK, (eg because his contract of employment did not fulfil the above conditions), he was entitled to a deduction of 100% on certain earnings from an employment performed overseas if he spent a sufficient number of days abroad. This was referred to as a qualifying period of absence and must have lasted (subject to certain permitted visits) for 365 days or more.

A qualifying period consists either:-

(a) of entirely consecutive days of absence from the UK, or

(b) of days of absence from the UK plus any earlier qualifying period plus the intervening period in the UK, provided that the total number of days in the UK in the intervening period and in the earlier qualifying period is not more than one-sixth of the total number of days in the new qualifying period, and that no intervening period is of more than 62 days. Successive intervening periods and periods of absence may continue to qualify as long as these conditions are met in relation to each new period of absence. Overseas duties merely incidental to a UK employment are treated for this purpose as performed in the UK. Conversely, UK duties merely incidental to an overseas employment are treated as performed overseas.

It is the individual’s responsibility to inform HMRC of his circumstances and, where relevant, to confirm his/her non-UK resident/non-UK ordinarily resident status. The practice whereby HMRC will grant provisional non-resident status from the day after the date of departure is a concession. Strictly, the tax treatment of individuals should be based on the individual’s circumstances in the tax year as a whole. Under the concession, where an individual is leaving the UK part way through a tax year, the tax year will be split so that he is treated as resident in the UK only for the part of the year that he actually spends here. The individual should complete HMRC Form P85 which deals with residence and employment abroad. Completion of this Form should speed up determination of the residence status and facilitate any repayment of tax, for example where tax has been deducted at source after the date of departure.

There are some special categories of overseas employees including Crown servants, European Community employees, employees working in oil and gas exploration and Merchant Navy seafarers. Consideration of the specific issues that apply to such persons is outside the scope of this topic and specialist advice should be sought.

Temporary absences from the UK do not immediately result in a change of residence or ordinary residence status. Where an individual leaves for a short period, he continues to be treated as both ordinarily resident and resident in the UK, although in respect of each tax year residence will be determined based on actual physical presence in the UK. Therefore it would be possible, despite the absence of an initial intention to remain abroad for a long period, to establish non-resident status in a particular tax year by actual absence if the individual does not satisfy the conditions set out in the section “Leaving the UK to work full time abroad under a contract of employment”.

When the individual leaves to work abroad but without a contract for full-time employment the same rules as for temporary absences will apply.

Generally speaking, an individual leaving the UK permanently or indefinitely will be treated as remaining resident and ordinarily resident in the UK subject to the usual rules, ie. physical presence in the UK for 183 days or more (unlikely where the individual leaves the UK permanently) or average visits of 91 days or more a year. However, once the individual has left the UK permanently or for at least three years, he will be treated as non-UK resident and non-UK ordinarily resident from the day after the date of departure provided:

- absence from the UK has covered at least a full tax year and

- visits to the UK since leaving have totalled less than 183 days in any tax year and have averaged less than 91 days in a tax year. (The average is taken over the period of absence up to a maximum of four years).

HMRC is likely to ask for some evidence that the individual has left the UK permanently. For example, steps taken to acquire permanent residence abroad and, if the person continues to have property in the UK for his own use, that this is consistent with the stated aim of living abroad permanently.

As indicated in “Fundamental principles”, domicile is primarily a question of fact and it will be the responsibility of the individual to convince HMRC that he has taken steps to acquire a new domicile of choice. Even then, for inheritance tax purposes he will continue to be treated as UK domiciled for three years after departure – see rules on deemed domicile in “Fundamental principles”. The following are examples of the type of action that should be considered by those seeking to lose UK domicile and adopt a domicile of choice in the new country of residence. The list is, of course, not exhaustive:

- disposal of all private residences in the UK

- purchase of a private residence in the new country of residence

- making a Will under the law of the new country and perhaps acquisition of a burial plot in the new country

- acquisition of citizenship, or permanent residence in the new country

- joining clubs and social organisations in the new country and severing all such links with UK organisations

- keeping investments and bank accounts out of the UK and in the new country

- no business links with the UK.

The following strategies should apply to any individual leaving the UK, for whatever reason, assuming that the individual will not be resident or ordinarily resident in the UK after departure. This will be so regardless of whether non-UK resident and non-UK ordinarily resident status is established immediately or in due course.

For those wishing to lose UK domicile it will also be important that, as far as possible, no UK investments or property are retained.

General planning points

• It is important that any planning is undertaken well before departure.
• Clearly, the tax rules of the country to which the individual is departing will be relevant.
• It will be necessary for the individual to determine whether a UK investment should be maintained, replaced with an investment in the new country of residence or replaced with an investment in another offshore location.

The details of any double tax treaty ought to be checked.

• The individual, as a British citizen, will be entitled to income tax personal allowances (in respect of UK income). The annual CGT exemption will be available each year although the availability of the various CGT exemptions and reliefs will be irrelevant if the taxpayer is non-UK resident and non-ordinarily resident for at least five tax years following departure as there will be no liability to UK CGT in any event even on UK assets.
• So as to plan with some certainty the individual can confirm his tax status with HMRC by completion of Form P85.

Income tax

It is important to remember that income originating in the UK, even where the individual is not resident and not ordinarily resident, could still be potentially subject to UK income tax. As already indicated, the individual will usually have a personal allowance (and married couple’s allowance, if relevant) available.

The maximum amount of tax payable by a non-resident on investment income (excluding rent) is the tax deducted at source, if any, calculated as if a personal allowance were not available.

Capital gains tax

It is important to remember that becoming non-UK resident/non-UK ordinarily resident may trigger previous capital gains tax liabilities which have been deferred by use of hold-over relief.

For example, an individual may have received assets by way of gift with the gains on those assets being held-over. If he then goes abroad within 6 years of the gift, a CGT charge would be triggered on the whole of the held-over gains unless he is leaving with a full-time contract of employment abroad and returning to the UK within three years whilst still owning the assets. In effect, a “wait and see” approach is adopted by the authorities.

If the individual has claimed CGT reinvestment relief on an investment in an Enterprise Investment Scheme, this relief will be clawed-back if he becomes non-UK resident within three years of the shares being issued (five years for shares issued before 6 April 2000) unless he leaves the UK to work full-time abroad and returns within three years still owning the shares.

Where the individual will be not resident and not ordinarily resident in the UK for five tax years he will not be subject to UK capital gains tax on disposal of assets (wherever situated). Therefore, disposal of any assets should be deferred until the first full tax year in which non-resident/non-ordinarily resident status is established. The concession which splits the year of departure from the UK into a period of UK residence and non-UK residence is unlikely to apply to most individuals for capital gains tax purposes so should not be relied upon.

However, any assets which are likely to produce a loss should be sold before departure. See also “Review of investments” – below.

Inheritance tax

Unless the individual is already non-UK domiciled, or until such time as he becomes non-UK domiciled, he will continue to be subject to UK inheritance tax on his worldwide assets. Individuals, who are emigrating and who wish to establish a new domicile of choice, will continue to be deemed UK domiciled for at least three years after leaving the UK.

Deposit accounts

Such accounts should be moved offshore so as to earn interest gross and to avoid the possibility of wasting a UK personal income tax allowance.

Where accounts are left in the UK, a declaration of non-UK ordinarily resident status should be completed so that payment of interest gross can be made.

Gilts

The interest on gilts is now generally paid gross to anyone. In addition, interest on gilts (known as FOTRA securities) is exempt from UK income tax if paid to non-UK ordinarily resident individuals who complete a declaration confirming that residence status. Effectively, all gilts now have FOTRA status.

For IHT purposes, gilts are treated as excluded property if they are owned by a non-UK domiciliary – see “Gilt-edged stocks” for further information.

ISAs

Subscriptions to ISAs can only be made by those who are UK resident and ordinarily resident. This means that no further subscriptions can be made after the investor becomes non-UK resident/ordinarily resident but existing ISAs can be retained – see “Individual Savings Accounts” for further information .

Stocks and shares and unit trusts

Investments which are likely to produce a loss should, subject to non-tax considerations, be disposed of before departure from the UK in order to crystallise the loss which can be used or carried forward. Those shares that are likely to produce gains should normally not be disposed of until the tax year following that in which departure takes place to ensure freedom from CGT provided the disposer does not return to the UK within the 5 tax years following his departure.

To avoid paying UK tax on any dividends, any reinvestment of sales proceeds should be made offshore. This applies equally to direct investment as well as pooled funds such as unit trusts and OEICs.

Investment bonds

Encashment of investment bonds should be deferred until the policyholder becomes non-UK resident (preferably waiting until after the commencement of a new tax year once departure has taken place) to avoid any UK tax charge on chargeable event gains that arise on encashment. In the case of UK investment bonds this would only apply where an individual is (after taking account of the top-sliced gain) a higher rate taxpayer – in the case of investment bonds with non-UK resident insurance companies it applies to all policyholders who are UK resident. If encashment is to be deferred, the taxation implications in the new country of residence should be examined.

Life assurance policies and PHI/critical illness/medical insurance

Insurance companies should be advised that an individual is going abroad. Where life assurance premium relief is available, this will cease to be available and the premiums will have to be paid gross. It may be necessary to maintain a UK bank account to facilitate the payment of future premiums.

Pensions

Our library document “Overseas Considerations” sets out the ability for an individual resident overseas to contribute and participate in a UK registered pension scheme.

Letting property and rents

Generally speaking, rents from UK property which are payable to a non-resident landlord, whether directly by a UK tenant or UK letting agents, will be paid after deduction of basic rate tax. However, a non-resident person may apply to HMRC for permission to receive rent with no tax deducted, for example, where the total rents and other UK income are within the individual’s personal allowance.

Correspondence with the local tax Inspector is necessary.