Residence
Even if your home, family, and work are located abroad, spending a significant amount of time in the UK can result in being classified as a UK resident and, consequently, being obligated to pay income tax on your foreign income.
The HMRC employs a statutory residency test, consisting of automatic tests and sufficient ties tests, to determine residency status. If you spend more than 183 days in the UK during the tax year or if the UK is your sole home, you are automatically considered a UK resident.
If you believe you are not a UK tax resident, the next step is to determine if any of the automatic overseas tests apply to grant you non-resident status. You are automatically classified as a non-resident if either: you spent fewer than 16 days in the UK (or 46 days if you were not a UK resident in the previous three tax years), or if you left the UK to work full-time abroad and spent less than 91 days in the UK, with no more than 30 days spent working in the UK.
If you do not meet the requirements of the automatic overseas tests, the number of days you can spend in the UK depends on the ties you have to the country, such as family, work, and accommodation.
For more detailed information on this matter, it is advisable to consult with your Financial Adviser.
Domicile
Domicile is another important aspect. Individuals who are domiciled in the UK are subject to Inheritance Tax (IHT) on their worldwide assets. It can be challenging to relinquish UK domicile status even if you move abroad for an extended period.
Domicile of origin refers to the domicile acquired at birth, usually that of the child’s father. It is possible to acquire a new domicile, known as a domicile of choice, by fully settling in a new country without the intention of returning to the UK. However, residing overseas for an extended period does not automatically indicate that a new domicile has been acquired.
Factors such as maintaining voting rights and holding assets in the UK suggest that you still consider the UK your home, thereby maintaining UK domicile status. Individuals who have been UK residents for fifteen out of the last twenty tax years are deemed to be domiciled in the UK.
Retiring back in the Britain
When returning to the UK as an expat with a Qualifying Recognised Overseas Pensions Scheme (QROPS), it is crucial to inform your QROPS provider about your return. If you decide to transfer your funds or receive benefits from your QROPS, the scheme is obligated to report these payments to HMRC, regardless of the duration of your previous non-UK residency. Even if you have already been receiving income from a pension scheme while living abroad, once you return to Britain, you will be responsible for paying tax on that income in the UK. This applies whether your pension scheme is registered in the UK, such as a SIPP (Self-Invested Personal Pension), or if it is a QROPS.
At this stage, it is vital to seek professional advice to ensure that the amount of income drawn from your pension and other assets is done in the most tax-efficient manner possible. There are various strategies to consider, such as offsetting your tax liability by drawing from the pension commencement lump sum, utilising tax-deferred 5% withdrawals from an offshore bond, taking advantage of the CGT annual exempt amount, or exploring asset transfers between spouses if one is a higher or additional rate taxpayer, among other options. You have choices and options available, but seeking advice before returning to Britain is crucial. Otherwise, you risk limiting your choices and options.
Repatriating: How are funds taxed in the UK?
If you are a UK-domiciled individual who has effectively ceased UK residence and is not considered ordinarily resident in the UK (i.e., an expat), you can bring funds into the UK without being liable for UK income tax. However, being cautious of the temporary non-residence rules is crucial if you have been living abroad for less than five years. These rules may require you to pay taxes on gains realised during your absence once you return.
If you suspect that you may be a resident in the UK, UK-domiciled but not ordinarily resident, it is advisable to seek professional tax advice as your tax situation can be complex.
Furthermore, if you are a UK non-domiciled individual, you have flexibility in how you are taxed. By consulting with a professional tax adviser, you can effectively plan your tax strategy to make the most of the available options.
Income tax
Tax liability in the UK is determined based on residency and domicile status.
As a tax resident in the UK, you are obligated to pay UK tax on your income from all sources worldwide. However, as a non-resident expat, you are only liable for tax on income derived from UK sources, such as rental income from UK properties or UK pension income.
The amount of UK income tax you need to pay, if applicable, depends on your income level and the corresponding tax bands. Every individual in the UK is entitled to a personal allowance of £12,570, which represents income that is not subject to tax. For detailed information about self-assessment and who needs to submit a tax return, you can visit the official website of HMRC.
If you are returning to the UK and accepting a job offer, you will need to complete a Starter Checklist form provided by HMRC. This form is for employees who don’t have a P45, which is a document issued at the end of employment in the UK and contains information about your tax code, gross pay, and tax paid for that year. The Starter Checklist has replaced the previous P46 form and ensures that your tax details are updated with the tax authorities. During the period when your tax situation is being clarified, you may also be assigned an emergency tax code. Both the Starter Checklist and emergency tax code can be applied through the HMRC website.
Regarding income tax, it is assumed that you are considered a resident for the entire tax year. Consequently, all income received in the tax year when you become a UK resident will be subject to UK income tax. However, an extra-statutory concession called “split-year treatment” can be applied for income tax purposes.
This means that income generated in the tax year of your return (before the actual date of your return) will not be subject to UK income tax. It’s important to note that the rules for split-year treatment differ from those for the treatment of capital gains. Additionally, split-year treatment for income tax is only applicable when an individual is leaving or returning to the UK for work-related purposes.
National contributions
To qualify for certain benefits, including the state pension, it is necessary to make National Insurance contributions (NICs). Even while residing abroad, you have the option to make voluntary contributions. However, you can access your National Insurance record online if you haven’t done so and want to catch up on contributions after returning to the UK. This will enable you to assess how any gaps in contributions may affect your future entitlement to benefits.
The type of NICs you are required to pay depends on your employment status and income level.
- If you are employed, you cease paying Class 1 National Insurance contributions once you reach the state pension age.
- If you are self-employed, you no longer need to pay Class 2 contributions upon reaching the state pension age.
- Additionally, you are no longer obligated to pay Class 4 contributions from the beginning of the tax year following your attainment of state pension age.
Insurance
When returning to your home country, it is essential to review your insurance coverage.
From home insurance to car insurance, life insurance, and boiler breakdown insurance, the array of insurance options can be overwhelming. It is crucial to assess the validity and suitability of your existing insurance policies upon your return.
In recent years, the Law Society has introduced new regulations concerning home insurance for property purchases, stipulating that buyers must have insurance in place before moving into the property. To streamline the process and save time, you can consider using UK comparison websites that enable you to obtain multiple insurance quotes simultaneously. This way, you can efficiently explore and compare different insurance options.
Wills/ Power of Attorney
When you return home, reviewing and updating your will and considering establishing lasting power of attorney is advisable. A lasting power of attorney is a legally binding document that allows you to designate one or more individuals to assist you in making decisions or make decisions on your behalf. This can be particularly helpful in situations where you may experience an accident or illness that could potentially result in a loss of mental capacity.
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