Many see their expat time as an opportunity to create a solid financial foundation for their future, so the appropriate tax treatment is important to optimise the benefits.
When you decide to move back, consider the following factors:
- Check your UK residency under the statutory residence test (SRT) to see how much time you can spend in the UK before becoming resident. It’s complex, but you can trigger residency in as little as 16 days.
- Access the HMRC website to ensure your filing obligations are up-to-date – you may need to register for self-assessment.
- If moving part-way through the year, seek advice on split-year treatment, separating the tax year into UK-resident and non-resident parts, with implications for your tax.
- Take a long-term view and start planning the year before you return: it may be tax-efficient to sell some assets before you leave, or invest in tax-efficient assets pre- and post-arrival.
- Will planning: it’s important for British expats to have a Will covering assets in the country where they live and work.
The story of the Smiths
John and Jean Smith have lived and worked overseas for 12 years. With John’s retirement approaching at the end of 2019, they will return to the UK – but first, they want to celebrate their new life with six months’ travel to the places they’ve never managed to visit.
During their years overseas, they have built a portfolio of investments on the advice of their IFA and John has amassed a pension through his employer.
They’ve rented a home overseas and maintained their house in Hampshire, while also retaining a UK pension from before they moved abroad.
The early birds
Fortunately, the Smiths started planning in the 2018 tax year, taking advice on their UK tax status. Returning in June 2020, after their travels, they will likely become UK tax residents as they will spend more than 183 days in the country during 2020-21.
They are not tax resident for 2019-20, however, as they were living overseas or travelling during this period.
They will spend 1 July to 5 April in the UK in the 2020-21 tax year. To benefit from a split year tax arrangement, they must have no UK home or have retained one overseas until the end of June before they arrive.
This may not be the case if they are travelling for six months prior to their arrival, which means they could be taxed on their worldwide income from 6 April 2020.
For his overseas pension, John faces a choice. As a UK resident in retirement, he would be taxed on income from overseas. To minimise this, he will take his overseas pension as a lump sum and invest in offshore insurance bonds.
These allow regular withdrawals, giving John access to capital tax-efficiently if he draws up to 5% of the investment amount annually as tax-deferred income. He can do this for 20 years or take an accumulated amount less frequently without incurring income tax.
As John will receive income from his UK pension, he will be taxed over and above the basic allowance of £12,500. His combined income will be more than £50,000, but making use of various allowances, he will only be taxed at the basic rates of up to 20%.
John had a look at the Pension Freedom rules introduced in April 2015 that enable access to the entire pension as a lump sum.
The 25% pension commencement lump sum (PCLS) is tax free – but anything over 25% is taxable as annual income.
While he could take up to 25% out of his UK pension pot as a lump, tax-free; in the end, John decided that his offshore investments more than compensated for the tax he would pay on his UK pension income and the inheritance tax efficiency of a UK pension makes keeping it attractive.
The Smiths’ UK property has been the subject of much discussion.
While they’ve been away, the house has been rented, but now it stands empty on the cessation of the lease and they must choose between selling or re-letting it. As they’re travelling for six months, they can’t occupy it straightaway and prefer to look for something smaller when they return.
They have therefore decided to sell while still non-resident to reduce the amount of capital gains tax due.
Both John and Jean have taken advice on Wills. They have taken a cautious approach, creating Wills for both countries where they have assets – governing the disposal of their UK home and other assets as well as their overseas-based investments.
With their affairs in good shape, the Smiths can look forward to a hassle-free holiday before returning to the UK.
This article was written by David Pugh, chief commercial officer of The Fry Group, which was recognised in International Adviser’s Best Practice Adviser Awards 2018 as the best adviser firm in the UK.
The awards are run in partnership with Old Mutual International.