Tax planning strategies for the UK domiciled expatriate
Planning ahead reduces an expatriate’s tax liability when they become UK resident. Here are 10 strategies which you can use to help them:
1. Ensure their non-resident status has not been breached.
Absence and foreign employment must last one whole tax year. Any visits to the UK must total less than 183 days per tax year, and average less than 91 days per tax year over four years.
2. Dispose of assets whose value has significantly increased.
During non-UK residence, any capital gains realised on the disposal of assets, whether situated in the UK or elsewhere, are not chargeable to UK Capital Gains tax (CGT).
Where the individual was resident in the UK for at least 4 out of the 7 years immediately preceding the tax year of their departure, and they return to the UK before 5 complete tax years have passed, any gains realised whilst abroad will remain chargeable to CGT on their return to the UK.
There is no CGT on gains arising from assets acquired after an individual’s date of departure from the UK and sold before their return.
It is important to receive financial advice in respect of any disposals made in the non-UK country of residence.
3. Retain assets showing a loss.
Losses can be offset against future gains where those losses are realised whilst the expatriate has a liability to CGT as a UK resident.
4. Recommend or review a will.
There may have been changes, not only in UK legislation but also within the expatriate’s family life during the period of non UK residence.
5. Review the individual’s UK Inheritance Tax (UK IHT) position.
Having built up substantial capital resources, there may now be a potential UK IHT liability.
If the spouse is non-UK domiciled, an excluded property trust can be used to protect overseas assets from UK IHT.
6. Equalise estates.
Income producing assets should be held in the name of the lower rate taxpayer. Likewise, in respect of CGT, a higher rate tax payer pays 28% compared to 18% for a basic rate tax payer. Utilise both personal tax allowances.
7. Consider the surrender of segments from an offshore bond.
From an income tax point of view, any gain from the surrender of segments happens on the day of surrender. A withdrawal is deemed to happen on the last day of the policy year in question, by which time the individual could be UK resident.
8. Ensure the expatriate is aware of Time Apportionment Relief (TAR).
If, for example, an individual has owned an offshore bond for 10 years and they have spent 5 of those years living abroad, only 50% of the gain would be liable to UK income tax.
9. Consider an offshore bond for non UK domiciled spouses.
A ‘non dom’ living in the UK may claim the ‘remittance basis’ of taxation. Once the foreign spouse has been in the UK for 7 out of the last 9 tax years, they will be subject to tax on the arising basis unless they pay a £30,000 charge (increasing to £50,000 after 6 April 2012 where residency is 12 or more years).
10. Close down any UK deposit accounts prior to return.
The full amount of interest received will be assessed as it is income arising in the UK, with no apportionment related to the part of the year where the expatriate was non- UK resident. Allow adequate time to avoid penalties or forfeiting interest.
Please note that every care has been taken to ensure that the information provided is correct and in accordance with our current understanding of the law and Her Majesty’s Revenue and Customs (HMRC) practice as at 31 May 2011. You should note however, that we cannot take on the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HMRC practice are subject to change. Legislation varies from country to country and the policyholder’s country of residence may impact on any of the above.