Top 10 Tax planning Tips for UK expatriates
For any expatriates or prospective expatriates avoiding or at least reducing UK tax on their income and capital gains will be crucial. In this article we look at 10 of the top tax planning tips for expatriates.
- Establish non UK residence
It may sound straightforward but if you can qualify as a non UK resident and don't claim it in your return you'll be throwing away some huge tax advantages. If you've left the UK to avoid full time overseas there should be no problem in establishing non residence. Similarly if you're already non resident you should be looking to ensure that you remain that way for as long as possible. This will involve ensuring you don't exceed 90 days in the UK on average since your departure from the UK.
The main benefit in non residence is that (1) you get an income tax exemption for overseas income, and (2)you get an exemption from capital gains tax.
- Establish non dom status
If you're looking at a permanent absence from the UK you should consider establishing non UK domicile status. Although it won't make any difference to your income or CGT position it will mean that you'll be exempt from UK inheritance tax on your overseas assets.
To establish it though you should be looking to show a permanent intention to live abroad and not in the UK. Where possible this should then be established with the Revenue (eg by transferring overseas assets into a trust) to safeguard the position if you later had to return to the UK at some point.
- Watch out for spouses
If your spouse is UK resident you could consider transferring assets solely into your name if you're a non UK resident. Your spouse will still get the benefit of the tax free interspouse transfer and there will be no capital gains tax on the transfer to you. As a non resident you could then potentially sell the assets free of CGT or receive overseas income free of any UK tax.
- Make the most of the CGT exemption
The CGT exemption applies for non residents on any assets not used for the purposes of a UK business. There is though a 5 year non residence requirement if you owned the assets at the date of your departure from the UK. In that case you'd need to stay overseas for 5 complete tax years to avoid the CGT being payable in the tax year of your return.
This is a valuable exemption and therefore wherever possible you should look to take full advantage of it before any return to the UK. If you can't actually sell assets before you come back to the UK you'd be looking at rebasing the assets by transferring to a controlled company or a close family member. This would crystallise the gain and uplift the base cost for a future disposal to the current market value.
- Using offshore companies or trusts
If you're planning on setting up an offshore company or trust doing so whilst non resident makes sense. As a non resident the control of the company would be likely to be abroad and therefore you could establish the company as non resident. There are numerous anti avoidance rules that can apply to treat income that arises to offshore companies and trusts as that of the the person who set it up. However, setting up the company or trust whilst overseas leaves more opportunity to claim exemptions from the anti avoidance rules.
- Where are duties performed?
If there are any duties of an overseas employment performed in the UK see if you can get these classed as 'incidental' to the overseas employment. If you can, there will be no apportionment of the overseas salary and it would be fully exempt from UK income tax if you're non resident.
Incidental duties will tend to be ancillary duties such as attending meetings etc which aren't related to the key focus of the employment.
- Contracts signed overseas?
If you're running your own business, ensure that there is no UK trade, otherwise you'll be taxed on some of your profits in the UK. Simply having UK customers won't mean there is a UK trade but you should ensure that the key revenue generating activities are carried out overseas and that any contracts are signed overseas.
- Relying on the split year basis on your return
Although you may well be entitled to the split year basis as regards income (and also possibly capital gains tax if you're returning to the UK after a long term period of non residence) if any overseas income was substantial you should ideally return in the tax year after the income arose. The split year basis is just a concession and the Revenue can and do refuse to apply it in certain cases. If the tax at stake is significant it may be worth taking the risk.
- Watch out for UK exemptions
There are a number of UK tax exemptions that can be highly beneficial (eg CGT exemption for your main residence and income tax exemption for premium bond receipts). However these may not qualify for the same relief from tax overseas. So ensure you carefully consider the overseas position. It could for instance be more advantageous to sell property as a UK resident and claim full principal private residence relief rather than being taxed on any gain overseas
- Establish treaty residence overseas
Make your permanent home overseas and ensure your new 'family base' is overseas. This will not only make any challenge to your UK resident status less likely but will qualify you for the tax treatment as laid out in any tax treaty (eg reduced withholding taxes and various UK tax exemptions).
These top 10 tax planning tips for expatriates should help in ensuring your tax position is 'robust' and UK tax is minimised where possible.