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Whilst the July 4 election means the non dom changes have been postponed for the next government to deal with; one group of individuals who have been pleasantly surprised by recent tax announcements are British expats.
According to the Institute for Public Policy Research, an estimated 5.5 million live permanently outside the UK (which equates to approximately one in ten of the current UK population). Many of those may wish to return to the UK (temporarily or permanently) but are discouraged by the current tax rules.
A UK domiciliary is an individual who has a UK domicile of origin or acquired a UK domicile of choice under common law principles. These are generally individuals whose parents were born in the UK and who have personal and economic ties to the UK.
There is also a concept of a “Formerly Domiciled Resident” which captures those who replaced their UK domicile whilst resident long term elsewhere, but who are taxed similarly to long term UK residents on a subsequent return to the UK.
Last year a woman unintentionally became UK tax resident when she spent too many days in the UK to look after her alcoholic twin, and her minor nieces. Unfortunately, the year in question was one where she received an £8million dividend from a non-UK company. HMRC was successful in its claim to tax the entirety of that non-UK dividend. In what must have been an incredibly disheartening outcoming to those involved; no flexibility was granted. The case was seen to be about “moral obligations” as opposed to the individual in question having any legal obligation to remain in the UK longer than was permitted for a non-resident under the UK statutory residence test.
Many expats are put off coming home to look after elderly or unwell relatives because of the UK tax burden. By proposing to amend the domicile rules to a residency-based system, expats with a UK domicile would have more certainty as to how they will be taxed. More importantly, under the proposals, those who have been non-resident for ten years, would benefit from no tax on their foreign income and gains on their first four years back in the UK. This means reassuming UK tax residency (even accidentally) would not be the worst-case tax scenario that it currently is for many expats.
In a period of global political volatility and key elections, some view the four year proposal as allowing them a temporary respite from tensions in their current country of residence. The new rules could also help position the UK as an attractive jurisdiction for non-residents who wish to exit from their non-UK business. However, it is also likely that some expats will see the change in the rules as the necessary inducement to allow them to return and retire in the UK. Appropriate planning could help minimise exposure to tax beyond the four years.
For those seeking to return before we have certainty on the new rules, it is usually possible to mitigate the impact of reassuming UK tax residence with taking certain steps whilst they are non-UK tax resident and planning carefully when to trigger the start of UK tax residence. There is also the possibility of relying on double tax treaties that can significantly limit the exposure to UK tax.
If you would like further information or advice on the issues discussed in this article, please contact Dhana Sabanathan.
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