Just as expats should carefully assess their finances on moving overseas when returning home, many aspects of the British tax system can considerably impact their bank balances.
If you’ve lived in a country with low-income tax rates or even a zero-tax regime, dealing with HMRC and annual declarations can be quite a shock.
To help out, here are some tips about what to do before landing in the UK.
Table of contents
Proving you are a UK tax resident
The Statutory Residence Test was enacted in 2013 and determines whether you’re a UK resident for tax purposes.
This test is separate from any other immigration process.
Expats splitting their time between different countries or with dual residency or citizenship are advised to seek professional advice to ensure they understand the specifics of a tax residency appraisal.
The test has three sections:
- Automatic overseas tests
- Automatic UK tests
- Sufficient ties tests
Generally, if you are resident in Britain for most of a tax year, earn income here and have ties (such as property, a business, investments or family), you’ll be liable for UK taxes.
Working through each test would help since one supersedes the next.
Expats returning permanently to the UK must factor in Capital Gains Tax on all gains worldwide and UK income tax on all earnings, wherever they originate.
Returning To Britain Within Five Years Of Leaving
Time spent abroad will impact your tax exposure on returning to the UK. Sometimes, you must pay tax on income or gains made during the non-resident period.
That exposure does not include income from employment or a salary but may apply if:
- You relocate back to the UK within five years of moving overseas
- You moved abroad before 6th April 2013 and returned within five complete tax years
- You were a UK resident during four of the seven years before relocating
If you return to Britain within five years, it may be beneficial to seek independent financial guidance or delay your return to avoid heavy tax obligations.
Registering with HMRC
Returning to the UK, you might need to register with HMRC to file self-assessment tax returns.
For example, if you have retained a property overseas as a holiday home or rental investment, still have assets abroad, or receive a wage from a foreign country, these income streams will be taxable if you are a UK tax resident.
The process is relatively straightforward, but tax advice can be necessary if you have complex affairs or multiple income sources spread across different countries.
Dual taxation treaties
If you do have overseas assets or income, then further consideration is required around dual taxation treaties.
That’s because, depending on your residency status, time in each respective country and overall wealth, you might be liable for taxes in two different places.
Most countries have some form of unilateral dual taxation treaty (although that isn’t guaranteed).
A dual tax treaty means you don’t pay tax on the same income or event in two countries simultaneously.
Usually, you can claim against the treaty by offsetting the lower tax bill against the other. However, you must follow the appropriate procedure and may still be required to submit returns in both jurisdictions.
Much depends on your residency position, and often you’ll find a tiebreaker applied to determine the right location to pay tax.
Changing UK Tax Rules
Depending on how long you’ve lived abroad, there may be a substantial difference in tax bands and allowances from when you left.
There have been multiple changes in the last ten years, including the rules for domiciliary status.
In short, if you return to the UK, regardless of how much time has passed, you automatically revert to being a UK domicile, provided Britain is your country of origin.
That means that you are subject to inheritance tax on your worldwide estate.
Previous rules that meant returning expats could claim tax advantages as non-domicile are no longer valid.
Any financial planning based on these exemptions will need revisiting.
Update on British Inheritance Tax Rules
In the 2021 budget, there were several amendments to inheritance tax (IHT) regulations:
- The IHT nil band rate (NRB) has been frozen at £325,000 until 2026 at the earliest. Any assets over this value will be liable for IHT with a standard tax rate of 40 per cent.
- The residence nil rate band (RNRB) for residential properties has been frozen at £175,000, with homes over this value also liable for IHT.
- Tapered IHT rates apply from a threshold of £2 million, a cap that will not change until the 2026/27-tax year.
Estates exposed to UK IHT can benefit from relief, with one option to leave at least ten per cent of wealth to charity, resulting in a four per cent tax reduction, but caution is necessary.
House prices in Britain continue to rise steeply, so many more families will be liable for IHT, mainly where assets include properties in prime city locations.
Changing Tax Bands And Rates
Reviewing income tax rules and how the allowances have changed during your time abroad is a good idea.
The 2021/22-tax year rates top out at 45 per cent for taxable income over £150,000.
Tax For Expats Returning to the UK FAQs
There isn’t a quick answer since tax depends on where you lived in the preceding years, where your income originates and your residency status.
As an indication, you can typically stay in Britain for up to 183 days (six months) as a maximum before becoming an automatic UK tax resident.
Yes, you need to notify the tax office of any circumstance changes, including relocating back from living abroad.
As a tax resident, you are responsible for ensuring you have properly registered and are paying the applicable taxes. That includes tax liabilities on all income and gains from the UK and those generated overseas.
Most returning expats register for self-assessment to declare foreign source income and Capital Gains Tax obligations.
If you pass the habitual residence test or are a UK citizen with domiciliary status, you can likely claim eligible benefits on your return.
You’ll often need to provide evidence that Britain is now your permanent or long-term home and have remained in the country for a minimum amount of time before you qualify for most types of income support.
The following benefits are claimable straight away:
– Pension credit
– Income support and universal credit
– Housing benefits
– Income-related allowances
You can also claim a working tax credit immediately, provided you ordinarily reside in the UK. After three months, you can claim:
– Jobseekers allowance – if you are habitually resident.
– Child benefit, child tax credit and a guardian’s allowance.
– Carers’ allowances, disability allowances and attendance allowances if you have lived in the UK for two of the last three years.
As a UK citizen, you are automatically eligible for free healthcare treatments on the NHS.
However, you will probably have to register with a GP on your return to make routine appointments or request prescription medications.
Just as you can live in Britain for up to 183 days before automatically becoming a tax resident, you can ordinarily live outside of the UK for up to six months at a time.
Although the same caveats apply, it doesn’t usually matter how much you spend outside of the UK over five years – you will retain UK residency for tax purposes provided you live in Britain for at least six months of each year.
If you are a UK domicile but now live abroad as a foreign tax resident (without falling into the ‘ordinarily resident’ or ‘habitually resident’ categories), you can potentially bring funds to Britain without worrying about tax.
However, if you relocate to the UK permanently, all of your income and gains worldwide are subject to British taxes.
Likewise, if you lived abroad for five years or less, you are treated as a temporary non-resident and must declare and pay taxes on any gains during your absence through the Capital Gains tax system.
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