How to reduce tax costs as a returning UK expat

By Tyla Phillips, Executive Director at AHR Private Wealth

The COVID-19 pandemic has caused widespread disruption to people’s lives right across the globe and with prolonged lockdowns enforced in many regions, British expats may well be considering their options for a sooner-than-planned return to the UK.

Moving back to the UK might impact their finances more than they think, however, with the UK in recession for the first time in 11 years. It’s crucial, then, that individuals understand what costs they may face upon return to the UK and how to best prepare for life back in the country.

Here’s what individuals need to consider to reduce any unnecessary costs and avoid any nasty surprises:

  1. Timed to perfection

The foundation of any plan to return to the UK must be the timing. Generally, plans to return don’t go as smoothly as individuals want them to, with delays a common occurrence. As such, advisers and clients should give themselves at least a year or 18 months to get everything in order, particularly in the current climate, with social and economic uncertainty rife.

Individuals can take the Statutory Residence Test provided by HMRC, which determines your residence status for a tax year. Any individual planning to return to the UK should make sure they’ve taken the test in time to start the new tax year on the 6th April as a UK citizen. Not doing so could leave them with a larger-than-necessary tax bill. A financial adviser can help with the test, as well as confirm whether the individual has a tax liability in both the country of departure and the UK, and by extension their entitlement to any tax relief.

  1. Asset review

Once the return date has been confirmed, individuals need to take stock of which assets should be sold before they become a UK resident again. Seeking financial advice is crucial during this stage, as advisers can identify and recommend to a client which assets need to be sold in order to keep the tax bill as cost-efficient as possible.

If an individual fails to sell of their investments they had abroad before returning, they can expect a hefty capital gains tax (CGT) bill. But, if an individual sells an asset when they’re a non-resident, they then are exempt from a UK CGT charge, allowing them to sell an asset standing at again and then holding onto the profit without being taxed in the UK. Conversely, holding onto assets standing at a loss until they’re a UK resident allows individuals to report the loss on a chargeable asset to HMRC, which can be offset against gains in turn to reduce the total taxable gains.

Additionally, recent-expanded non-resident capital gains tax means non-UK residents are subject to UK tax on gains arising from direct or indirect disposals of UK land ad interests in UK property-rich entities. As a result, individuals may wish to sell any UK property as a non-resident to lower the potential CGT bill.

Above all, individuals need to be aware of the CGT tax rules of the country they’re based in. While popular destinations such as Hong Kong and Dubai have no CGT, other countries like Australia have exit charges on assets standing at a gain. If an individual isn’t aware of the differences in CGT tax rules, it’s important they seek financial advice to clarify where they stand.

  1. New way of life

Individuals should continue speaking to an adviser when they return to the UK, as it can be difficult to readjust to the new way of life once they’ve returned. Tax policies are regularly being updated, so the tax regime may have changed significantly during the time an individual has been away. In recent months, the Chancellor has ordered a review of CGT, while the possibility of a wealth tax and the introduction of a new online goods tax have been debated as options to recover from the impact of COVID-19.

Advisers can also help to restructure an individual’s finances to maximise the benefit of any entitled allowances while in the UK. Couples can make the most of both their allowances by splitting their assets and avoid paying unnecessary taxes. Dividends, CGT and ISAs are all tied on the individual, not a couple, and with the help of tax and wealth advisers, annual income can be structured at a far more efficient tax rate. And, with the Government looking to cut costs to boost the recovery from COVID-19, allowances could be one of the first things targeted, so individuals should make the most of them quickly.

  1. Pension planning

The COVID-19 pandemic has thrown many people’s retirement plans in the air, with some choosing to retire early, while some facing extra years in work to deal with the economic damage. However, a plan of action can still be put in place with an adviser that caters to an individual’s desires.

If an individual was planning to retire abroad, it’s likely they’ll have set up a pension in their country of choice and transferred any UK pension savings to the new fund, known as a Qualifying Recognised Overseas Pension Scheme (QROPS). However, if the COVID-19 pandemic has forced plans to change, whether it’s due to the need to care for a loved one or due to financial concerns, they’ll have to decide whether to keep the QROPS or transfer back to a UK pension.

Whereas a UK pension is subjected to the pension lifetime allowance, QROPS isn’t, so sticking with it rather than transferring into a Self-Invested Personal Pension (SIPP) could save a significant amount of money. Although, transferring into a SIPP would mean they’re liable for the pensions lifetime allowance, set at £1,073,100, so any savings accessed over that amount would be charged at 25% tax, if withdrawn as an income, or 55% as a cash lump sum.

While a substantial tax bill from the pensions lifetime allowance would be avoided with QROPS, the option does lack flexibility. Some providers won’t allow flexi-access, which means an individual is restricted with the amount they can withdraw over 12 months. On the other hand, a SIPP allows an individual to invest or withdraw funds as and when they want.

With so much to consider when returning to the UK, and as economic uncertainty continues to dominate Government policy, seeking professional advice is crucial. An adviser will be able to build a flexible plan for returning to the UK which accommodates for an individual’s specific needs and desires, as well as for any changes to tax policy due to the economic recovery from COVID-19. Taking this approach can create a tax-efficient bill that provides peace of mind while saving thousands of pounds during a difficult economic period.