EXPAT

Coming home?

Marc Beattie explains why returning expats need to consider capital gains tax implications very carefully.

Marc Beattie

Chief Operating Officer, AHR Private Wealth

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© Getty images/istockphoto Millions of UK residents – around one in ten of the UK population, according to analysis by the Institute for Public Policy Research (IPPR) – have taken the plunge and relocated to a new country, as the lure of an expat lifestyle, career opportunities and the promise of a better quality of life have proved hard to resist.

For many people, the expat life remains a transient experience. However, the combination of the extraordinary disruption and knock-on economic impact caused by the Coronavirus pandemic and the uncertainty surrounding Brexit will almost certainly result in a considerable rise in the number of returning UK expats over the next year or two. And many will look to accelerate their plans to return home, particularly if they’ve lost their job or want to be closer to family again.

The complexity of tax rules

Even as a British national, returning to the UK after a stint living abroad is not as straightforward as simply packing your bags and booking the next flight. As with any international relocation, careful planning and preparation is essential in order to avoid any expensive mistakes. The tax ramifications of a return home are no exception, and advisers have a pivotal role to play in guiding their clients through the minefield that is the ever-changing expat tax landscape.

Despite the complexity of tax rules at play, many UK expats return home without being fully aware of how these regulations will apply to them. Coming back to the UK after time abroad is already inherently stressful, without the anxiety of being landed with an unexpected tax bill. For expats who have worked in a low or zero tax country for many years, it’s understandable that tax may not be front of mind.

Capital gains tax (CGT) is one of the heftiest tax bills UK expats are likely to face on their return, but given proper advice much can be done to ensure that an individual’s CGT liability is kept to a minimum at this challenging economic time. Clients will therefore need to work closely with a financial adviser to devise a clear plan based on an in-depth understanding of the rules and identify the steps needed to mitigate the CGT risks.

Each case is obviously different, and individual advice will vary depending on the client’s circumstances, but the following issues are the ones most likely to crop up in discussions about limiting CGT liabilities, so advisers should be prepared to discuss them.

Sales of assets

If clients have assets to sell and profit to release, it is essential to do this well in advance of returning home. In anticipation of any move back to the UK, advisers should first identify which assets should be sold before the client becomes a UK resident again. Generally speaking, selling an asset when a client is still a non-resident makes them exempt from a UK CGT charge, so settling any assets standing at a gain will help clients to hold on to the profit without being taxed.

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The Chancellor has ordered a review of CGT which could have massive implications for both clients and advisers.”

Author bio Marc Beattie is chief operating officer and co-founder at AHR Private Wealth. He has been working in the financial services and private banking industry since 1999.

On the other hand, clients may want to consider holding onto assets standing at a loss until they are once again a UK resident. Individuals can report a loss on a chargeable asset to HMRC, which can in turn reduce the total taxable gains. These “allowable losses” can allow clients to have a smaller CGT bill when they return to the UK. Needless to say, this approach requires advisers to consider the local country rules on CGT. (This is discussed in more detail below.)

Non-resident capital gains tax

Recently-expanded non-resident capital gains tax (NRCGT) means that non-UK residents are subject to UK tax on gains arising from direct or indirect disposals of UK land and property, and interests in entities deriving at least 75% of their value from UK land or property.

It is important for clients who plan to return to the UK to consider selling any UK property in the period leading up to their departure, as it may incur a lower CGT tax bill compared to when they become UK resident. Conversely, they may want to wait until they’re back in the UK to make any sales of their UK property where the sale results in a loss.

Principal private resident relief

If clients are selling their home as part of their return to the UK, they may qualify to receive principle private residence (PPR) relief. PPR protects an individual from CGT but the relief only applies in full if the property has been occupied by the individual as their only home or main home for their entire period of ownership.

Additionally, married couples and those in civil partnerships can only have one main residence between them. Where the gain isn’t fully covered by PPR relief and the property is jointly owned, the CGT can be split, potentially resulting in a lower tax liability overall. Advisers should make sure to point this out to applicable clients.

Temporary non-residence rules

Another implication of CGT is temporary non-residence, which generally applies if a client has been based away from the UK for five complete years or less. The rules around this are quite technical, so it is imperative that advisers understand their client’s circumstances. One of the downsides of temporarily being a non-UK resident is that sales of assets made while non-resident may become taxable when UK residence resumes.

If a client is temporarily non-resident, any gains or losses on assets purchased before the period of temporary non-residence and realised during their period of non-residence – including in an overseas part of a split year – become chargeable to CGT in the year of their return. The rules are designed to prevent people from leaving the UK to dispose of an asset just to avoid CGT.

Local country CGT implications

Advisers should also ensure that clients are aware of the CGT rules of the country they’re based in to avoid any unwelcome surprises. Some popular destinations for UK expats, such as Hong Kong and Dubai, have no CGT, so selling off investments before a client returns can save them thousands of pounds. On the other hand, countries like Australia have exit charges on assets standing at a gain. Clients may not be aware of the geographic variations in the rules, so it’s important to clarify them as soon as possible.

Ongoing uncertainty

The widespread disruption caused by Covid-19 hardly needs pointing out and, as part of the recovery measures, the Chancellor has ordered a review of CGT which could have massive implications for both clients and advisers.

Given the current economic environment, it seems clear that the government will need to either increase taxes or cut spending, with little appetite for the latter after many years of austerity. Bearing in mind that the government’s last manifesto contained a pledge not to increase income tax, National Insurance or VAT, there has been speculation that the government may target wealthier individuals with a new wealth tax, but this would present huge implementation challenges. As a result, less glamorous taxes such as CGT are likely to be under the spotlight.

Removing or reducing the annual exemption, which currently stands at £12,300, or reforming loss relief would seem to be the most realistic policies. Alternatively, the government may look to increase the rates of CGT to bring them in line with income tax. They could also look to abolish more of the reliefs around principal residence relief, but such changes would likely be met with fierce opposition, particularly as this is an area which has already been targeted in recent years.

Whatever happens, it is fair to assume that the government would look to invoke any changes as soon as possible, likely the start of the next tax year. Any mid-tax year changes seem quite unlikely, although that is not entirely unprecedented. Either way, it will become even more crucial for clients to take advice before returning to ensure that any action or restructuring opportunities are undertaken before becoming UK resident. It is therefore essential that advisers work closely with their clients to ensure that they have a clear plan to achieve a safe passage on return.

Needless to say, the secret with CGT planning starts with the planning. Clients should really start looking at their financial affairs 12 to 18 months before their actual repatriation and use the services of CGT experts to chart a course. The specific regulations relating to expat CGT can best be described as moving goal posts. The combination of ever-changing rules and the need to take into consideration the unique financial situation and varying plans of individuals only serve to add complexity to what is already an area of tax that is fraught with uncertainty. Having a clear CGT plan that clients are comfortable with – and understand as part of a wider strategy for a smooth return to the UK – can give them much-needed peace of mind. ●