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Returning to the UK - tax planning for the UK expatriate

Returning to the UK after time spent abroad inevitably means upheaval and lots of paperwork, which may appear daunting. It may also mean a need to consider tax as it changes all the time. This briefing card picks out some key points for those advising people returning to the UK.

This briefing is only intended for financial professionals.


In this briefing

  • Settling affairs with the Hong Kong tax authorities 
  • Returning to the UK - split year treatment
  • Capital Gains Tax for temporary non-residents

 

Settling affairs with the Hong Kong tax authorities

When someone leaves Hong Kong permanently, they must apply for tax clearance from the Inland Revenue Department (IRD) in Hong Kong. They need to inform the IRD at least one month before they go. If they are employed, their employer must complete a form IR56G and withhold all salary. This withholding continues until the individual submits their tax return (BIR60) and pays any outstanding tax. The IRD will then provide the employer with a letter of release. If the individual doesn’t pay their tax, the IRD will collect it from the withheld salary. So the sooner an outstanding tax bill is paid, the sooner the individual will receive their salary.

Returning to the UK – split year treatment

The position in law is that an individual is either resident for a whole tax year or they are not. However, HM Revenue and Customs (HMRC) may agree to a ‘split year’ treatment where individuals will only be assessable to UK tax after they arrive in the UK (ESC A11 for income tax, ESC D2 for Capital Gains Tax (CGT)).

Individuals may be treated as resident from the date of their arrival if their usual home has been abroad and they come to live in the UK permanently, or for three years or more.

The concession may also be given on departure and return where an individual leaves the UK for employment. The job overseas must last for at least one complete UK tax year (6 April – 5 April in the following year). Ideally individuals could negotiate this with their employer at the outset and stay for at least that length of time to secure the best tax outcome.

Example

Jim’s employer sends him to work in Hong Kong for 18 months. He leaves on the 2 January 2011 and returns on the 1 July 2012.

Susan works for the same employer and is also sent to Hong Kong for 18 months. She leaves on 1 June 2011 and returns on 31 December 2012.

Only Jim is eligible for split year treatment in the UK as he has spent a full tax year working in Hong Kong. He will be treated as UK tax resident from April-December in 2010/11, not resident in 2011/12 and UK tax resident from July – 5 April 2012/13.

Susan will be treated as resident for UK tax purposes for all three years. This would mean that her employment income would be subject to UK and HK tax, and her worldwide savings and investments are still subject to UK Capital Gains Tax and income tax.

Split year treatment does not apply if an individual comes to the UK as a short term visitor, or for only limited periods with no intention to live here permanently or to stay for at least two years.

Timing is everything

The recent Kimber v HMRC (2012) case shows how risky it can be to rely on a favourable split year treatment. Mr Kimber worked in Japan from 1989 to July 1995. In July 1995 he resigned from his job and came to the UK on holiday. Later in September, Mr Kimber returned to the UK to work. Before that, he visited the UK again in August 1995 and he made a substantial disposal of shares on which he would have paid around £97,000 of CGT if he was UK resident for tax purposes. Perhaps not surprisingly, HMRC argued that he was UK resident at that point rather than the later date of September 1995. Mr Kimber was found to have become resident in July 1995 when he was on holiday in the UK. This was because he made various preparations and arrangements during that July holiday, such as signing an employment contract in the UK, finding a place for his daughters in a UK boarding school and finding a place to live from September, all during that July holiday.

So, someone thinking of returning to the UK could consider:

a)  doing any tax planning in the tax year before the tax year they return
b)  making as few visits as possible to the UK in the year they return; and
c)  making arrangements for their life in the UK while they are still outside the UK (where possible).

Capital Gains Tax for returners

Further care needs to be taken where individuals have disposed of assets which they owned when they were UK resident. There are anti-avoidance provisions at s10a TCGA 1992 if they become UK resident again within five complete tax years of leaving the UK. As a consequence, they will be charged CGT on any gains on assets that they owned prior to departure and disposed of while they were non-resident. Assets that they bought and disposed of while non-resident should be free of CGT.

Want to know more?

The procedures needed for Hong Kong tax clearance are described in a pamphlet ‘Tax clearance’ (IR6158). You can get a copy from the HK Inland Revenue Department at www.ird.gov.hk.

A guide is available from HM Revenue and Customs called “Residence, domicile and the remittance basis” (HMRC6) which has a lot more information on the topics covered here. You can find it at www.hmrc.gov.uk.

Any links to websites, other than those belonging to Standard Life (Asia) Limited (“SL”), are provided for general information purposes only. We accept no responsibility for the content of these websites, nor do we guarantee their availability.

Information provided in this briefing does not constitute any form of advice and SL is not responsible for any advice given on the basis
of this briefing. Any reference to legislation and tax is based on Standard Life's understanding of law and tax practice in Hong Kong and the UK at July 2012. These will be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of
these comments nor is SL responsible for the completion of any tax returns on the basis of this briefing. We recommend that investors seek advice from professional advisers regarding their own personal circumstances.

Find out more 

www.standardlife.hk

Disclaimer: The above information is for reference only and should not be construed as legal, tax or investment advice. You should seek professional advice regarding your tax circumstances and the types of savings and/ or investment that are suitable for you. Investing in investment-linked assurance scheme involves investment risks. Past performance is not indicative of future performance.