This article is part of a series. Please scroll to the bottom of the page to see all the articles in the series.
If you have made the choice to move back to the UK, you have consequently made the choice to move back into the wonderful world of tax.
Life was simple in the UAE from a tax point of view. No income tax, no capital gains tax, no national insurance, VAT at only 5%. This will all soon be a distant memory…
However long you’ve been offshore, the tax rates, and some rules, are likely to have changed. In this section you will learn the main points of what you need to know. These are:
1. Splitting the tax year
Understanding your tax residence status is vital in ensuring that you pay the correct amount of tax in the correct jurisdiction.
The way in which an individual’s tax residence is assessed in the UK is via the Statutory Residence Test. This is a series of 3 tests introduced in 2013 and is by no means simple. You may need to seek professional advice on this. If that is the case, please feel free to get in touch.
Key points to know:
You may be able to split your tax year into two separate parts:
- One for when you were UK resident; and
- One for when you were still resident in the UAE.
This means that you would benefit from applying the UK tax rules from the date at which you move back, rather than for the whole tax year.
This may provide a large tax saving for you.
The situations when you may be able to split your tax year when arriving in the UK are:
- When coming to live in the UK and establishing your only home there;
- When starting to work ‘full-time’ in the UK;
- When ceasing ‘full-time’ work overseas and coming to live in the UK;
- When accompanying a partner who has returned to the UK following a period of full-time work overseas;
- When starting to have a home in the UK.
Split years are a very complex area of the Statutory Residence Test and each situation is different which is why there is a need for you to take advice on this.
Legislation is also subject to change. It is possible to become UK resident without even entering the UK. It all comes down to intention and your overall bigger picture.
Getting this wrong could land you with a large tax bill at a later date. I recently spoke to someone who did not take advice and was subsequently landed with an unexpected tax bill of £32,000 after returning to the UK. Don’t let this be you.
On the flip side, good advice could also save you tax which you didn’t know was possible. Seek advice from a UK based tax adviser well in advance of your move home. If you would like a recommendation for a company to speak to, get in touch.
2. Registering for tax
When you left the UK, you should have told HMRC that you were no longer resident in the UK.
When you return with the intention of being employed, you will need to complete a Starter Checklist form (this used to be called a P46). This brings you back into the UK tax web and lets HMRC know of any income you’ve earned and tax you’ve paid.
Whether you are employed or self-employed will determine further steps.
3. Income tax
Whilst a distant memory for those who have spent lengthy periods of time in the UAE, income tax is often the tax people are most familiar with.
6 things you should know:
The rate of income tax you pay will depend on your level of income.
All resident UK individuals are liable to income tax on income over the ‘Personal Allowance’, currently £12,570.
As a non-resident of the UK, you were only liable to UK income tax on your UK sourced income.
For example, if you retained assets in the UK whilst you were offshore, such as property, you will have been liable to the rental income it produced.
However, as a resident of the UK, you are liable to income tax on your worldwide income.
So if you are retaining offshore assets which produce income (such as property), then you will be liable for tax on this income.
Income tax can be charged on earnings from salary, bonuses, investments, property income, savings income as well as certain other areas.
As a financial planner, one of the things I most often see is people who are paying too much in income tax due to not being aware of the ways to mitigate it. To be clear, there are numerous ways in which you can mitigate your income tax liability.
These will depend on your specific circumstances such as whether you are employed, self-employed or retired but in each scenario, options do exist. One of the key roles of a financial planner is to assess and understand your tax position to ensure that your assets are structured in the most efficient way.
If you would like a free 60 minute consultation on this, please get in touch.
4. National Insurance
National Insurance Contributions will provide access to a range of UK benefits, chiefly the State Pension.
Whatever views or conspiracy theories you may have on what may happen to the State Pension in the future, at the moment, it remains an excellent source of inflation linked, guaranteed income for your retirement.
If you haven’t been making contributions whilst you have been offshore, the good news is that if you wish to, you can make voluntary contributions to plug any gaps.
Your first action should be to check your state pension forecast. This is very quick and easy to do online. Use the HMRC website and follow the steps, setting up an account if you haven’t already here.
In order to get the full state pension, you will need 35 years of contributions. If you do have gaps, you can usually fill up to 6 years of missed payments, although this will depend on your age.
Is it worth it?
Whether or not you should make any additional contributions very much depends on your wider situation as well as your future requirements and should be considered as part of your overall financial planning.
For the majority of people, it is likely to be a good idea but if you have any questions on whether it is right for you, I would be happy to answer these for you.
5. Capital Gains Tax (CGT)
What is CGT?
CGT is a tax payable on the gain you have made from an investment.
There are a number of exempt assets, such as private motor vehicles, but assets such as investments and second homes all fall under the remit of CGT.
In its simplest form, CGT is the tax on the profit you have made from the investment, minus the purchase and sale costs. There are a number of other nuances and exceptions involved, although these are outside the scope of this guide.
It’s worth pointing out that you only pay CGT on amounts over the personal CGT allowance (£12,300 in the 2021/22 tax year).
If you believe that you may be subject to CGT, you should seek professional advice.
How much CGT will I pay?
The amount you pay will depend on the type of asset, as well as your income.
In 2016, the government reduced the rate you pay on investments from 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers, to 10% and 20% respectively.
However, the rates for residential property have remained at 18% and 28%.
Why is CGT higher for property?
The reason for this was to make property a less attractive investment.
The UK property market has been over inflated for a number of years which has the result of making it difficult for first time buyers to get onto the property ladder, which is not good for any economy.
The unattractive CGT rates, increases in stamp duty (except for the Covid-19 holiday!) and reduction in mortgage interest tax relief are all factors which have made property in the UK a significantly less attractive investment than it once was. In some cases, what was once a good investment and source of income has actually become a financial drain - if this is you, I would also urge you to get in touch to discuss your options.
So what should I do with my offshore investments?
Coming back to CGT specifically, the length of time you have spent offshore is likely to impact your liability.
For instance, if you return to the UK within 5 years of moving overseas, according to HMRC: “you may have to pay tax on certain income or gains made while you were non-resident”. More detail on this can be found on the HMRC website.
Nevertheless, if you have acquired assets whilst in the UAE, whether they’re held in the UAE or in places like the Isle of Man or Jersey, you may not be liable to UK CGT if they are disposed of before you become a UK resident again.
You should consider this very carefully as it has the potential to save you a large tax bill.
Remember that once you become a UK resident again, your entire gain from this disposal may be liable to UK CGT. Regardless of your time offshore, returning to the UK with unrealised gains may not be in your interest.
This hopefully highlights the importance of taking advice on the subject as well as acting early. The sooner you can clarify your own situation, the better chance you have of limiting any potential tax liabilities.
6. Inheritance Tax (IHT)
Colloquially referred to as ‘the voluntary tax’, IHT has been dividing opinions for generations and generations.
It is the tax on an individual’s estate on the amount over the ‘nil-rate band’ (NRB), currently set at £325,000. For married couples or civil partners, the total NRB is £650,000.
IHT is another complex area which may require bespoke planning, depending on your personal circumstances and intentions for your estate. Many British expats have been known to incorrectly assume that it does not apply to them.
Common perceptions I have come across are:
"I don't live in the UK, so IHT doesn't apply to me."
"I'm in the UK but most of my assets are offshore, so I won't have to pay IHT."
Unfortunately, if you are a British domicile, which most people reading this guide are likely to be, IHT is likely to apply to you irrespective of where you live or where your assets are situated.
UK domiciled individuals will pay UK IHT on their worldwide estate, regardless of where they are resident. This is where it’s key to understanding the differences between residency and domicile.
In isolation, moving abroad for an extended period is not enough to change your domicile. Again, the good news is that by planning in advance, you can take steps to mitigate your liability to IHT (if that is your intention).
The specifics of IHT are discussed in a separate guide which also includes general guidance on ways in which an IHT liability can be reduced.
7. Tax Relief
If you have been offshore for a particularly long period, the concept of tax relief may be a foreign one to you.
To quote HMRC, tax relief means that you either:
“pay less tax to take account of money you’ve spent on specific things, like business expenses if you’re self-employed;
get tax back or get it repaid in another way, like into a personal pension”
Remember that almost everything you do or earn in the UK will be taxed, so any time you can get some relief on this it will be an added bonus.
There are a few ways in which tax relief can apply, the most common of which are:
- Pension contributions
- Charitable donations.
If you are employed, there are certain minimum requirements for pension contributions (currently 3% from your employer and 5% from you).
The more you earn, the more tax you will pay, and therefore the more tax relief you will receive by contributing into a pension.
If you’re a basic rate taxpayer, your tax relief will be 20%, for higher-rate taxpayers it’s 40% and for top-rate taxpayers, it’s 45%.
In other words, a monthly pension contribution of £1,000 would cost an additional rate taxpayer only £550 in real terms.
That’s a pretty good incentive!
As such, it is often advisable to increase your personal contributions and you can do this either by asking your employer to increase the amount, or by contributing yourself through a personal scheme.
If you’re self-employed, you may be able to deduct some of your businesses running costs as allowable expenses in order to receive tax relief. This is absolutely something which you should take advice on in order to benefit.
Whatever your personal situation, the amount you should contribute to your pension should be considered in line with your wider circumstances and future requirements. This is where forecasting your future, based on your current assets and liabilities, as well as your desired retirement plan, is an essential part of financial planning.
How can you save or plan effectively if you don’t know what you’re saving for or how much you might need?
For former UAE expats with pensions and investable assets valued at £250,000+, I offer a free personalised ‘Lifeline’ and 60 minute discussion about your personal situation (usually valued at £2,000).
If you would like to take advantage of this offer, please do feel free to get in touch.
8. Minimising your tax bill
Whilst pension contributions will be sufficient for some, for higher earners, recent reforms have meant that for certain people, they do not carry the same benefits as they once did. We have outlined the details of this previously in a blog which you can find here.
Fortunately, there are other ways in which tax bills can be mitigated. One example is by investing into certain small businesses which qualify for relief. By investing into these types of companies, you are supporting British innovation and the British economy so the government rewards you by reducing your income tax bill.
Of course, this is an oversimplification and there certainly are risks involved but the point is to highlight that for certain individuals, opportunities do exist which allow you to minimise your tax bill if that is indeed your intention.
If any of the above has been of benefit to you or if you believe that you would benefit from a conversation either around your tax planning, or your overall financial planning in general, please feel free to contact me.
In Part 5 of this series, I will provide guidance specifically for those retiring to the UK.
Circumstances vary for individuals and any personal opinions or firm opinions represented above should not be seen as advice or a recommendation to take any specific course of action.
We are not tax advisers. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results.
Personal opinions may change and should not be seen as advice or a recommendation. This post is based on current legislation as at the time of writing, which is subject to change and will not be kept up to date. This document is for UK retail investors.