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Expats Pensions advise all clients to seek specialist tax advice when leaving or returning to the UK. However we thought we would share an interesting technical article we read recently on the subject.

Ask the experts: ‘My client is returning to the UK…’

Q: I was doing some research for a client, let’s call him Mr Jones, who is thinking of returning to the UK in 2013/2014. He has been non-resident for around five years.

He finally left in May 2007, but as he rented a property in Portugal from March 2007, HMRC acknowledged that he formally left in April 2007.

He set up an offshore bond before leaving the UK, a Bond issued by Skandia Life, and his investments within it have increased in value.

In order to minimise any tax on the growth of the collective retirement bond, I assume it is advisable for Mr Jones to crystallise any gains before returning to the UK. Is this correct?

Andrew Penman: Generally speaking, individuals are resident in the UK for complete tax years, apart from in particular situations where HMRC will, by concession, (and, from 2013/14 on a statutory basis) allow a ‘split-year’ treatment, such as where the individual is leaving or arriving to carry on full time work.

Therefore, if Mr Jones wishes to avoid UK tax on any gains crystallised in respect of his bond, he would be best advised to do so before the end of a tax year in which he is not likely to be considered UK tax resident.

There are also tax rules which say that where an individual ceases to be UK tax resident, crystallises a gain while he is non-resident, and then returns to the UK without being absent for at least five complete tax years, the gain in some cases becomes chargeable in the UK in the year of return.

It is not entirely clear, from the way you’ve described it, whether Mr Jones ceased to be UK resident in 2007/08 – and thus, if not, whether it would be advisable for him to wait until after 5 April 2013 to return to the UK.

This assumes the gain is one that is subject to capital gains tax. If it is subject to income tax, then these rules are not relevant and the rules applying to “Capital Redemption Bonds” may be relevant and the gain chargeable to income tax.

If an individual has been non-UK resident while holding a Capital Redemption Bond only a proportion of the gain corresponding with the time spent resident in the UK will be taxable. So encashing the bond shortly after returning to the UK may only generate a very small tax liability.

As it happens, though, there is actually quite a favourable tax regime in Portugal for residents wrapping up their investments into an appropriate offshore life assurance bond. So your Mr Jones could be in luck, and may not have to concern himself with his residency status with respect to gains on his offshore bond.

Under this regime, the original capital can be taken out of the structure on an ad hoc basis, without a gain arising; withdrawals of income in excess of the original capital are taxed at discounted rates after five years.

This might, therefore, be a more favourable outcome than crystallising a gain while UK resident (see below). But you would want to work the two potential scenarios out fully, and compare the results, just to be sure.

Q: My understanding is that if he left Portugal for more than 183 days in a calendar year, Mr Jones would lose his Portuguese residency status.

Andrew Penman: Not necessarily. In particular, if a person has a place of abode available to him or her in Portugal at the end of the year – which, it can be inferred, will be retained as his or her permanent residence – then his or her Portuguese residence status will be retained, regardless of the number of days spent in Portugal during that year.

Note that the tax year in Portugal is on a calendar year basis. So if Mr Jones wishes to lose his Portuguese residence status for 2013, it would be advisable for him to end the lease on his flat in Portugal before the end of the year.

Note, by the way, that it is possible to be resident in more than one country under some countries’ tax rules, and so he would then need to apply the UK/Portugal double tax treaty to determine where he is treated as resident.

Q: If Mr Jones were to go on a cruise for six months before surrendering the bond, would there be any tax to pay?

Andrew Penman: It is theoretically possible to have no place of residence during a tax year, but it is difficult to achieve in practice.
What’s more, the rules of the game are about to change, as we have a new statutory residence test coming in, which will apply in the UK from 2013/14 onwards.

Under the new rules, as currently proposed, for example if an individual spends fewer than 46 days in the UK in a particular tax year – and was not resident in any of the previous three tax years – then he or she will be automatically treated as not UK tax resident for that particular tax year.

The proposed new residence rules are giddyingly complex and will need to be studied closely when they are formally introduced.

Therefore, going on a cruise for six months (from 6 April 2013 or later) would help, but your Mr Jones would also need to limit his UK days on his return, to guarantee non-resident status in 2013/14.

Q: My client, Mr Jones, also owns a company that owns a house in the Bahamas. Would it work if he lived there for six months before surrendering the bond?

Andrew Penman: The above comments to the previous question apply here also.

Additional measures, other than restricting the number of days spent in the UK, which may help (but not necessarily guarantee) non-UK residence status, would include ensuring that none of his close family members return to the UK without him, and avoiding having some form of accommodation available to him in the UK.

Q: Finally, would anyone at HMRC be concerned if the proceeds from Mr Jones’s bond were to end up in a UK bank account?

Andrew Penman: Where a UK resident, non-domiciled individual remits the proceeds from an offshore item of income or gain to the UK, this can indeed have adverse tax consequences.

However, if Mr Jones remains non-UK resident, remittance of the gain to the UK will have no UK tax consequences, even if he returns to the UK. If an item of investment income arises in an individual’s hands while non-UK resident it will not be taxed in the UK.

Q: I would appreciate your thoughts on how else we might best support Mr Jones.

Andrew Penman: The reliefs referred to above may help to significantly reduce any tax liability arising in the event that Mr Jones were to realise the gain from encashing his offshore bond while he is UK tax resident.

But note that this assumes that his offshore bond is a life assurance policy, contract for life annuity or capital redemption policy. If it is a different type of bond – such as a Treasury bond (gilt) or company loan stock (corporate bond) – a different treatment may be called for.
I am not aware of any proposed changes to either of these reliefs from 6 April 2013.

Note that there is a “top slicing relief” which merely compares the rate of income tax that would have applied to one year’s ‘slice’ of gain to the rate applicable on the whole gain. Therefore, it is only of benefit where realising multiple years’ worth of gain pushes an individual into a higher income tax bracket for the year in which the gain is crystallised.

I would recommend in the first instance calculating the potential tax liabilities arising assuming that Mr Jones is either UK or Portuguese resident and then consider the cost of taking action to avoid a tax liability arising in either country.

Editor’s Note: This document has been prepared as a general guide. It is not a substitute for professional advice. Neither Expats Pensions, LifePlus or PKF (UK) LLP nor its partners or employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this [document].

For an introduction to a specialist tax adviser please contact us at info@expatspensions.com