Kevin Read reminds readers of the anti-avoidance rules affecting temporary non-residents.
The statutory residence test (which took effect in April 2013) has made it possible to ascertain, with reasonable certainty, whether you are resident or non-resident in the UK for a particular tax year.
Temporary non-UK residents
Without anti-avoidance rules (in FA 2013, Sch 45, Pt 4) regarding temporary non-residents, it would be easy to become non-resident for one tax year, during which you could realise various amounts of income and gains and avoid UK tax on them.
These temporary non-residence rules apply if:
- you have sole UK residence in four of the last seven years; and
-
become non-resident for less than five years.
‘Sole UK residence’ is defined as the individual being UK resident for
- an entire tax year and not treaty non-resident; or
-
the UK part of a split year and not treaty non-resident in that part.
In these circumstances, certain income and gains accruing, arising or remitted in the period of non-residence are chargeable in the tax year of return. Those charges to tax concern:
- pensions (withdrawals, lump sums and certain other charges);
- relevant foreign income (broadly, that to which remittance basis applies for a non-UK domiciled person);
- distributions and loan write-offs from most private companies;
- chargeable event gains on life assurance bonds;
- offshore income gains on non-reporting (‘roll-up’) funds; and
-
capital gains.
What these have in common is that the taxpayer can choose when to trigger the charge (e.g. by arranging a distribution from their private company or choosing to encash a life assurance bond).
Example 1: Harry goes abroad
Having six months earlier decided to retire, Harry (aged 61) leaves the UK to work full-time abroad for a two-year period from 1 November 2018 to 31 October 2020.
During 2019/20, he:
- drew down income of £40,000 from UK pensions in flexi-access drawdown;
- received dividends of £10,000 from quoted investments; and
-
made capital gains, totalling £30,000, on quoted investments that he had owned for several years.
What are the tax consequences, assuming he was UK-resident in at least 4 or the 7 years before departure from the UK?
Harry will clearly be caught by the anti-avoidance rules that stop him choosing to take income or realise gains while temporarily non-resident, because his period of absence from the UK is less than five years. These rules will not affect the dividends on the quoted shares (which will therefore not be taxable in the UK) but will affect both of the other transactions, making them taxable in his year of return (i.e. 2020/21).
Example 2: Harriet sells her private trading company
Harriet left the UK on 1 March 2020, intending to settle abroad. She is non-UK resident in 2020/21 and sold shares in her private trading company in June 2020, making a gain of £1 million. As a non-resident, this disposal is not within the charge to CGT in the UK.
If her circumstances change and she returns to live in the UK again on 1 June 2024, the gain will become chargeable in 2024/25 (i.e. the year of return). However, she will be outside the time limit for making a claim for business asset disposal relief (BADR) (previously entrepreneurs’ relief).
To cover herself for this situation, she should make a protective BADR claim (using form HS275) by 31 January 2023.
Practical tip
Remaining non-resident for five years will avoid triggering UK tax charges on your return to the UK.
