Returning To UK? Lawyers Snared In UK Tax Trap.
One of the joys of living in the United Arab Emirates is the lack of personal taxation. There is no income tax and no capital gains taxes to worry about. Therefore after 2 or 3 years in the sun, returning to a taxed environment can be a bit of a jolt. In this post, I look at a couple of Tax Traps which the UK Taxman has set. Whilst not always possible, it is best to have plenty of time to plan your re-entrance into any taxed system, ideally about 18 months.
Statutory Residence Test (SRT)
Since 6th April 2013, the SRT has provided a relatively straight-forward guide on whether you are UK resident for tax purposes or not. Full details of the SRT can be found at this HMRC website link.
Before you start your making plans, take a few minutes to read the page on the SRT. Potentially this could save you a significant amount in tax. So time well spent.
In most cases, it makes sense to realise any gains in the tax year before you return to the UK. Losses should not be realised as they may be useful to off-set future gains.
Offshore Life Assurance Based Investments
Life assurance companies such as Friends Provident International, Zurich International Life and RL360 offer investment products. Some of these products enable investors to buy individual stocks and shares. Where this is the case, the UK taxman will view the investment as being ‘highly personalised’. The consequences of this are the investment, in the hands of a UK resident, is taxed on the basis of a token return of 15% of the premium paid each year. This is regardless of your actual return. This is known as a ‘deemed gain’.
To avoid this treatment, you should ask your financial adviser if your investment is classed as a highly personalised bond. If it is, they should be able to advise you on the action to take. If not, you can contact me and I will.
Having a UK property provides you with many benefits. However, the tax treatment of UK property has changed over the last few years. The ability to offset interest against rental income has been reduced. When you return to the UK, rental income will be added to your earned income. This means that if you were not paying tax, due to the personal allowance, this benefit will be lost as your earned income will use up the £12,500 allowance. Consequently, the rental income you receive from the property will be lower due to taxation.
Capital gains tax on property is at a special rate. It is now 18% for basic rate taxpayers and 28% for higher rate taxpayers. Clearly, it is better to avoid these taxes if possible. The ability to claim Principle Private Residence (PPR) relief needs to be reviewed carefully. It is not simply enough for the property to be your only property in the UK. Fortunately, HMRC updated their helpsheet (HS283) on this subject last month. The sister helpsheet (HS307) on Capital Gains for non-UK residents on Land and Property is also a useful reference.
When returning to the UK, preparation is key. Preserve your non-UK resident / UAE resident status as long as possible. Take advantage of exemptions and allowances available. If in doubt, consult a professional.
If you have any questions, please contact me or call me on 050 594 5217.