UK Temporary Non-residency Rules
If you are going to be living or working outside of the UK for a period of less than 5 years, you need to be sure that you don’t fall foul of HMRC’s Temporary Non-Residence Rules.
Introduction
In an increasingly globalised world, you may find yourself moving overseas for various reasons, such as work opportunities, retirement or personal circumstances.
When it comes to taxation, residency status plays a crucial role in determining your tax obligations in a specific country.
In the UK, temporary non-residence rules exist to prevent you from avoiding tax liabilities by becoming non-resident for a short period of time.
In this blog post, I will explore the UK temporary non-residence rules and provide a comprehensive guide for expats who may be leaving or returning to the UK.
Understanding UK Residency Status
Before delving into the temporary non-residence rules, it is essential to understand the concept of UK residency for tax purposes.
The UK tax system uses a combination of statutory residence tests and a series of other factors to determine your residency status.
These factors include the number of days spent in the UK, connections to the country, and intentions to reside in the UK.
You can find a more detailed explanation of how UK residence is established here.
The UK uses the Statutory Residence Test (SRT) to determine whether you are a UK resident for tax purposes. Check your status now . . .
Temporary Non-Residence Conditions
You will be regarded as temporary non-resident in the following circumstances:
- You lived in the UK for at least 4 out of 7 of the last tax years prior to departure from the UK, and;
- You were away from the UK for 5 years or less.
The 5-Year Rule
You will need to be non-resident for more than five years in order to escape UK Capital Gains Tax (CGT) on assets owned at the time of departure (other than UK land and property) and which you dispose of after leaving the UK.
This five-year clock starts from when your sole UK tax residence ceases.
If you become resident again in the UK during this five-year period, any assets sold after leaving the UK will be taxed in the UK in the tax year that you return.
If you become resident again after this five-year period, any assets disposed of while non-resident will not be subject to UK CGT.
If you purchase assets during a period of temporary non-residence, these assets will not be subject to UK CGT if you sell them while not resident, even if you return before the end of this five-year period.
Temporary Non-Residence Example
John, who had lived all his life in the UK, left the UK on the 12th of March 2018 for a contract of employment in Dubai.
On the 11th of September 2019, he sold some shares that he acquired before he left the UK and realised a gain of £25,000.
He returned to the UK and resumed residence on the 15th of February 2022.
John will be chargeable on this gain in the tax year of his return to sole UK residence (i.e., 2022 to 2023).
This is because he fulfilled the following criteria:
- He had sole UK residence for at least 4 out of the 7 tax years immediately prior to his year of departure (all 7 in John’s case).
- He was non-resident for a period of less than 5 years.
- He resumed UK residence in tax year 2022 to 2023 (the year of return).
Factors to consider when leaving or returning to the UK
Timing: Proper timing is crucial to ensure that you meet the conditions for temporary non-residence.
Connection with the UK: Careful consideration should be given to severing significant ties with the UK, such as disposing of UK property, ending UK employment contracts, or ceasing involvement in UK businesses.
Residence in Other Jurisdictions: It is also important to consider the tax implications in your new country of residence.
Double taxation agreements and local tax rules should be thoroughly examined to avoid unintended tax liabilities.
Conclusion
The UK temporary non-residence rules provide a framework for individuals seeking to establish non-residence status for a temporary period.
By navigating these rules effectively, taxpayers can benefit from tax advantages during their non-resident period.
However, it is important to carefully consider the conditions and seek professional advice to ensure compliance with the regulations and avoid any unintended tax consequences.
Further Reading
Five big tax mistakes made by British expats and how to avoid them
How do I keep my UK bank account when I live abroad?
Coming Home: 10 Financial Steps for Expats Returning to the UK
UK Temporary Non-Residence Rules
FAQs
The UK Temporary Non-Residence Rules are designed to prevent individuals from avoiding UK tax liabilities by becoming non-resident for a short period. If you leave the UK and return within five full tax years, certain types of income and gains realized while you were non-resident may still be subject to UK tax upon your return.
UK residency is determined using the Statutory Residence Test (SRT), which considers factors such as the number of days spent in the UK, connections to the country, and work status. For example, spending 183 or more days in the UK during the tax year typically results in being considered a UK resident.
You are considered temporarily non-resident if you were a UK resident for at least four out of the seven tax years prior to departure and remain non-resident for five years or less before returning to the UK.
The 5-year rule implies that to avoid UK Capital Gains Tax (CGT) on assets owned before departure (excluding UK land and property) and sold after leaving the UK, you must be non-resident for more than five years. If you return within five years, gains from such disposals may be taxed in the UK in the year of your return.
The rules primarily apply to certain types of income and capital gains realized while you are temporarily non-resident, including capital gains from the disposal of assets, certain pension payments and benefits, and gains from the sale of shares or securities.
No, a brief period of non-residence is insufficient to avoid UK tax liabilities. The Temporary Non-Residence Rules ensure that certain income and gains realized during a short period of non-residence remain subject to UK tax upon your return.
The SRT assesses your residency status based on days spent in the UK, ties to the UK, and work patterns. Meeting specific criteria under the SRT determines whether you are considered a UK resident or non-resident for tax purposes.
If you return within five years and were considered temporarily non-resident, certain gains from asset disposals made while you were non-resident may be subject to UK tax in the tax year of your return.
Yes, exceptions include double taxation relief if you’ve paid tax on your income or gains in another country during the period of temporary non-residence, and split-year treatment, which can affect how the rules are applied in the years of departure and return.
Navigating the Temporary Non-Residence Rules involves complex considerations, including timing, connections to the UK, and tax implications in other jurisdictions. Professional advice ensures compliance and helps avoid unintended tax consequences.
