Expats Must Go To Increasing Lengths To Escape UK Tax Net

by Robert Lee, Tax-News.com, London

07 August 2009

With HM Revenue and Customs (HMRC) using an ever-broadening test to establish whether someone is resident in the UK for tax purposes, British expats are having to go to greater lengths to sever their ties with the land of their birth.

HMRC’s recently rewritten guidance on these matters - booklet HMRC 6 – explicitly emphasises the broader criteria employed in HMRC’s investigations of residence status. What’s more, you have to do much more than merely count the days that you spend in and out of the UK every year to qualify as a true non-resident, as evidenced by the long-running Gaines-Cooper legal case.

“It is all too common for people to go to live abroad only to find out later that they have not in fact left the UK as far as UK tax rules are concerned. This leaves the ill-informed vulnerable to attack from HM Revenue & Customs and could lead to hefty tax bills, plus interest and penalties,” warns Matt Coward Director of Private Client Tax Services at PKF Accountants.

Besides income tax, there are a number of other tax traps that could ensnare the unwary expat, even if they have been abroad from some considerable time. These include National Insurance contributions, which can continue for a year after leaving the UK; capital gains, which can be captured upon a temporary resident’s return to the UK if they have been out of the country for less than five years; and inheritance tax, for which an emigre remains liable for three complete calendar years after they have left the country.

“Recent Court decisions on residence have generally gone against the taxpayer and HMRC is actively pursuing cases where, in its view, the taxpayer has not done enough to demonstrate that they have ceased to be UK resident,” Coward continues. “The key to proving that you have become non-resident for tax purposes is to sever as many ties with the UK as possible – just staying overseas and counting days spent in the UK is not enough. It’s essential to be able to demonstrate a decisive break.”

PKF recommends that expats take the following measures to ensure that they truly severe their ties with Blighty as far as the Revenue is concerned.

UK property

• Sell your UK property or let it out for at least 12 months.
• Do not leave your property empty.
• Ensure your property is not be available for your use when you visit the UK.
• If you are letting the property, ask a UK agent to deal with the property on your behalf.
• Pay all property bills before you depart from the UK.
• Notify your house insurers.
• Notify your mortgage lender as appropriate.
• Notify your local council that you have left the property.

UK business

• Consider resigning from any UK company directorships or company secretarial positions.
• Consider disposing of your UK business interests altogether.
• Ensure that official paperwork such as Companies House filings are completed.

Other UK connections

• Notify your UK doctor and dentist that you have left the UK.
• Cancel your UK sporting and social club memberships.
• Consider appointing an attorney in the UK who is empowered to deal with your UK affairs.

Taxes

• Send form P85 to HMRC, declaring that you have become non-resident.
• Ideally, do not return to the UK for an entire tax year to emphasise the break in residence.
• Do not return to the UK for more than 90 days a year in subsequent tax years.

Finances

• Cancel your UK credit cards and reduce the balances in your UK bank accounts.
• Ensure any outstanding bills are paid in the UK.
• Consider transferring pension arrangements overseas.

Cars

• Sell your car and cancel your car insurance and subscriptions to motoring organisations.

Your new country of residence

• Establish employment or business links in the new country.
• Obtain a residence permit, where necessary.
• Contact the local tax authorities to inform them that you have become resident.
• Purchase or rent on a long lease a property in your new jurisdiction and buy a car there.
• Register with a doctor and dentist in your new jurisdiction and open a local bank account.
• Move with your family to the new country.
• Establish social and cultural connections in your new homeland.
• Have a will drawn up dealing with your property in the new country.

Coward concludes: “The overall pattern of your life must reflect your declared non-resident status and the fact that you have left the UK for the foreseeable future. Maintaining significant links with the UK is dangerous and could prove costly, as HMRC will argue that you have not quit the UK. The best way to keep your taxes down is to cut most UK ties when you go overseas. That doesn’t mean you can never come back for events or to see your family, but just that you need to establish yourself conclusively as non-resident before you start making such visits."

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