Tax and legal issues for emigration from the UK

Tax residence

It is important to understand what UK residence means. UK residents are subject to income tax and capital gains tax (CGT) on their worldwide income and gains respectively (unless they are taxed on the remittance basis). However, non-UK residents are only subject to tax on their UK income and gains. The rules for determining UK residence or non-UK residence is often not as simple as people might expect.

The number of days a person can be in the UK in any year before becoming UK resident often depends on the number of connecting factors in the UK which incudes availability of property and family living in the UK.

An important point to note is that generally an individual is either resident or non-UK resident for a complete tax year which runs from 6 April to the following 5 April. An individual could be subject to tax in the UK until 5 April despite having left much earlier in the tax year and could therefore be subject to tax on the same gains or income in the UK and in their new country of residence.

There are some circumstances where an individual emigrating can claim that they are UK resident for the part of a year that they were actually resident in the UK, rather than the whole tax year, known as the split year rules. There are detailed rules outlining exactly when the split year rules apply but generally an individual may be able to take advantage of these where they have started full time work overseas or they have ceased to have a home in the UK.

It is vitally important that people leaving the UK understand when they will become non-UK tax resident as this is fundamental to CGT and income tax liability. A good understanding of the rules will also ensure they do not accidently remain UK resident for tax purposes.

Capital gains tax

An individual emigrating can take advantage of some planning in relation to gains on non-UK assets they are looking to realise. As noted above, non-UK residents are not subject to CGT on their non-UK assets. Therefore, it may be better to wait to crystallise the gains on becoming non-UK resident. That is not the end of the story; there are anti-avoidance provisions which mean that if an individual returns to the UK within 5 years of crystallising non-UK gains, CGT will be clawed back when they return.

Long term residents

For those individuals who have been resident in the UK for at least 15 out of the last 20 years, they will be deemed domiciled for inheritance tax (IHT), CGT and income tax purposes. This means that long term residents, who are not domiciled under common law in the UK, cannot elect to be taxed on the remittance basis as they will be taxed on their worldwide income and gains.

Individuals who do not have a common law domicile (i.e. where they consider their home to be and where they want to reside indefinitely) in the UK they will only be subject to IHT on UK situs assets. However, long term residents are deemed to be UK domiciled for IHT purposes.

Long term residents will not lose their deemed domiciled status as soon as they leave. For IHT purposes, they will lose their domicile by being non-UK resident for four complete tax years. For CGT and income tax purposes, an individual must be non-UK resident for six complete tax years.

Quite apart from the deemed domicile issues if someone retains their UK common law domicile despite living abroad, their worldwide assets will be subject to IHT.

Leaving the UK does not mean that an individual has left their tax obligations behind. An understanding of the rules will help those emigrating plan their affairs appropriately.

Emigration and estate planning

It is a good time to think about Wills when relocating. More often than not it is advisable to have different Wills covering assets in different jurisdictions. It is important to have an English law Will reviewed (if there is already one) or drawn up (if there is not) to ensure it dovetails with the other Wills. The best way to do this is to ensure the advisers drawing up various Wills have sight of the other Wills.

Lasting Powers of Attorney across jurisdictions

If an individual has assets in the UK, such as a UK property or accounts and have family or friends looking after their matters, a property and financial affairs Lasting Powers of Attorney enables them to manage the individual’s affairs. Individuals emigrating may have Powers of Attorney in other jurisdictions, however, attorneys looking to rely on them to deal with UK assets will find it difficult. Therefore, it is advisable to have appropriate English Lasting Powers of Attorney drawn up where attorneys are to manage UK affairs.