Tax is like comedy – not that it’s a joke but the effects are all in the timing.
How much tax someone pays HM Revenue and Customs depends on their residence status with the UK, which falls under three categories – ‘resident’, ‘ordinarily resident’ or ‘domiciled’.
Although it’s no laughing matter, a taxpayer can fall under one, all or none of these residence categories at the same time.
To plan a tax strategy, someone must know their residence status and how this affects the tax they pay.
A common misconception is leaving the UK means someone is non-resident for tax.
This is not correct. To qualify as non-resident for tax, some must be absent from the UK for at least one full tax year, which runs from April 6 one year to April 5 of the following year.
If someone left the UK in March 2010, they would not be considered non-resident until April 6, 2011.
On top of that, they can only return to the UK for a total of 93 days across the five tax years following their original departure.
Once these non-residence qualifications are met, tax liabilities change as well:
No income tax is paid in the UK on income earned overseas. Instead, income tax is paid in the new country of residence. Tax might be due on any money earned in the UK regardless of where they are resident. This covers rental income from UK property and dividends from shares held in the UK.
Capital gains tax depends entirely on timing. Selling an asset held in the UK, like a buy to let triggers capital gains tax for a UK resident, but a non-UK resident is exempt from capital gains tax.
UK residents moving abroad should keep hold of any assets that would incur capital gains tax on disposal until they are non-resident and can safely sell. They also need to check the capital gains tax situation in the country where they are resident.
Even if a non-resident returns to live in the UK within five tax years of selling an asset, they might receive a tax demand equal to the unpaid capital gains tax.
Inheritance tax is related to domicile. Once domicile is established, tax authorities can test a will to work out if an estate is liable to IHT.
