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Thinking about leaving the UK for a few years and hoping to dodge big tax bills? The truth might shock you! Below, we’ll explore seven eye-opening facts about the rules on “temporary non-residence” and why they might still make you pay UK tax even while you’re living abroad.
What Is “Temporary Non-Residence,” and Why Does It Matter?
Temporary non-residence is a special rule in UK tax law designed to stop people from briefly leaving the country to escape taxes. In other words, if you become a non-resident of the UK for a short period—five years or less—some of the money you earn or gains you make while away could still be taxed when you return.
Under the rules, if you were a UK resident for at least four out of the seven tax years right before you left, and you remain non-resident for five years or less, you might fall under “temporary non-residence.” For departures after 5 April 2013, a non-resident period of exactly five years or fewer will often trigger these rules. This is crucial because you don’t have to be gone for a very long time to be pulled back into the UK tax system. If you want to avoid temporary non-residence, you’d generally need to be abroad for more than five complete tax years (usually at least six) unless a special “split-year” treatment applies.
Why does this matter? Imagine you own a valuable asset—like shares in a big company—and you plan to sell them while you’re living outside the UK. If your non-residence is considered “temporary,” you could be taxed on that gain once you return. This is exactly what these rules are designed to prevent.
How Do You Get Caught by These Rules?
Let’s say you move out of the UK with the plan to stay away for exactly five years. You think, “Great! I’m no longer paying UK taxes, so I can sell my assets or realize income without worrying about the UK taxman.” But the surprising truth is that if you come back any time within that five-year window—sometimes even right after it, depending on exact rules—you could still owe tax for those gains in the tax year you return.
This effect is so strong that it hits you with the tax rates that apply in your year of return. For example, if capital gains tax rates have changed by the time you come back, you might pay the newer, possibly higher, rate. The government designed it this way to discourage people from intentionally timing their moves abroad to beat the tax system.
Gains on UK Land and “Old” Assets
Not all gains are treated the same under the temporary non-residence rules. Interestingly, gains from UK land don’t fall under these special anti-avoidance measures because they’re already taxed under normal UK capital gains tax (CGT) rules, even if you’re non-resident. However, other gains can be pulled into the tax net if the assets were originally owned before you left the UK.
Let’s say you hold shares that you acquired several years before moving abroad. If you sell these while you’re temporarily non-resident, you can still get taxed on those shares when you come back. But if you bought new assets during your time away, the gains on those wouldn’t be taxed upon your return under these specific rules (though you might face other tax laws). This distinction is crucial because it tells you which assets are safe from the moment you buy them and which ones could land you in hot water later.
Capital Losses and a “Carry Back” Twist
Here’s a powerful twist you might not expect: if your capital gains can be taxed under these rules, then capital losses can also be recognized. In other words, if you’re forced to pay tax on gains that happened during your temporary non-residence, you can also offset those gains with capital losses from within the same period. Even more surprising is that capital losses from a later tax year in your non-resident spell can be offset against gains from an earlier tax year in that same period.
This “carry back” style rule can help reduce your overall tax bill. But be cautious: the rules can be complicated, and you need to track which assets were owned when and which gains or losses happened in which year. Mistakes in paperwork could mean losing out on valuable relief or, worse, facing penalties for incorrect filings.
Offshore Trusts and Close Companies
The rules don’t stop at your personal gains; they also reach into certain companies and trusts. If you set up an offshore trust and you’re the settlor (the person who placed assets into the trust), any gains the trust makes during your temporary absence can be taxed on you when you return. The logic is straightforward: if you can benefit from the trust while avoiding residency, the government wants to plug that gap.
Similarly, if you’re involved with a non-resident close company—a company that would be considered “close” if it were in the UK—any gains made by the company can also be taxed on you once you come back. These provisions aim to stop individuals from hiding assets inside foreign entities and thinking they can slip through the cracks by being non-resident for a short time.
Income Tax Surprises, Including Life Policy Gains
You might think these rules only target capital gains, but some types of income are also caught up in this net. Dividend income from a close company (not a publicly traded one) can be taxed under the temporary non-residence rules. Similarly, non-qualifying life policies can trigger a “chargeable event gain” that becomes taxable if it happens during your temporary non-residence, assuming the policy was issued before you moved away and wasn’t triggered by someone’s death.
On the other hand, some forms of income—like bank interest or dividends from large, publicly listed companies—are usually not included. The aim here is to catch potential abuses of the system where someone might structure their investments to pay out while they’re away, hoping to skip out on UK tax. It’s a “better safe than sorry” approach for the tax authorities, and it can come as a shock if you assume only capital gains were covered.
Domicile & Double Tax Treaties
Domicile Changes: In the Autumn 2024 Budget, the government announced it will abolish the remittance concept starting 6 April 2025. Remittance generally allowed non-UK domiciled individuals to pay tax on UK income and gains but only on foreign income or gains if they brought that money into the UK. Since it’s being scrapped, you can expect fewer ways to shelter gains under “remittance,” making the temporary non-residence rules even more important to understand.
Double Tax Treaties: You might wonder if a double tax treaty (an agreement between the UK and another country to avoid double taxation) could help you sidestep these rules. The unfortunate news is that these treaties generally don’t override the temporary non-residence provisions. The UK has built in a “domestic override” clause to ensure nobody can exploit such agreements for short-term tax breaks.
A short stint abroad doesn’t automatically exempt you from UK taxes. You can’t simply leave, sell a house or shares, and expect tax-free returns if you plan to come back soon.
- Be aware of how many years you’ve been a resident out of the last seven.
- Consider the tax implications of selling assets before you leave.
- Different rules may apply to gains from assets purchased during your non-resident period.
- Certain dividend payouts and gains may also be taxable.
- Tax laws change frequently, including shifts like the removal of the remittance basis.
Understanding these factors helps you avoid residency “games.” Consult our tax advisors to navigate your temporary non-residence for better peace of mind and to prevent a hefty tax bill later. Think twice before assuming you can avoid UK taxes by briefly moving overseas. These rules can reach across borders and years, so make sure you understand what’s truly at stake. Sometimes, the most astonishing part is how easily you could end up paying taxes back home—long after your plane took off. If you need help regarding tax advice or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.