Retiring abroad could be more taxing than you think

Thursday, March 03, 2011 | Posted by: Naomi Smith
Categories: Personal, Protecting your wealth | Tags: tax, property, capital gains tax, inheritance tax, CGT, IHT, retirement, Naomi Smith, HMRC6, residence, family, overseas, UK residency, residency, refunds, retire, children, options, abroad

Planning to move abroad for retirement? Fancy a sunnier climate and ending your UK tax residence? We don’t blame you! But you’ll need to look at your tax position carefully because becoming non-resident is now more difficult than ever. Here’s why…

Revised guidelines were published on 29 December 2010 by HM Revenue and Customs (HMRC) in an amended version of the guidance booklet HMRC6 Residence, Domicile and the Remittance Basis. It replaced HMRC’s previous guidance in IR20 in the wake of the Gaines-Cooper case, which my colleague Sue Knight wrote about in UK residency all at sea as HMRC targets tax exiles last March.

Essentially, the ‘91-day test’ has been mostly removed from the new HMRC guidelines. HMRC has also just won another residence case, this time against Lyle Dicker Grace, a long-haul airline pilot based in South Africa who claimed he was no longer a UK tax resident, despite having a house in the UK.

So the net is closing in, with HMRC on a mission to attack claims for non-residence on the grounds that the person has never left the UK.

The previous guidance used to confirm that it was possible for people who have left the UK to visit for up to 91 days and still be treated as non-resident. But the new guidance makes no mention of being able to visit the UK, except for those on full-time contracts of employment abroad.

The change in the rules represents a real problem for the retiree with children in the UK. It means that if you move abroad to retire and decide to visit the UK regularly to see family and friends, you may find that HMRC claims you are still UK resident and have not left the UK.

For example, the guidance says that:

If you live outside the UK for a complete tax year and do not set foot in the UK you will not be resident in the UK for that tax year, unless your absence from the UK is for the purpose of occasional residence abroad only.

If you became non resident simply because of a complete absence from the UK, it is unlikely that your presence in the UK on your return is for a temporary purpose only, if any of your UK ties remained throughout your period of absence. You would most likely become resident again on your return.

This is just not practical for many retirees. What if the family need to you to visit? What about visiting your friends? What if you want to come home for Christmas?

Greater emphasis is also being placed on the need to explain any property retained in the UK if claiming non-residency.

The guidance is not law, but the case of Lyle Dicker Grace adds weight to the guidance. The fact that Mr Grace kept a residence in the UK was one of the deciding factors in arriving at the decision that he had not left the UK in 1997.

Anyone planning on a move abroad should pay particular attention to chapter 8 ‘Departing from the UK’ – you can download a PDF of the HMRC6 advice here – and seek professional tax advice as the new guidance is tougher than anything before. Moving abroad for tax reasons is not going to be for the faint-hearted.

Many retirees consider moving abroad to protect wealth from UK inheritance tax, for example. But if you cannot shake UK residence status, the UK tax laws will mean that you will also retain your UK domicile for inheritance tax purposes.

Many business owners also move abroad before selling their businesses in order to escape UK capital gains tax on the sale. But if you’re having trouble ceasing residence, that won’t work.

For decades Brits have left the UK for a sunnier climate and the ultimate tax fix. But with the UK tax net rapidly tightening, you will have to look to your tax adviser for more innovative retirement planning solutions.

Image: © Colin Jaramillo

Want to talk to a Grant Thornton tax specialist? You can contact us via your local office or read more about our services on our International Private Client page.

You might also find these posts useful:

* Thinking of leaving the UK? Be sure to sever all ties
* New Irish domicile ‘wealth tax’ puts HNWIs in line of fire
* Advanced strategies for reducing your IHT bill