Death and Taxes S5:E1: Those leaving the UK – what to think about, what do they need to do?

from Inheritance Tax and what action affected farmers, landowners and family businesses should take before next April. Throughout this period of considerable UK tax reform, we will bring you our thoughts on the major issues affecting private clients in this new tax regime. In today’s episode, we are looking at what those leaving the UK need to consider from a UK tax perspective and I’m delighted to be joined by Ed Hayes and Scarlett Underwood. Ed is a partner in the International Tax and Trust team specialising in UK tax and estate planning advice for a range of international and UK-based clients, often looking at complex structures and cross-border issues. Scarlett is an associate in the same team and often advises international, high-net-worth and ultra-high-net-worth clients in connection with UK tax and trusts matters.

So Ed and Scarlett, there have recently been some high profile reporting of business owners leaving the UK. So for example, Lakshmi Mittal that was reported in the FT recently. But does this match what you’re seeing after the Budget announcements from last October and as we move into this new tax year?

Ed Hayes (01:41)
Thanks, Guy. I think it’s definitely right to say that the huge changes to UK tax landscape recently have caused a lot of people to rethink their plans. But that has gone both ways. So you probably don’t hear about it as much in the press, but there are certainly some inbound traffic into the UK as well, in addition to the outbound. In terms of business owners, yes, a lot have felt significant push factors. But actually, if you’re a foreign business owner with a non-UK business, suddenly the UK is an incredible jurisdiction to move to and sell your business potentially with no tax. So there are attractions there. And we’ve been having a lot of conversations with clients about either coming to or moving from the UK and we’ve seen a lot of themes in that, hence wanting to share some of those today. I think the very first point always when you’re talking to someone who’s thinking about going from the UK is where do you want to go to?

Because although from a UK tax perspective, all you really need to care about is you are going from the UK. From a life perspective, you absolutely need to be comfortable with where you are swapping into and you need to be clear on why. And tax should be one consideration amongst others. But we would generally say to clients, it shouldn’t be the sole driving force. And it’s also really important for clients to understand what they will continue to have by way of connections to the UK and how much time they still want to spend in the UK going forward, because that has a huge impact on what’s possible in terms of their tax planning and the kind of tax impact that the move will have in the first place. So actually Scarlett, I don’t know if you’ll be happy to give us kind of a really high-level summary of the points that we tend to run through with clients at this stage.

Scarlett Underwood (03:24)
Thanks Ed, yes. So if you’re only going to listen to a very small part of this podcast, it should be this next bit. And what we’re going to do is cover off a very high-level summary of what you should think about when leaving the UK. So first and foremost, it is essential to be really, really clear on your residence position, both in the UK and wherever you’re moving to. And so you want to make sure you’re getting advice well ahead of time to make sure you understand your UK taxes exposure and how that’s going to change as you leave the UK. This should also take into consideration the effect of any kind double tax agreements that are in place between the UK and the country that you’re moving to. As well as this, you’ll want to take steps before and after the move to improve your tax efficiency based on your circumstances, so your assets, what you’re planning to do in your new country and your family ties in particular.

So even after leaving the UK, you’ll want to ensure that your UK tax compliance is kept up to date where relevant. If you’re keeping a UK property, for example, or if you are receiving any income in the UK, you want to make sure that you’re recording that properly. And you’ll want to be careful of certain traps that we have under UK tax legislation, for example, becoming temporary non-resident. So if you return to the UK within a certain period of time, that can have adverse tax implications for you, for the period that you were away from the UK. As well as that, you’ll probably also want to think about updating your wills and general estate planning for your worldwide assets.

Guy Broadfield (04:59)
Thanks, Scarlett. An important checklist, no doubt. For those listeners who do have a bit more time to go into the detail on what to do before leaving, should we take tax residency first? Because you mentioned that was almost the number one issue to consider. So do you to explain that a bit more detail?

Scarlett Underwood (05:20)
Yeah, of course. Definitely tax residency is the most important issue to consider here. So if you’re planning on leaving the UK, you’ll want to have a good idea of which year you want to leave in, in particular, and then planning around that. So you’ll want to be very aware of your tax residence status, not only in the year that you leave, but also the preceding years and the years after that. So usually you’ll often need to drop your number of days spent in the UK below either 90 days in the tax year or 45 days depending on your ties and your circumstances. And so that for some people can be quite significant change if they’ve been living in the UK full-time before that. If they’ll cease to be UK tax resident, you need to think about when that’s going to take effect. Is it going to be from the start of the tax year, so from 6th April in any given year, or is that going to be mid-year?

And if it is going to be mid-year, you’re going to need to consider split-year treatment under the statutory residence test and how we can go about advising on your UK tax liabilities and where they fall in the year, whether they fall before you leave or whether they fall after you leave.

Guy Broadfield (06:34)
And just a point on sort of considering tax years. Obviously, as we know, UK tax year is 6th April to 5th April, but it doesn’t always align across all jurisdictions. So the US, for example, works on calendar year basis, which you may or may not know if you were moving over that way. Unfortunately, the tax systems don’t always align.

Scarlett Underwood (06:54)
No, that’s right, completely right.

Ed Hayes (06:55)
The truth is they align pretty much everywhere else other than the UK. Most countries use the calendar system. We’re rather on our own with the novel April to April one.

Guy Broadfield (07:05)
Possibly a reason to leave in and of itself, anyway.

Scarlett Underwood (07:08)
That’s a very good point to bear in mind. So wherever you’re moving to, you need to be aware of when their tax year runs from, when you’ll become resident in that jurisdiction and kind of, you know, you’ll need to get advice in that jurisdiction as well that will need to tie in with your UK advice. Another important thing for people leaving the UK is when they’re going to acquire a home in their new jurisdiction and when they’re going to cease to have a home in the UK if they’re going to get rid of their home here.

There’s some careful timing to be aware of with that and just certain implications under the statutory residence test that they’ll want to be aware of and take advice on when they come to look at buying and selling homes. And then the final thing is probably if you’re going to become non-resident, it’s ensuring that you maintain that non-resident and don’t inadvertently fall back within the UK tax net by virtue of being resident here.

And so you’ll want to keep an ongoing record of the number of days you’re spending here, the number of ties that you have in the UK, and probably maintain good advice on that going forward for a number of years.

Ed Hayes (08:14)
I think that actually raises one thing we do see with clients quite a bit, which is that people understandably assume sometimes that, well, I’m going to be taxed in the UK until I jump on the plane and jet off to X country. And then from that date, I’ll be taxed in that country. And there’ll be this neat kind of crossover. And unfortunately, people give too much credit, I think, to the way in which the international tax system works. And it’s hardly ever as simple or as straightforward as people would like. And it’s very important for anyone who is leaving the UK, in fact, regardless of whether they will cease to be UK residents or not, to understand once they’ve changed their set up, so they are at least splitting their time between the UK and another jurisdiction, and I suppose at most you’re completely departing the UK, understanding what their future tax profile will look like, and in particular how that tax exposure will be split between the UK and any other jurisdiction.

That’s part the reason we always try and plan well ahead of time with someone who is leaving the UK because you can do things prior to departure, which can help with that future tax exposure. And in terms of helping someone understand what their exposure might be in the UK, even after ceasing to be UK resident, there are various types of income and gain that actually even non-UK residents are subject to tax on. Some of really obvious examples are income and gains realised from UK property, whether that’s residential or commercial.

But also employment income can be relevant here, as can certain withholding taxes on things like pensions that are paid from the UK or indeed interest that comes from a UK source and is paid to a non-UK resident. And understanding how all of those will factor into the new tax profile that someone will have after leaving is really key. If you’re an employee, your employer might also need to think about things like PAYE and NICs and so forth and all of these factors play into that early planning piece so that someone is making as informed a choice as possible when they’re going. On the Inheritance Tax side, there’s been lot of news recently about the switch from domicile to long-term residence as the primary testing factor here as to how much someone is exposed to Inheritance Tax . For most individuals who are leaving the UK, the key point to understand is whether or not they have already been a UK resident for 10 tax years. If they’ve been resident for 10 tax years, they’ve probably got worldwide exposure to Inheritance Tax and they will almost certainly keep that worldwide exposure for Inheritance Tax for a tail period after ceasing to be a UK resident. And that tail period might be anywhere from three to 10 years, depending on the circumstances. If they’ve not been in the UK for 10 tax years, and they won’t hit 10 tax years, then actually they might not have worldwide exposure to UK Inheritance Tax and they may have no tail period at all.

But it’s another example of something people really need to understand before they make that decision because it can have very material consequences.

Guy Broadfield (11:13)
Thanks Ed. In terms of income and gains, it’s one thing being subject to UK tax or not in our jurisdiction in one place. I suppose high on anybody’s list is making sure to the extent possible you’re not taxed in two jurisdictions on the same income and gains and Scarlett, I suppose in this context, double tax treaties or double tax agreements are key. So what are the main considerations there?

Scarlett Underwood (11:40)
Yeah, you’re absolutely right. So regardless of whether the person will remain UK resident or not, tax treaties with the jurisdiction they’re moving to will need to be considered really carefully. The UK does have a really broad network of treaties dealing with income and capital gains with a number of countries. It’s possibly worth saying that it has far fewer treaties dealing with Inheritance Tax, possibly the one I come across the most is the India-UK Double Tax Treaty.

So you should always check whether there’s an Inheritance Tax treaty in place, but quite often there won’t be. But there might be tax treaties for income and capital gains. Typically, however, income and capital gains tax treaties look to give one country primary taxing rights and then either allow credit against the tax, which would otherwise be due in the other country, or they exempt certain income gains and assets from tax entirely.

It’s important to look at the provisions carefully and that’s obviously where we come in and we can help with that because the impact is different for different types of income and gains. So in individual specific circumstances will always need to be looked at really, really carefully in any given situation. It’s also particularly important to stop withholding taxes in some situations. So if the individual leaving the UK has UK source pension, we’d always want to check that as well.

Ed Hayes (13:05)
I completely agree with all of that. I other things that people need to think about when going, lots of jurisdictions around the world have an exit tax. Now, the UK doesn’t have an exit tax for individuals as such. So you can leave the UK and it’s not as though accrued gains are suddenly taxable or anything like that. But we do have exit charges for trusts and companies in certain circumstances. So one thing we will look at with someone who’s looking to depart from the UK is whether they do have trust companies or other structures connected to them and whether their departure could be relevant for those, whether it just changes the taxation of those structures generally or in fact triggers some kind of exit charge whether now or in the future. And again, that’s really just making sure that the individual understands the impact of what they’re considering doing there. And although I’ve said we don’t have an exit charge for individuals, there are situations in which becoming non-UK resident can result particularly in the clawback of certain reliefs that someone might have claimed whilst they’ve been UK resident.

So again, it’s important to understand what planning has been undertaken whilst they’ve been in the UK and actually will that be impacted at all by them becoming non-UK tax resident. And all of that gets factored into a kind of broader assessment of the individual estate and estate planning in light of the move. So we’ve mentioned already, it’s really important to understand, will the person become tax resident in the new jurisdiction as well? When will that begin? What kind of visa and immigration status will they have in that jurisdiction and what’s required to comply with that? You’ll often find that tax laws and immigration laws don’t line up as neatly as you would like in terms of what they expect or demand of people. And it’s also, of course, important to look at the assets and expectations of the individual and how that will translate into the new jurisdiction’s tax system and indeed succession system, depending on what will happen on the estate planning side.

A big first step on that is often to look at, how is the individual going to obtain accommodation in the new jurisdiction? Is it best to purchase? Is it best to rent? If you’re going to do that, is it best to do it before after you leave the UK? And lots of things play into this because depending on the funding that’s available to the individual, for example, if they’ve got their own funding available or if they need to draw on a trust to pay for something, can have a big impact on whether it’s best to do that before or after they’ve left the UK. I’ve mentioned pensions a bit already. The tax treatment of pensions is complex and always needs careful thought. But particularly for someone becoming non-UK resident, you can find that actually a non-UK resident is taxed in relation to a UK pension quite differently to a UK resident in lots of circumstances. And if you try and move a UK pension outside of the UK, there are often tax charges associated with that, even if you’re moving it to what we call a Qualifying Recognised Overseas Pension Scheme, a QROPS that lots of clients will have heard, that’s not always a straightforward transition.

So it’s something people always need to look really carefully at. And beyond just the tax side, estate planning obviously involves often succession planning and wills and powers of attorney and all sorts of things of that nature. Often it’s even if not essential, it is very strongly recommended to update all of those, take into account the move, not only just to ensure that actually these things have been thought through because it’s surprising how often people will kind of leave a will in particular in place for a long, long period and not reassess it, even though the family circumstances have changed very materially. But particularly to try and take advantage of any other kind of tax opportunities there are, if the tax profile of the individual and the family have changed, then updating the estate planning to take that into account is very important.

Scarlett Underwood (16:44)
I agree with that Ed and just to add on that point, for people that are leaving the UK, they might want to keep the option of returning to the UK open in future and it’s kind of important to bear in mind that if you’re a non-UK citizen leaving the UK, you should probably consider the impact that your departure will have on your immigration status and whether you’ll be easily able to return to the UK or not in future.

Some visas only allow you to leave for a certain amount of time and indefinitely to remain can lapse in some circumstances. So always be aware that if it’s not a one-way ticket and you might like the option of coming back in future, you need to consider carefully how best to do that.

Guy Broadfield (17:28)
Well, thanks both. I think if we now turn to some more of the, I guess, practical aspects to the move, clearly individuals and families have got a lot to consider if you are moving your life and your family to a new jurisdiction, whether that’s considering a property, consultants and where you might live or schooling and education for children and family members. Nonetheless, I suppose there are some practical points to consider on leaving the UK in terms of reporting responsibilities. So Scarlett, do want to talk briefly to those points?

Scarlett Underwood (18:06)
Yeah, absolutely. So if you’re ceasing to be UK tax resident, you’ll need to notify HMRC. This can either be done with a specific form called a P85 or in the client’s next tax return, so whichever option is better will depend on the client’s circumstances and if they’re filing tax returns here in the UK. They’ll also need to notify various other entities and authorities. So just to name a few, the local council, banks, financial institutions, other advisors. There’s quite a lot of notifications that will need to be thought about. It’s also worth adding that once you’ve left the UK, you still might need to file a UK tax returns. So if you have a UK property or you’re receiving UK rental income from that property, you’ll still need to notify HMRC about that and pay tax accordingly. So even after you’ve left the UK and it’s important to note that there is also a non-resident landlord scheme which applies as well.

Ed Hayes (19:06)
I think those practical points also, it’s really important for you to understand some of the practical traps they can trip over. A classic example of that is the temporary non-residence rules. And even the way these are written is almost inviting people to fall foul of them because essentially the temporary non-residence rules say that if you leave the UK for too short a period and you come back within a certain period of time, then the UK can tax gains that you realise when you’re outside of the UK and also some income that you receive when you’re outside the UK. Now, this is only relevant if the client has been UK tax resident in four or at least four of the seven years prior to departure. So someone’s been only in the UK for a very short period of time, they might not need to worry about this. But for many people leaving the UK, these rules are a concern and they can be triggered if the individual is non-UK resident for five or fewer tax years.

That’s really important because when you read the rules it’s easy to think that actually five tax years is enough. It’s not. You must be non-UK resident for more than five tax years. For most people that’s going to mean either being non-UK resident for five years plus part of a year on a split year basis, so five and a bit, or being non-UK resident for at least six full tax years. If someone is going to realise, say, a material gain whilst they’re non-UK resident, we would always recommend the safer option of having six full tax years because it’s just much harder for any authority to challenge that. And as I said, if you do get caught by these rules, most forms of gain realised whilst non-UK resident can be taxed when you come back to the UK on your return, which is a really nasty shock if it applies. And there are some types of income that are realised during that period, particularly things like dividends from close companies. So they are something to be aware of. Well-advised clients should find it quite easy to steer clear of them, but they are a trap for the unwary. Another is Private Residence Relief and maybe, Scarlett, you don’t mind kind of explaining to people how that can work and where you can fall foul of it.

Scarlett Underwood (21:08)
Yes, sure. So, principal Private Residence Relief exempts all or part of capital gain that’s realised on the disposal of a property if it’s been that individual’s only or main home at some point during their period of ownership. To contextualise this, we’re looking at scenarios where an individual’s lived in the property as their family home for a long period of time and now they’ve left the UK and they’re not sure what to do about it.

So an election can be made to designate a property as the main home, even if in practice it will be second home or third home. And this should be considered if property in the UK is being retained. So once you’ve left the UK. Thought should also be given to where this is likely to be a disposal whilst non-UK resident. So if you’ve left the UK and you’re planning to dispose of your property, so sell it further down the line. You’ll also want to be considering principal Private Residence Relief and whether any rebasing reliefs apply and whether you might return to the UK before you sell the property in particular. The availability of PPR whilst non-resident depends on the individual spending a certain number of days at the property and each year. So we recommend that you take advice on that point if this is relevant to you and it may or may not be possible to achieve whilst also remaining non-resident. So it needs to be considered in conjunction with any advice you take on your tax residency position as to whether you can qualify for PPR if you’re selling your property.

Ed Hayes (22:44)
Thanks, Scarlett. I think probably the final trap I was going to flag at this point for people is if you’re a remittance, well, if you’ve been a remittance basis user, obviously no one is a remittance basis user now going forwards, but if you’ve been a remittance basis user and you have a stockpile of foreign income and gains that would trigger a taxable remittance if brought into the UK, it’s very easy and again understandable for someone to think, if I’m leaving the UK, I no longer need to worry about all my segregated accounts and making sure I keep this distinction between my UK facing funds and non-UK facing funds.

Now broadly that’s true as long as you never intend to come back to the UK again. But if there’s any possibility you might become a UK resident again in the future, then actually you should maintain all of that segregation because those foreign income and gains won’t lose their characteristic, their kind of status whilst you’re a non-UK resident. And if you come back again in the future, you’ll still need to know which funds represent those foreign income and gains. And if you’ve mixed everything up in the meantime, you can easily end up with an accidental remittance on your return.

So anyone who’s a historic remittance based user and is leaving the UK. And obviously we do have a number of people in that situation now. Unfortunately, the message is you must maintain that segregation going forwards.

Guy Broadfield (23:54)
That’s a key point in terms of people might think when they’re leaving the UK there’s going to be a completely clean break and therefore to a earlier point, they’re going to be outside of the scope of UK tax and that’s that. But maintaining some form of flexibility depending on your future plans is important and engaging with the UK tax rules even after you’ve left is equally as important because circumstances change. Those people who decide to leave the UK might for various reasons, decide to come back to the UK, whether that’s because for family reasons or professional reasons or otherwise. So it’s not something you can completely ignore once you leave Heathrow.

Ed Hayes (24:34)
I think that’s absolutely right. And particularly because although we talk about someone leaving the UK and the mental image that’s conjured there is someone is departing the UK and they’re never going to set foot here again. The reality for most clients who are reducing their date, when we say leave, what we really mean is they’re becoming non-UK tax resident. And often that just means they’re reducing the number of days they’re spending here. They’re not going to spend zero time here each year. And actually, the way our residency tests work, it’s very feasible to spend at least a month and often two or three months in the UK in a year without being residents. You find people who are spending a fair bit of time in the UK and actually this clean break idea is rarely kind of something we see in practice. So bearing all of that in mind and having a good early chat with your tax advisor and updating them on your plans is always much appreciated because some of the hardest work we do is when someone mentions, I’ve got a flight booked in a month or so.

Is there anything I need to do before I go? And there’s a bit of a flurry of work then to try and get them well set up.

Guy Broadfield (25:36)
Well, thank you Ed and Scarlett for setting that out so clearly.

Thanks again for listening to this episode of Death and Taxes – and everything in between, the private wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com or on our LinkedIn page. Keep an eye out for new episodes coming in 2025, focusing on individuals, landowners, business owners and trustees. Our specialist team will bring you our views on the new tax rules and their practical implications for clients. So don’t forget to subscribe and thanks again for listening.