Expatriates and the strong €uro

The unprecedented strength of the €uro has made life more expensive for British ex-pats in Europe. Is this going to force an early return for some, and what are the potential tax pitfalls?

What about income tax?

Recent case law has shown that it can be difficult to lose your UK tax residence status. If you have left the UK permanently or for three years or more, in order to be treated as not resident (NR) or not ordinarily resident (NOR) in the UK from the day after the day of departure, an individual's absence from the UK must cover at least a whole tax year, and visits to the UK since leaving must total less than 183 days in any tax year and average less than 91 days per tax year (taken over the period of absence up to a maximum of four years). Any days spent in the UK because of exceptional circumstances beyond the individual's control, for example personal illness or that of a member of his or her immediate family, are not normally counted for this purpose.

If the individual has not gone abroad for a settled purpose, they will be treated as remaining resident and ordinarily resident in the UK, but their status can be reviewed if their absence actually covers three years from departure, or evidence becomes available to show that the individual has left the UK permanently, subject to the 183/91 days limits as before.

NR/NOR status confers significant income tax benefits; for example employment income earned on duties performed outside the UK escapes a charge to UK tax, although it is likely to be taxed in another jurisdiction.

Where individuals leave the UK in order to take up full-time employment abroad, provided their intention is to leave the UK for at least one complete tax year and they meet the 183/91 days limits, HM Revenue and Customs (HMRC) will, by concession, treat the individual as NR and NOR from the day after departure.

For those leaving the UK permanently or indefinitely, in order to qualify for the concessionary treatment and be regarded as NR/NOR from the day after leaving the UK, on making a claim to HMRC individuals may be required to give some evidence they have left the UK either permanently or to live outside the UK for three years or more. HMRC suggests that this evidence might be, for example, that they have taken steps to acquire a permanent home abroad, and if they continue to have property in the UK for their use, the reason is consistent with the stated aim of living abroad permanently or for three years or more. Where such evidence is not available but the individual has gone abroad for a settled purpose (such as a fixed object or intention which they will be engaged in for an extended period of time) the concessionary treatment may still apply.

As stated above, recent case law has shown that it can be difficult to prove that you have lost your UK residence status. Where a valid claim has been made to HMRC and the original intention was to remain outside the UK for one tax year/three tax years from departure, a change of circumstances requiring an early return may not have a retrospective adverse effect for income tax purposes, although each case will be considered on its own merits. It may be the case that individuals who have not remained outside the UK for long enough periods are not considered to have left the UK permanently, and any absences will be 'temporary', thus ordinary residence is not lost.

What about capital gains tax?

An individual's liability to UK capital gains tax (CGT) also depends on an individual's residence (R) or ordinary residence (OR) status. Individuals who are either R/OR will be liable to CGT on gains arising on the disposal of assets situated anywhere in the world.

A number of years ago, it was the case that where an individual was considered NR and NOR, as above, he or she could sell assets owned at the date of leaving the UK during periods abroad and escape a charge to CGT. However, anti-avoidance legislation was introduced to prevent taxpayers from leaving the UK for as little as one tax year in order to realise gains, before taking up their UK residence again. Now, if a taxpayer was resident in the UK for four out of the seven years immediately preceding the year of departure, taxpayers must leave the UK for at least five complete tax years to escape a UK CGT charge on the sale of assets during the period of their absence from the UK.

If an early return to the UK means that an individual is returning inside this five tax year period, he or she will be chargeable to UK capital gains tax on all such disposals during the period of non-residence in the tax year of their return.

What if I have a foreign property?

If ex-pats have purchased properties abroad, even if these are sold for the same amount as the purchase price, therefore making no gain in Euros, the difference in the value of the Euro may give rise to a foreign exchange gain in the UK, which may be liable to CGT.

For example, if a property was purchased for €200,000 when the exchange rate was £1.67, the equivalent sterling cost would have been approximately £120,000. If the same property is now sold for €200,000 at a rate of £1.09 the sale price converts to approximately £184,000, giving rise to a chargeable gain of £64,000. This would result in an unexpected and unwanted tax bill for the individual.

By returning to the UK and becoming UK R/OR the individual would be taxable on their worldwide gains on an arising basis, it would not matter whether or not the sale proceeds were ever actually converted into sterling as the disposal triggers the requirement to calculate the gain at the prevailing exchange rate.

If, however a property was purchased after becoming NR/NOR, as would be the case if an individual lived in rented accommodation immediately after leaving the UK, this could be disposed of while still outside the UK without triggering a UK chargeable gain.

The UK does also provide specific exemption in respect of gains arising on the disposal of an individual's main private residence. Full exemption from capital gains tax can be available where the property has been the individual's sole residence throughout the period of ownership. This exemption applies to both UK and foreign properties and could therefore  fully exempt the gain on a foreign property that has been used as a residence, even where they have subsequently returned to the UK still owning that property.

Additionally, where overseas properties are owned by a company or otherwise than by an individual, care must be taken and specialist advice sought on the potential tax implications.

Chris Mills, Client Service Director at Grant Thornton says: "It is crucially important that any expatriates thinking of changing their plans take appropriate advice before acting. Even simple measures like delaying a return to the UK until after 5 April in order to remain overseas for a complete tax year could mean a huge difference in tax terms."

He continues "Where properties have been purchased while outside the UK, individuals would be advised to look into whether any of those properties qualifies for main residence exemption or whether disposing of such properties while still regarded as non-UK resident and not ordinarily resident would be beneficial, possibly avoiding a potential charge to UK CGT."

Please contact us if you would like further advice on any of the above.