Heading home? You’ll need to get your tax affairs straight

When it comes to being an expat, as far as the UK taxman is concerned, absence does not make the heart grow fonder. A tax specialist gives tips on avoiding problems.

There is no avoiding the fact that moving overseas or returning to the UK creates some tax issues, and could trigger a lot of interest from the taxman.

Although the UK now has a clear residence test, the underlying rules can be complex, particularly for those not in full-time employment. It is important to understand your UK tax position before you start the process of moving back.

A lot of problems arise where an absence from the UK is not clear cut. The key point to establish is whether you became non-resident for tax purposes. The number of visits you made to the UK since you left the country, and any continuing connections with the UK in the intervening years, could mean you have remained resident in the UK for tax purposes. If so, then Her Majesty’s Revenue & Customs (HMRC) will be keen to catch up on the tax you should have been paying.

If you originally left the UK with tax planning in mind, make sure that you have been non-resident long enough for the original plan to be effective – usually you need to be non-UK resident for at least five full years.

If you held an offshore account set up before you left the UK and did not report the income from them at that time, you may experience particular problems. Is is always more cost effective to put right such historic problems voluntarily before HMRC catches up with you after you return to the UK.

If you have had a UK tax problem at some point in the past 20 years, it may be possible in some cases to put things right. For example, if you had an undeclared Swiss bank account while previously resident in the UK, you can make a voluntary disclosure – even if tax has been deducted from the funds under the UK-Swiss agreement.

When it comes to tax issues relating to the time before you left the country, you should not assume that spending a few years abroad wipes the slate clean as far as HMRC is concerned. Once you return to the UK, HMRC is likely to take a particular interest in your overseas assets and how the cash to buy them was accumulated. Its offshore coordination unit and specialist investigation teams use a wide range of data to identify and track suspected tax evaders.

If you have UK domicile, returning to the UK means that you will be taxed on your total worldwide income. So, depending on the tax rate you currently pay, it may be appropriate to close overseas bank accounts to crystallise interest before you come back so that it is not taxable in the UK. You can reopen the accounts later, but any future interest must be declared in the UK after you return even if tax is deducted at source overseas. It is also worth checking whether it is tax-efficient to crystallise capital gains by selling assets before you return and then putting the cash into ISAs after you return.

Once back in the UK, don’t be tempted to “forget” to record your continuing overseas income on your UK tax return. HMRC has been working hard on offshore issues in recent years, and now has many ways of identifying UK residents with offshore income. Within the next few years a new system of automatic information exchange will see banks and financial institutions around the world report to HMRC on accounts and assets held by UK residents. Nearly 50 countries, including many former tax havens, have signed up and HMRC intends to send out partially completed tax returns showing details of the taxpayer’s overseas accounts in future. Global tax transparency is approaching fast.

It is also important to consider any tax-advantaged investments very carefully. An investment product that is tax exempt in one country is unlikely to be tax-free when you move to another. For example, if you retain a UK ISA while living overseas, you may need to report the income and gains it makes on your tax return, and pay tax on it where you currently live. Equally, if you are using the tax breaks available in your current location, check how they will be treated when you return to the UK.

Expat employees with share options from a multinational company should determine whether it is advantageous from a tax perspective to exercise and or sell them before returning – the UK rules in this area are changing from April 2015.

Of course, there are many other tax issues to consider, from pension funds to inheritance tax on overseas properties. You should prepare well in advance and always work on the basis that HMRC knows everything about your finances – because it probably does.