We sometimes get asked if it is possible for an individual to break residence for just a year in order to escape high UK tax charges for income received in that tax year. Generally, the answer is that this is not possible because of what are known as ‘temporary non-residence rules’. These rules broadly aim to tax somebody on their return to the UK on capital gains and income that they received during their period of non-residence.
Jim has always lived in the UK and owns a company with £2m of reserves in it. After speaking to a man in the pub he decides to go to Portugal for the whole of the 2023/2024 tax year (let’s assume for simplicity that he is away for the whole year from 6 April 2023 to 5 April 2024). In May 2023, he pays himself a £2m dividend in the belief that he will escape UK tax on this (and he understands that he will not have a Portuguese tax liability). On 6 April 2024 he flies back to the UK happy that he has saved a tidy amount of tax from his ‘Portuguese Scheme’. This actually does not work because Jim will be subject to tax on the dividend in his 2024/2025 tax return under the temporary non-residence rules. He probably would have had to stay out of the UK for six years in order to legitimately avoid UK tax on the dividend.
This is the typical position, but it is dangerous to make blanket assumptions because there are certain circumstances where this planning might work.
Taxpayers who are new to the UK
The temporary non-resident rules can only apply if someone was UK resident for four out of the seven years before leaving the UK. Therefore, in the above example, if Jim had only been UK resident from 6 April 2020, his scheme would have worked.
Some income is not caught by the temporary non-resident rules
Although dividends would have been caught for Jim in the above example, not all income is caught by the rules. In fact, although almost all capital gains are caught for somebody who is temporarily non-resident, income categories that are caught are very narrowly defined as follows:
1. Dividends from a 5% interest in a close company (but only if they are from profits accrued while UK resident)
2. Loan write-offs to participators
3. Various pension scheme payments
4. Chargeable event gains from life policies
5. Offshore income gains
6. Disguised remuneration charges
7. Various payments from unapproved pension schemes
This means that it may be possible for certain income to escape UK tax if the recipient is only out of the UK for a year. For example, if Jim (above) had traded in offshore property while abroad then that would not have been caught by the rules. Alternatively, a dividend made out of profits made by the company while he is non-resident would not be within the rules.
Forbes Dawson view
This is a good example of an area where it can be dangerous to assume that general principles apply. Although anti-avoidance legislation exists in this area, it will only bite for reasonably long-term UK residents and even then, not for all types of income. In summary it is possible to make some tax savings by only becoming non-resident for a year. Great care does however need to be taken in meeting the conditions of the complicated statutory residence test (to be non-resident) and also to ensure that you do not jump out of the frying pan and into the fire by moving to a high-tax jurisdiction. There will also be significant logistical costs associated with becoming non-resident for a year.
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