We are returning to the UK from the US following the coronavirus pandemic. We lived and worked in the US for several years and it is likely that we will be back in the UK for some time. We are worried we will face a sizeable tax bill from HM Revenue & Customs on our US earnings while still being taxed in the US. Is there anything we can do to ensure our repatriation does not leave us with a large tax bill?
James McNeile, a partner in the estate planning team at Royds Withy King, says residence is one factor which governs what and how much UK tax you have to pay. If you spend over 183 days in the UK in a tax year you will normally be treated as tax resident there. If you have other linking factors, such as residential property or family living in the UK, a much shorter period may cause you to become tax resident.
Special guidance issued by HMRC on March 20 suggests, though, that if an individual is unable to leave the UK as a result of closure of an international border or is asked by the employer to return temporarily to the UK as a result of the virus, then days spent here, up to a maximum of 60, will be treated as “exceptional circumstances” and ignored in the day counting exercise for residence. You do have to leave as soon as circumstances allow.
Another concession which may help is the possibility of splitting a tax year into resident and non-resident portions so that, in certain circumstances, income earned in foreign employment may not be taxed in the UK even if received in a tax year in which you eventually end up being treated as resident here.
An important point to bear in mind is that the US tax year mirrors the calendar year and the UK tax year runs to April 5. This can create mismatches and opportunities so far as the extent of yearly income is measured in each of the two countries.
You will also be able to benefit from the double tax treaty in place between the UK and US to ensure that you do not duplicate the tax paid on the same income.
Something to keep an eye on is the tax compliance position if you are a trustee of any family trusts, as the change of residence of an individual trustee can cause the trust itself to change residence status with potentially punitive results.
Stephen Metcalf, a senior manager in the private client tax team at accountants Kreston Reeves, says each country has its own set of rules to determine your tax resident status, with a common feature being a measure of the number of days spent in that country. The UK has the statutory residence test, in which the number of days that an individual is allowed to spend in the UK without becoming resident is affected by various factors including work, home and family locations. The best way you can avoid a UK tax bill will be to limit the number of days spent in the country to avoid becoming UK tax resident.
In the current circumstances, with travel restrictions across much of the globe, this is quite a challenge. The UK residence test does allow for individuals to spend up to 60 additional days in the UK in “exceptional circumstances”, although that bar is set very high.
However, HMRC has provided welcome clarification, with the impact of coronavirus on travel being recognised as exceptional in a number of scenarios. This includes whether self-isolation quarantine stops you from travelling; if government advice is to not travel from the UK; border closures in other countries, such as the US currently: and your employer asking you to return to the UK temporarily.
Despite this, you may find yourself tax resident in the UK and the US. Even if you lose your US tax residence status, its tax rules can still mean you are liable as a continuing US citizen.
You will then need to consider the double tax treaty between the UK and US, which in many cases will allow for tax relief to be claimed in one country for tax paid in the other. The treaty sets out tiebreaker clauses on tax residence and also, in the cases of different types of income (employment, business income, dividend, interest), which country has the primary taxing rights and the rate of relief available.
Double taxation may cause significant cash flow problems even if there are reliefs available, as it can take time for the relevant authorities to process claims and issue appropriate refunds. It is a complicated area and one that can easily catch you out. You should therefore take action as soon as practicably possible.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to [email protected]
Our next question
I’m a senior executive working in management consultancy and have been asked to take a 10 per cent pay cut. My employer has not said it is temporary, just that it will be reviewed in three months. They have said that if we don’t take pay cuts redundancies would be on the cards for a number of employees. Should I agree and what are the considerations?