For many British expats, the idea of returning to the UK may have seemed distant or highly unlikely, but events in the Gulf have changed that view.
When a UK expat returns to the UK in a hurry, unexpected tax exposure can arise quickly. UK tax residence is determined under the Statutory Residence Test (SRT), which looks at both days spent in the UK and connecting factors such as accommodation, work and family ties.
A rapid return can therefore trigger UK residence earlier than anticipated, bringing worldwide income and gains into the UK tax net.
The temporary non-residence rules should also be considered, as they can bring gains realised during a period abroad back into charge if the expat returns to the UK within five tax years.
Since 6 April 2025, the remittance basis and ‘non-dom’ status have been replaced by the Foreign Income and Gains (FIG) regime.
Those returning after at least ten consecutive tax years of non-UK residence may claim relief on qualifying foreign income and gains for their first four years of UK residence, although this may come at the cost of certain UK allowances.
New long-term residence rules
The UK has replaced its long-standing domicile-based tax system with residence-based rules. The new regime provides estate planning clarity and advantages to long-term British expats.But UK assets are always liable to UK inheritance tax - and this includes pension funds from 2027.
These new long-term residence rules also offer significant tax mitigation opportunities to returning Britons, particularly in the areas of inheritance tax (IHT) and FIG.
If they have been living abroad for ten years or more, they could benefit from up to a decade of UK inheritance tax relief (except for UK assets) and four years of tax-free foreign income and gains. But only if they are planned for well ahead and assets structured accordingly.
Liability to UK IHT is now determined by whether or not clients meet the long-term residence criteria, with ten years being the magic number.
Long-term residents are liable to UK IHT on worldwide assets, while everyone else is only assessed on UK-situated assets (with a few exceptions). Where assets are owned is therefore key for estate planning and protecting wealth for heirs. With careful planning, returning expats could make the UK an IHT-free zone for up to ten years.
The new FIG regime is another key benefit. It offers four years of UK tax exemption on foreign income and gains, even if they are remitted to the UK and a valuable opportunity to reorganise their wealth and investments before they become fully liable to UK tax.
Timing is everything
When it comes to tax, timing the client’s return strategically can make a significant difference. Since the UK and foreign tax years don’t align, you can potentially plan their move and when to sell assets to optimise opportunities in both countries.
If clients spend time in the UK before moving back, such as looking for and refurbishing a new home, watch the number of days they spend there. Follow the UK SRT to ensure they don’t trigger UK tax residency too early, particularly around the timing of selling the overseas home.
Capital gains taxes
Selling or buying property can have different tax implications depending on the client’s country of residence at the time.
In many countries, the sale of a client’s main home is exempt from capital gains tax, but only if the property is their actual main home when they put it on the market. The window for benefitting from the exemption is limited and the gain may be taxed under the rules for second homes if they wait too long.
If they sell UK property to release funds to buy a new home for their return, the sale may be subject to UK Capital Gains Tax.
Private Residence Relief will generally only apply for periods during which the property was genuinely used as their main home. They will be liable for UK capital gains tax even if they sell it as a non-resident, though only on gains made since April 2015 for residential property and 2019 for commercial property.
The UK charges an additional 5% stamp duty on second homes and investment properties, which would affect them if they bought a UK home while still owning their overseas residence.
Be aware that some countries apply an ‘exit tax’, which can be as much as a 30% tax on potential gains, even though the asset is not sold.
Releasing capital
Withdrawing from investments or pensions – say to buy a UK home – could affect your client’s long-term retirement income and savings, and you need to plan carefully. Taxation can be drastically different overseas and in the UK, so timing is key.
Establish how their investments will be taxed in the UK and how to restructure them for greater tax efficiency. It’s also a good opportunity to review how they can be passed to their beneficiaries.
Decide too if and when to convert a client’s savings and investments from foreign currency into sterling. Some arrangements offer currency flexibility to help manage exchange rate risk.
UK pensions
Most unused pension funds and death benefits become liable to UK inheritance tax from April 2027. Pension savings transferred out of the UK while clients were living abroad may remain exempt for up to ten years, provided they leave the funds overseas.
Raquel Plaza is a Tax Adviser with Blevins Franks, which has been advising expats for over 50 years
