The Temporary Non-Resident rules present a potential trap for the unwary. Let’s face it, very few of us haven’t considered moving overseas to escape the dreary UK winters. However, sometimes the reality of life abroad doesn’t meet expectations. This article looks at the tax consequences of returning to the UK, and the traps you need to avoid.
What are the Temporary Non-Resident Rules?
As a UK resident, you are subject to Income Tax and CGT on your worldwide income and gains. However, non-residents are only subject to:
- Income Tax on their UK income
- CGT on certain types of gains (mainly real estate gains)
This presents a potential tax planning opportunity. If you are about to sell your business, why not move overseas for a year so that you don’t pay CGT? However, you won’t be surprised to learn that you are not the first person to have thought of this. Understandably, HMRC aren’t too happy with this type of planning. Special anti-avoidance rules exist to counteract any advantage from briefly becoming non-resident. These are known as the Temporary Non-Resident (TNR) rules.
How do the Temporary Non-Resident rules work?
The TNR rules operate by subjecting people who are only non-resident for a short period of time to UK tax on their return. You will be a TNR if:
- You were UK resident for at least 4 of the 7 years before your departure; and
- You are non-resident for 5 years or less.
If you satisfy both of these tests, income and gains that you generate whilst non-resident may be subject to UK tax on your return.
Try it for yourself
To give you an idea of your the Temporary Non-Resident rules work, try my handy tool below. As always – this is not a substitute for proper advice and cannot be guaranteed to be error free.
What types of income and gains are caught?
Not all types of income and gains are subject to the TNR rules. Therefore, it’s important that you understand what categories of income and gains you are generating. The types of income and gains that the TNR rules applies to includes:
- All types of capital gains (including gains on offshore funds)
- Dividends
- Certain types of employment income (principally share schemes and other “disguised remuneration”)
Importantly, there are certain types of income that are not subject to the TNR rules. Notably, the rules do not apply to salary received for an overseas employment. The TNR rules also don’t apply to income that is treated as arising to a settlor under a settlor-interested trust. This last point is outside of the scope of this article but is potentially a valuable exclusion.
It’s a trap!
It is easy to incorrectly assume that you are not a TNR. On a first reading of the rules, you may think that being outside of the UK for 5 years will prevent the rules applying. However, this is not necessarily correct. The rules require you to be non-tax resident for more than 5 years. In practice, this can often mean you will need to be outside of the UK for 6 complete tax years. But why?
First, in order to avoid the TNR rules you must be non-resident for at least 5 years and 1 day. In addition, the default rule under UK law is that you are either resident or non-resident for an entire tax year. This is the case unless you qualify for one of the “split-year” cases. If so, you can divide your year into a resident and a non-resident part.
Let’s look at an example. Alex Alan is a lawyer who dreams of working somewhere warmer. He sells his house and jumps on a plane to the BVI on 16 August 2025. Whilst non-resident, he sells his entire investment portfolio. However, after a few years he realises that being a bald man with fair complexion in the sun is no fun. He returns to the refreshing drizzle of the UK on 1 October 2030.
On first glance, this looks fine. He has been non-resident for over 5 years. However, the chances are he will have been tax resident until 5 April 2026 in the year of his departure. His non-resident period therefore started on 6 April 2026. He may also be tax resident from 6 April 2030 on his return. Taking both of these points into account, his period of tax non-residence will be less than 5 years. Any gains he generated on the sale of his investment portfolio will then be taxable in the UK in the 2030 / 2031 tax year.
Don’t do what Alan did!
What could Alan have done differently? Well, first he could have looked to apply “split-year” treatment to his years of departure and return. If available, split-year treatment allows you to divide a tax-year into a resident and non-resident part. The detail of the split-year rules will be covered in a different article in future.
However, a safer approach would have been to plan his departure and return better so that they tied in with the UK tax years.
