Unplanned UK stays could mean big tax bills for UK expats

Expatriates and non-residents who find themselves unexpectedly stuck in the UK could find they become liable for UK income tax.

British expatriates and non-residents who are stranded in the UK because of coronavirus travel restrictions could face unexpected tax bills, warns accountancy group UHY Hacker Young.

Under what’s known as the statutory residency test (SRT), non-residents and British expats pay UK income tax only on UK earnings; they pay no tax on their overseas earnings, provided they have been absent from the UK for one complete tax year and spend a maximum of 183 days in the UK in any tax year.

But if they are in the UK for more than 183 days in a tax year, they will be considered as UK resident for tax purposes, which means they will be liable for tax on all their income, both UK and worldwide.

“For British expats who have returned home and for foreign nationals visiting the UK during the coronavirus pandemic, this disruption is causing significant concern, as they are required to spend a limited amount of time in the UK in order to maintain their UK non-resident tax status,” says Jamie Favell, a partner at the Tax Advisory Partnership, which is part of the ExpertsForExpats.com network.

An increasing number of countries are closing their borders partially or completely, in an attempt to control the virus, including Australia, Canada, much of the EU, the US, Russia and several Gulf states. The UK government is advising against all overseas travel.

Neela Chauhan, partner at UHY Hacker Young, says: “Non-residents need to be on top of their day count – otherwise they could face huge tax bills.” She warns that an overstay, even of just one day, could result in HMRC charging tax on all the income earned both in the UK and overseas during the whole tax year.

“We often see individuals use up the number of days they can spend in the UK towards the end of the tax year. This means those who are stuck may not have enough days left to cover their stay,” she adds.

Expatriates could also be caught out by capital gains tax (CGT) liability on the sale of assets such as shares or a property owned when they lived in the UK. They need to have been non-resident for at least five years for sales of such assets to be exempt from CGT. 

Chauhan adds: “Given the circumstances, we hope that HMRC may be more lenient in its approach. However, there are no guarantees and we would recommend that anyone up against their day-count limit seeks professional advice as soon as possible.”

Exceptions to the SRT rule

Importantly, the SRT does provide a set of exemptions that can be applied under exceptional circumstances. These exemptions allow a certain amount of time in the UK to be ignored. Under the standard exemptions, the maximum number of days which can be ignored under exceptional circumstances is 60.

HMRC has created clear definitions of what they declare as “exceptional circumstances”:

“Days spent in the UK may be ignored if the individual’s presence in the UK is due to exceptional circumstances beyond their control. This will usually only apply to events that occur while an individual is in the UK and which prevent them from leaving the UK.”

“Exceptional circumstances will normally apply where an individual has no choice concerning the time they spend in the UK or in coming back to the UK. The situation must be beyond the individual’s control.”

This is what HMRC says about potential exceptional circumstances: “The type of events that may give rise to exceptional circumstances will be, by their nature, out of the ordinary and it is difficult to be prescriptive about what characteristics such an event would exhibit. However, local or national emergencies, such as civil unrest, natural disasters, the outbreak of war or a sudden serious or life-threatening illness or injury to an individual are examples of circumstances that are likely to be exceptional.”

Favell believes the current coronavirus pandemic would clearly count as “out of the ordinary” and be treated as an “exceptional circumstance”.

However, he raises concerns on two counts. First, the 60-day extension may not be long enough, given the Covid-19 prognoses from some world health experts. These indicate the likelihood of restrictions being imposed for considerably longer.

Second, he says: “It is also possible that ‘circumstances beyond their control’ could be challenged by HMRC on the basis that the current rules states that exceptional circumstances will apply only when someone has no choice concerning the time they spend in the UK or in coming back to the UK.

“But that may not be the case, as people could still potentially travel, but their personal circumstances could dictate that it is either safer not to, or they have commitments which would not permit them to. HMRC may consider these to be exempt them from the exceptional circumstances.”

He adds that this is a situation where it’s important to get specialist help in regard to your tax situation and your plans or options.