Chapter 8 - Working Overseas:
A Powerful Tax Shelter

8.1 Introduction

If you go abroad under a full-time contract of employment you will usually be regarded as non-resident and not ordinarily resident from the date of departure if:

• You work full-time overseas for the tax year without any significant breaks from that overseas work, and:
• you spend fewer than 91 days, (excluding deemed days) in the UK in the tax year, and the number of days in the tax year that you work for more than three hours in the UK, is fewer than 31.

This rule also applies to your spouse if he or she goes abroad with you. Therefore, provided one spouse works overseas and satisfies the above requirements, the accompanying spouse will also be regarded as non-resident and not ordinarily resident from the date of departure.

This means any UK income will be liable to UK income tax, whereas the overseas income will be completely exempt. From a capital gains tax perspective although you are non-UK resident, most overseas employees won't be able to escape UK CGT. The scope of the CGT rules has been widened. There will be no UK capital gains tax on either UK or overseas assets owned at the date of departure, provided you are non-resident during the tax year of disposal and you remain overseas for a period of more than five complete tax years.

Note that this five-year rule does not apply to assets purchased after you become non-UK resident -- you would be exempt from UK capital gains tax on these provided you were non-resident during the tax year of disposal.

8.2 Tax-deductible Expenses

Where an employee is resident in the UK and performs all work duties abroad, the cost of travelling abroad to take up the employment and returning to the UK on its termination is allowable as a tax deduction.

If travel is only partly for the above purpose, relief is restricted to the relevant part.

Where the overseas duties necessitate the expense of board and lodging for the employee outside the UK and this expense is met by the employer, no tax liability will arise for the employee on the payments made.

Where you have two or more jobs, the duties of one or more of which are performed totally or partly overseas, you are entitled to tax relief for the cost of travelling between the jobs where either or both places are outside the UK.

Where an employee works overseas for a continuous period of 60 days or more, the payment by the employer for a visit by the employee's spouse/children (including a return ticket) will not be taxable.

8.3 Tax-free Termination Payments

A termination payment made to an employee can be partially free of tax provided the employer had no contractual obligation to make the payment. Assuming this is satisfied, Section 401 ITEPA 2003 will usually apply, and the first £30,000 of the termination payment will be tax free.

However where an employee has substantial foreign service it is possible to obtain additional relief and in certain circumstances to totally eliminate any UK income tax charge.

In order to totally shelter the payment from UK tax, the period of employment must include foreign service which includes:

• Three-quarters of the whole period of service.
• Where service has exceeded 10 years, the whole of the last 10 years.
• If more than 20 years' service, half the period plus 10 of the last 20 years.

Where these conditions are not met, the amount exempt after any other deductions (such as the £30,000 exemption) will be in the proportion of foreign service to total service. In other words, a straightforward pro rata of time spent overseas to UK employment.

Example

Johnny commences employment with XYZ Plc. in January 2003. He spends two years working at the overseas office in Germany. He is made redundant in January 2012 and is to be offered £100,000 as an ex gratia termination payment.

As Johnny's foreign service does not meet the above criteria, the amount that will be exempt will be two-ninths.

Therefore the taxable amount will be calculated as follows:

8.4 Protecting Your Property Investments from the Taxman

An individual who works abroad for a number of years may decide to keep a UK residence.

If the property is subsequently sold, will the gain be subject to UK capital gains tax?

Obviously if the individual satisfies the non-residence criteria at the date of disposal, then any gain will be outside the scope of UK capital gains tax.

If the individual is UK resident/ordinarily resident at the date of disposal, it is necessary to look at the application of the Principal Private Residence (PPR) relief, in anticipation of returning to the UK to live in the property.

The PPR relief provides full or partial relief from capital gains tax for an individual who has occupied a property as his main residence at some point during the period of ownership.

A gain on a property will be completely exempt from capital gains tax if an individual has occupied the property as his main residence throughout his entire period of ownership.

Where an individual has occupied a property as a residence for only part of his period of ownership, a proportion of the capital gain resulting from the disposal of the property is tax free. This is calculated on the following basis:

Capital Gain x Occupation Period/Ownership Period

In addition to the period that an individual actually occupies a property as his residence, when calculating the period of occupation, there are certain deemed periods of occupation that are allowed to be taken into account.

Most notably, the last 36 months of ownership would always be deemed to be private occupation, irrespective of whether you actually occupied the property during this period. Please note that this relief will only apply where the property has been your main residence at some point during your ownership.

Therefore an individual does not need to reside in a property during the last 36 months of ownership in order to gain full exemption from capital gains tax on a subsequent disposal.

Example

Samantha purchased a property in December 2004 for £50,000. She lived in the property as her main residence until June 2011 when she decided to move in with her boyfriend.

The property was then left empty until June 2013 when she decided to sell it. Any gain on the property when disposed of in June 2013 would be fully exempt from capital gains tax.

She actually lived in the house until June 2011, and the period from June 2011 until June 2013 is covered by the last 36 months 'deemed occupation' rule.

A problem occurs if the 36 months rule does not fully cover the period when the property was not occupied (in other words, the taxable portion). What is the position then?

Fortunately, there is a special provision that relates to individuals working overseas (and in various other circumstances).

Any period during which the owner works full time in an employment wholly outside the UK, provided that both before AND after those periods it was the owner's only or main residence, and assuming he had no other main residence, is deemed private occupation.

Example

Peter purchased a house in 2003 and lived in this as his main residence until 2011. He then travelled abroad until 2013.

On his return, he should ensure that he resumes occupation of the property. His period spent overseas would then not restrict the availability of the PPR exemption when he sells the property.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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