Easy come, easy go? A new consideration for temporary non-residents

The outbreak of hostilities in the Middle East earlier this year has led some former UK residents to look at returning to the UK having originally left the UK for jurisdictions such as the UAE. The Financial Times has reported that one in eight British nationals who were UAE residents has left the UAE since the start of the Iran war. HMRC’s sympathy for their plight is likely to be limited. In particular, new rules, brought in with effect for those returning to the UK on or after 6 April 2026, mean that the income tax ramifications for many such returners may be worse than they might have thought where they receive trading profits from a UK business. These rules may also pour cold water on the plans of some UK tax resident individuals who wish to move overseas on a temporary basis, if they lose out on income tax savings they might have initially expected to receive.

Temporary non-residence (TNR)

Individuals who are only temporarily non-UK tax resident are subject to tax rules which are designed to ensure that leaving the UK on a short-term basis is not an effective method of avoiding UK tax.

To be TNR, the taxpayer must have originally been UK tax resident, then become non-UK tax resident for a period of five or fewer years, and must then be UK tax resident again. The test for being UK resident / non-UK resident is the UK’s “statutory residence test”. Unless split-year treatment is available (which can sometimes apply when the taxpayer becomes or ceases to be UK resident partway through the UK tax year, which runs from 6 April to 5 April), it is generally safest to assume that at least six full tax years of non-UK tax residence are required for a taxpayer to avoid TNR status.

Consequences of being TNR – the position to date

To date, the most significant ramifications of being TNR have been for capital gains tax (CGT) – all chargeable gains realised during the TNR period are treated as arising in the year of return. So, for example, if a taxpayer owns a company, moves abroad and sells it for a gain, that gain would ordinarily be outside the scope of UK CGT assuming they are non-UK resident in the year of sale (and assuming the company does not own any UK land).  However, if they are UK resident again within five (or, in certain cases, six) years, that gain will become subject to CGT in the year of return, at the tax rate applicable at that time. It should be noted that there are some exceptions to this rule, particularly for assets acquired and disposed of during the period of TNR which need to be kept in mind.

Prior to 6 April 2026, the TNR regime was not of such importance to taxpayers’ income tax position. The TNR rules do not generally apply to income received, and there is no retrospective UK income tax on income received while TNR. The exception to this is dividends received by a company in which the taxpayer is a “material participator” in a close company.

A taxpayer is a “material participator” in a company if they (together with anyone with whom they are associated) own at least 5% of its shares. This threshold is relatively low and is likely to catch many personal and family companies. Any dividends received from the company in which the taxpayer is a “material participator” during the period of TNR are treated as received in the year of return and exposed to income tax accordingly.

Prior to 6 April 2026, there was an important exemption to this rule for post-departure trade profits of companies in which TNR taxpayers were “material participators”. Dividends were outside the TNR rules to the extent that the dividends related to trading profits arising during the taxpayer’s non-UK residence. For companies in existence before the taxpayer became non-UK resident, profits would be allocated to the UK / non-UK residency periods on a “just and reasonable” basis. Such dividends, if in scope, could be received by a TNR taxpayer without being exposed to retrospective UK income tax on resuming UK tax residence.

Consequences of being TNR – the new position

For those returning to UK residence after 6 April 2026, however, this exception for trading companies has been ended. All dividends received from a company in which the taxpayer is a material participator are now exposed to retrospective UK income taxation on return to the UK following a period of TNR. Credit should be available against the UK income tax for any other taxes paid overseas on the same distribution.

It is also important to note that there are other ways in which income tax can be applied retrospectively to income received while TNR (namely, when a close company writes off a loan made to a participator, certain taxable events in connection with life policies and gains connected to some offshore investments which are subject to income tax instead of CGT).

A possible solution?

The simplest solution is for non-UK tax resident individuals to make sure that they remain outside the UK for sufficiently long so that the TNR rules do not apply. That may require forward planning for those leaving the UK for the first time. Of course, remaining non-UK tax resident may not be possible owing to local geopolitical considerations; in such instances some taxpayers might look at different jurisdictions outside the UK. Careful analysis of the taxpayer’s position under the UK’s statutory residence test, which can be surprisingly complex, will be required in any event.

It is important to note that the tax treatment of dividends from a trading company differ depending on who receives the dividends. For example, if the taxpayer is a beneficiary of a non-UK discretionary trust which is a shareholder in the trading company, the discretionary trust would receive the dividend instead of the taxpayer. In this case, the TNR rules as they apply for income tax should not be in point (though other taxation rules connected to the trust would need to be considered).

HMRC anticipates that this measure will raise between £110 million and £155 million per year going forward, following a small loss of £5 million in the 2026/27 tax year. In light of the unexpected return to the UK of a number of former UK residents, the number of TNR taxpayers may be greater than anticipated so the new rules may generate more income tax than anticipated. It will be essential for returners to take proper advice, if possible, before resuming UK tax residence (and at the very latest immediately after returning to the UK).