Your Taxes: Brexiting to Israel

The Brexit breakdown may drive some Brits to contemplate aliyah. Israel grants a 10-year tax holiday on foreign income for new immigrants, but homework is needed as exemplified below.

An Israel Shekel note (photo credit: REUTERS/THOMAS WHITE)
An Israel Shekel note
(photo credit: REUTERS/THOMAS WHITE)
Temporary aliyah?
Ben moved to Israel from the UK four years ago. He is now thinking of returning to the UK. “That’s not going to give me any tax problem, is it?” he asks. Unfortunately for Ben, it probably will.
A person who has lived in the UK and who is “temporarily non-resident” (TNR) can be liable for UK tax on certain income and gains received while they were non-resident, after they come back to the UK.
A person will be TNR for UK tax purposes, broadly, if they were previously UK resident, become non-resident then returned to the UK if their period of non-residence is not more than five years. To avoid the TNR trap you must be non-resident for more than five complete tax years (April 6 to April 5).
Strictly, if you are UK resident for any part of a tax year, you are UK resident for the whole of it. The rules provide for “split-year treatment” in limited circumstances, mainly where you are taking up full-time employment in the UK (or are married to someone who is doing so) or where you move to a home in the UK and have no home anywhere else.
If you cannot claim split-year treatment and become resident part way through the tax year, you will be treated as resident for the whole of it. If you are non-UK resident for five complete tax years, but do not obtain split-year treatment, you will be regarded as resident for the whole of the tax year each side of your absence. Say you leave the UK on January 1, 2019, and return on August 1, 2024, but do not qualify for split-year treatment. You will be treated as having been non-resident for exactly five years. “Exactly” is not “more than,” and so you will be temporarily non-resident. If you do not get split-year treatment, you must remain non-resident for six complete tax years to avoid being TNR.
If you get split-year treatment, you can count the part years when you are treated as non-resident as part of your total period of non-residence. In the above example, if you get split-year treatment, you would be treated as non-resident from January 2, 2019, to July 31, 2024. Your absence is now more than five years and you would not be TNR.
Temporary non-residence matters. If you are TNR you may potentially be liable for UK tax on the following, even though they were received while you were non-UK resident:
• Money taken from a pension scheme
• Dividends received from a family company
• Capital gains made
• Payments received from a trust
• Money taken from an insurance bond
The tax liability bites in the year you come back to the UK. The rules are complicated. Make sure you don’t get caught out if you return to the UK too soon.
Long-term aliyah
Ben decides to stay in Israel. Ten years later he inherits his father’s UK house worth £2,000,000, which his father bought in 1978 for £50,000. He promptly sells it. “That’s not going to give me any tax problem, is it?” he asks. Unfortunately for Ben, there is a double tax problem.
Israel does not have an inheritance tax, but the sale of such assets may be subject to Israeli capital gains tax (CGT) at rates of 25%-50%, if the sale occurs after Ben’s 10-year Israeli tax holiday for foreign income and gains has expired.
And the Israeli tax law prescribes that Ben’s cost is the historic cost paid by his father, a mere £50,000, leaving £950,000 taxable in Israel (approximately, the calculation is done in shekels with indexing to the Israeli inflation rate)
If 40% UK inheritance tax was paid on Ben’s father’s estate, the tax burden in the two countries can be up to 90%!
The good news is that Ben can apply to the Israeli Tax Authority to “step up” (re-base) the cost for Israeli CGT purposes to the inheritance tax value declared to the UK tax authority (HMRC). The bad news is that most ITA officials are unfamiliar with this step-up procedure and Ben or his professional advisers will need to keep chasing the ITA officials to deal with it. C’est la vie!
As always, consult experienced tax advisers in each country at an early stage in specific cases. Marilyn McKeever is a solicitor and partner at New Quadrant Partners Ltd. Leon Harris is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.,