For individuals leaving the UK, establishing non-residence is only half the battle. To prevent taxpayers from leaving the UK for a short period purely to realise tax-free gains or extract company profits, Parliament enacted strict anti-avoidance legislation. The Temporary Non-Residence (TNR) rule catches individuals who leave the UK, realise certain income or gains, and return within a specified period.
The Legislative Mechanics of TNR
The TNR rules operate across both Capital Gains Tax (CGT) and Income Tax. The foundational definitions of “temporarily non-resident”, “the period of return”, and “the temporary period of non-residence” are governed by Part 4 of Schedule 45 to the Finance Act 2013.
1. Capital Gains Tax
Under section 1M of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), if a temporarily non-resident individual disposes of an asset and a gain or loss accrues during that temporary period, the legislation treats that gain or loss as accruing in the period of return.
“If, in the case of the disposal of an asset by an individual who is temporarily non-resident— (a) a gain or loss accrues to the individual in the temporary period of non-residence… the gain or loss is treated instead as accruing to the individual in the period of return.”
A similar matching rule applies under section 3E of TCGA 1992 for gains attributed to individuals from non-resident companies.
2. Income Tax and Dividends
For Income Tax, section 812A of the Income Tax Act 2007 (ITA 2007) charges “relevant investment income” received during a temporary period of non-residence upon the individual’s return to the UK. Relevant investment income primarily includes dividends from UK close companies where the individual (or an associate) was a material participant.
Furthermore, section 832A of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) targets individuals using the remittance basis. Any relevant foreign income remitted to the UK during the temporary period of non-residence is automatically treated as remitted in the period of return.
2026 Legislative Update: Close Company Dividends
A critical change affects taxpayers returning to the UK after 6 April 2026. Previously, under section 812A(5) of ITA 2007, a carve-out existed for dividends paid in respect of “post-departure trade profits”.
However, effective 6 April 2026, the government abolished this post-departure trade profits exemption. Consequently, all dividends extracted from UK close companies (and non-UK resident companies) received during a temporary period of non-residence are now taxable in the year of return, regardless of when the underlying profits were generated.
Case Study: McCabe v HMRC
The First-tier Tribunal decision in Kevin McCabe v The Commissioners for HMRC [2022] highlights the stringent application of residency principles that underpin the TNR rules.
Mr McCabe relocated to Brussels, intending to secure temporary non-residence status to facilitate a highly lucrative, tax-free disposal of assets. The taxpayer structured his affairs under the assumption that he had successfully broken UK residence for the required duration before returning.
However, the Tribunal closely examined his ties and the “distinct break” principle. Because Mr McCabe failed to demonstrate a sufficient break in his UK ties, HMRC successfully argued that he remained UK resident throughout the period. Consequently, the TNR rules did not even need to bite; the disposal was simply taxed as a standard disposal by a UK resident. This case serves as a vital reminder that before analysing the impact of a return to the UK, advisors must ensure the taxpayer definitively broke UK residence in the first instance.
Pensions and Employer-Financed Benefits
The TNR net also extends to pension extractions. Section 394A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) dictates that lump sum benefits received from employer-financed retirement benefits schemes during a temporary period of non-residence are treated as received in the period of return.
| Income/Gain Type | Governing Legislation | Tax Treatment upon Return |
|---|---|---|
| Capital Gains | TCGA 1992 s 1M | Treated as accruing in the period of return. |
| Close Company Dividends | ITA 2007 s 812A | Taxed in the period of return (all profits caught post-April 2026). |
| Remitted Foreign Income | ITTOIA 2005 s 832A | Treated as remitted in the period of return. |
| Pension Lump Sums | ITEPA 2003 s 394A | Treated as received in the period of return. |
Crucially, the legislation explicitly states that nothing in any double taxation arrangements prevents these charges from arising.
Consider researching the specific impact of split-year treatment under Schedule 45 FA 2013 on the precise commencement and termination dates of a temporary period of non-residence.
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