[Estimated time to read: 6 minutes]
(So the taxman doesn’t take all your dough…)
Nestled between junk mail and bills is the letter you’ve been dreading…
You gingerly peel open the envelope.
This isn’t going to be pretty – it certainly isn’t a rebate…
Getting stung by a big tax bill can be more than a nuisance. In some cases, it can be life changing.
But often, it’s completely avoidable.
Many of you have raised this topic when we asked for blog suggestions recently. In particular, we had tax queries from Peter, Ursula and Joel on the subject – hopefully this blog answers your questions, but if not, do get in touch.
Here are 9 things you should know:
(Do accept our apologies – this list only looks at tax from the perspective of a British expat – we may do others focusing on other nationalities in future blogs – but trying to do them for more than one nationality at a time would be overly complex.)
1. Even though you don’t live in the UK, you may still need to file a tax return with HM Revenue & Customs (HMRC), even if you are fully “non-resident”
The tax rules for UK residents and non-residents are very different, and one of your first requirements is to determine your tax residency status as regards the UK. It is important to remember that even if you are officially a resident in another country, you may still be tax resident in the UK.
2. Income from a UK-based pension is always subject to tax
Income from UK pension arrangements is subject to UK income tax. It is collected as a withholding tax at 20% and this tax is applied to everyone in receipt of UK pension income whether or not they live in the UK, and with no exemption for foreign nationals.
3. Your State Pension may be frozen when you leave
While all British pensioners are entitled to receive their State Pension regardless of where they live, the British Government "freezes" the state pension for pensioners who live in certain overseas countries.
This means, depending on where you live, payments may be fixed at the level of your first pension payment. Not all countries are included in this "frozen" list. But what may come as a surprise is that most Commonwealth countries are included in the frozen list (including Canada, Australia and New Zealand).
If you are relying on the State Pension when you retire (and even if you’re not!), make sure you don’t accidentally choose to live where it’s frozen.
4. A Double Taxation Agreement (DTA) could save you pounds
A DTA is simply an agreement between two or more countries that reduces the amount of tax that an international worker must pay, so they do not have to pay tax twice on the same income. Under a DTA, any event that is normally taxable in a country, other than the country of residence, will be tax exempt in that country, but may be taxable in the country of residence.
DTAs also prevent you being taxed more than you should be on a UK pension, especially if you are based within the EU. Typically, if you live in the EEA (EU member states and Iceland, Liechtenstein & Norway), including Switzerland, your pension will match the level of pension payment within the UK.
5. Failure to establish your tax status could be expensive
HMRC use their Statutory Residence Test to determine whether you are UK tax resident, which incorporates a number of factors.
One of the most common, and often very expensive, mistakes non-residents make is reading about it on the Internet, and making their own decision about their residence status, even though the matter is technical. Establishing your tax residence status can be complicated, and you should always seek advice from a qualified accountant.
Getting it wrong can lead to penalties and unexpected tax bills – just ask Robert Gaines-Cooper who received a tax bill for £29m (although ultimately he only paid £647,500…).
6. Despite being non-resident you may still have to pay capital gains tax
In general, non-residents are not subject to UK tax in respect of capital gains realised on the disposal of UK assets. There are, however, three exceptions to this general rule:
A non-resident individual or trust trading in the UK through a branch or agency is chargeable in respect of UK assets used or held in or for the purposes of the trade or the branch or agency. The same applies to companies trading in the UK through a permanent establishment.
An individual who is non-resident for less than five complete tax years is assessed in the year of his return on gains realised during his absence on assets he held on the date of departure.
From 6th April this year, expats and non-residents who sell a UK property may have capital gains tax applied to any gains made and should seek advice from a tax adviser who specialises in expat affairs.
This does not apply to those individuals who were resident in the UK in less than four of the seven tax years preceding the year of departure
Gains realised on assets acquired during the absence are not caught, and the charge is subject to any applicable Treaty.
7. Inheritance tax could still apply to your estate…
Even if you are an expat living outside of the UK, you will still be subject to inheritance tax in the UK if you are deemed to be of a UK domicile status, even if not UK tax resident.
If you are UK domiciled and your estate is valued at over £325,000, your estate will be subject to inheritance tax – either at 40% or 36% on the amount over the threshold (subject to various exceptions).
Since 2007, this threshold has increased to £650,000 for married couples and civil partners, providing the executors transfer the first spouse/partner's unused inheritance tax threshold to the second partner when they die.
It is essential to understand that being classed as non-resident in the UK for tax purposes, as your domicile is unlikely to have changed, you will still be liable for UK inheritance tax.
In terms of inheriting money from the UK, the rules are exactly the same. It doesn’t matter where you are living. The amount of tax payable on the sum to be inherited is dictated by the country in which the deceased, not the benefactor, lived.
8. If you return to the UK within 5 years, you may have to pay tax on your foreign earnings
You may have to pay tax on foreign income or gains you brought into the UK while you were non-resident, although this doesn’t include wages or other employment income.
“Bringing to the UK” includes transferring income or gains into a UK bank account.
These rules (called ‘temporary non-residence’) apply if both:
You return to the UK within 5 years of moving abroad (or 5 full tax years if you left the UK before 6 April 2013); AND
You were a UK resident in at least 4 of the 7 tax years before you moved abroad
9. Remember to pay your tax when you get back!
If you return to the UK after living abroad, you’ll usually be classed a UK resident again. This means you pay UK tax on:
Your UK income and gains;
Any foreign income and gains – although you may not have to if your permanent home (‘domicile’) remains outside the UK
If you're looking for more information on tax planning and how we can help, you may find this page useful.