What are the expat tax rules?
As a UK expat, you will (we hope!) be concerned to understand your tax position. However, this will be a two-headed beast and you will need to understand your position in both the UK and also your host country. All well and good, however, but expat tax rules are a challenging area of taxation – not least as they are subject to such frequent change.
Fundamental to UK expat tax rules is that you will not have been released from the clutches of the UK tax system simply by way of emigration. The UK tax system has a long tail and sharp teeth!
Successive rule changes impacting UK-situ assets and UK domiciled taxpayers have served to ensure expats remain liable to taxation on all forms of UK income – irrespective of whether you are living in the UK or overseas.
You may also of course still have to file a UK tax return; there is no escaping the bureaucracy either!
Do the expat tax rules apply to you?
The place to start with any tax issue is determining your residence. By understanding your status, you will be able to determine if and where you are within the scope of UK taxation. Use the Statutory Residence Test (SRT) to establish if you have become non resident for tax purposes, and if so, when.
Note that it is possible to be resident for tax purposes concurrently in more than one country, depending on the domestic tax laws of those countries.
In such instances, you would need to investigate whether a Double Taxation Agreement (DTA) exists between the relevant nations, and what this states in respect of where your tax liabilities will lie.
Expat tax rules: Income tax
If you hold non resident tax status, you should expect to be chargeable to UK income tax on all forms of income arising in the UK – e.g. all types of profits, employment, pensions and rental income, dividends and interest from a UK bank or other UK source etc.
While non residents will face the same income tax rates and are subject to the same notification and payment terms as UK residents, non residents must claim their personal allowance for each year they have UK income using form R43.
However – the personal allowance will not always be available to non residents. Entitlement is dependent on nationality and/or country of residence, so you will need to confirm this based on your specific circumstances.
Income above the personal allowance is taxed at the prevailing rates according to basic, higher or additional rate bands, which as at November 2017 are:
Personal allowance for 2017/18: £11,500.
|Taxable income bracket||Total tax on income below bracket||Tax rate on income in bracket|
|£0 – £33,500:||£0 –||20% (basic rate)|
|£33,501 – £150,000:||£6,700 –||40% (higher rate)|
|£150,001 & over:||£53,300||45% (additional rate)|
The main source of concern in this area is anti-avoidance legislation.
Non residents are not permitted to become non UK resident for short periods in order to benefit from income received outside the UK taxation regime, and then revert UK residence status. The rather catchily-titled ‘temporary non-residence rule’ is an anti-avoidance measure buried deep in the Statutory Residence Test (essentially so the Government could sneak it in with nobody noticing.)
The temporary on-residence rule applies primarily where, among many other conditions, the taxpayer returns to the UK within 5 years of leaving having received certain types of income. Under temporary residence, the income becomes taxable in the year of return. The individual must hold non residence for more than 5 years to ‘avoid’ the anti-avoidance rules.
If you own property in the UK which you rent while living abroad, the rental income received will be taxable in the UK. There is a special tax regime, referred to as the Non Resident Landlords Scheme (NRL).
Expat tax rules: Inheritance tax
The implications of UK inheritance tax (IHT) are quite literally far-reaching.
Indeed, the ongoing liability to UK IHT is perhaps the most tenacious of UK taxes to shake off. This is because one’s liability is not directly related to residence but, instead, to one’s domicile.
Inheritance tax is payable on worldwide assets held by all UK domiciled individuals, including those who are not UK domiciled under UK general law but, for tax purposes, have become ‘deemed domicile’.
Above the current threshold as at November 2017 of £325,000 per individual, IHT is charged at 40%.
The same spousal relief generally applies to expats, meaning up to £650,000 will be IHT for the estates of married couples and civil partners where first partner’s unused allowance is transferred to the second partner upon death.
For non doms, they will start out from the position that only UK-based assets will be liable to UK inheritance tax. However, this would change once they have been in the UK on a long term basis and they become deemed domiciled.
If one has emigrated permanently then one can ‘lose’ one’s UK domicile by asserting a domicile of choice elsewhere. It is necessary to reside in that jurisdiction AND to have formed the intention to live there indefinitely. HMRC will resist any such claims and will often adopt a ‘wait and see’ approach on the basis that many people will return to the UK further down the line (at which point their UK domicile is likely to revert).
That said, even where one remains UK domiciled, it is possible to put in place various planning to reduce one’s exposure to IHT.
Expat tax rules: Capital gains tax
At the most basic level, UK non residents will not be liable to UK capital gains tax on any asset – except for residential UK property.
Non resident capital gains tax (NRCGT) took effect from 6th April 2015, and applies to non UK residents disposing of UK residential property. You must notify HMRC of the sale within 30 days of the conveyance or you will be liable for a penalty. You may also have to pay any tax due within the 30 day period.
The 5 year temporary non residence rule among others apply here in the pursuit of anti-avoidance.
In addition, a non-resident individual trading in the UK through a branch or agency will be chargeable to UK capital gains tax on any assets used in the trade.
Generally speaking, non doms who have elected for the remittance basis of taxation will only be liable to tax on foreign gains remitted to the UK.
Enterprise Tax can assist with understanding and applying expat tax rules
At ETC we are experienced in helping individuals manage their cross-border tax affairs, both personal and business.
We can support in ascertaining your tax liabilities, and provide tax planning advice to help mitigate tax charges through appropriate use of structures, reliefs and exemptions, in the UK and in relevant jurisdictions overseas.
We have specific expertise in working with overseas property investors with portfolios that include UK property, who have been hit particularly hard by recent UK tax changes.
Our advisory services for expats include:
- Expat tax
- Non dom tax
- Estate planning
- Asset protection
- Capital gains tax advice
- Inheritance tax planning
- Property tax
For more information on expat tax rules, please get in touch with one of our chartered tax advisers.