A guide to income tax for expats
It’s a common misconception (or perhaps wishful thinking!) that leaving the UK releases you from all UK tax liability. As with all misconceptions the reality may be somewhat different. Looking specifically at income tax for expats, the rules can be a source of great confusion, but you have to get it right to avoid HMRC scrutiny and penalty. Both of which have increased in recent years.
It’s not just companies that have to deal with the web of the rules governing cross-border activity. Given the increasingly global nature of business and how we conduct our lives, international tax issues are affecting more individual taxpayers than ever.
So if you are a UK expat, how do you know if and when you have to pay UK income tax?
Confirm your residence status
In the simplest terms, a UK resident is liable to UK income tax on worldwide income, whereas a non resident is only chargeable to UK income tax on income arising in the UK. That said, there are exceptions to this general rule.
On this basis, the fundamental consideration for establishing liability to income tax for expats will be ascertaining your residence status.
Since 6 April 2013, the Statutory Residence Test (“SRT”) has provided a set of definitive rules replacing the previous patchwork of case law and legislation.
While far from simple, the SRT provides a standardised framework to enable you to establish if you have become non resident for tax purposes, and if so, when.
The test has three stages and one must approach them in the following order:
- automatic overseas tests;
- automatic UK tests; and,
- a sufficient ties test.
The SRT is complex but provides certainty in most cases. Each test comprises thresholds to be met to ascertain whether you are trying to ‘leave’ the UK or are a ‘visitor’. For a detailed explanation of the SRT and its application, click here.
Applying the SRT and getting this first step right will ensure you proceed on the correct tax footing, so it’s crucial to seek advice on its application.
Perhaps adding further complication to the matter, it is in fact possible to be a tax resident of multiple countries, depending on the local tax laws of the countries in question.
If this is the case, your residence will usually be determined by the relevant double taxation agreement (“DTA”), if indeed a DTA exists between the UK and the country you are now living in.
Where there is a DTA in place, the agreement will specify which of the two countries has taxing rights in relation to different forms of income and gains, and as such will determine where your tax liabilities lie.
Non resident expat income tax liability
If you are deemed to be non-resident, you will generally be chargeable to UK income tax on income arising in the UK.
This could include income from any of the following – albeit not exhaustive – list:
- Profits of a trade or vocation carried on in the UK
- Share of profits from a UK partnership
- Profits of a UK property business if the land or property is situated in the UK
- Rental income from UK properties
- Dividends, interest and other savings income from a UK bank or other UK source
- Employment income relating to UK duties
- UK pension income
Non residents are taxed at the same rates as UK residents. However, they may not be entitled to any UK personal allowances. Entitlement is dependent on nationality and/or country of residence, so you will need to confirm your position.
For example, UK citizens are entitled to a tax-free personal allowance upon which no income tax is paid, but non residents must claim their allowance for each year they have UK income, using form R43.
Income above the personal allowance is then taxed at the usual rates of income tax, i.e. basic, higher or additional rates.
Income tax for 2017/18:
The personal allowance for 2017/18 is £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)|
Non residents should be aware of anti-avoidance legislation, designed to prevent individuals avoiding UK tax by becoming non UK resident for a short period and receiving income (which absent these rules would be outside the clutches of the UK tax man) while under their new status.
The period of temporary non residence is defined by a series of specific, complex conditions. However, where the taxpayer returns to the UK within 5 years and has received certain income, then that income may be taxable in the year of return.
If the taxpayer remains non resident for the five years then the anti-avoidance rules do not apply.
Importantly, not all income is within the scope of the rules so again, it will be critical to seek advice on your situation for the correct application of legislation to your particular circumstances.
Note also that the rules for individuals that left the UK before 2013-14 are different to those stated above; we can advise in these instances for optimum tax efficiency and compliance.
ETC can help with advice on income tax for expats
Income tax for expats is an area subject to a complex set of rules that must be complied with to avoid HMRC scrutiny and penalty.
At ETC we are specialists in helping individuals manage their international tax affairs, however complex in nature or global in reach.
Whether you have recently moved overseas or have been living away from the UK for a number of years, depending on your circumstances you may still be liable to UK taxation, in addition to local tax.
We will work with you to understand your goals and provide tax planning advice across your income types, asset portfolio and financial interests to ensure you meet liabilities in all relevant jurisdictions in a tax-efficient manner, taking advantage of available reliefs and exemptions where possible.
Our advisory services for expats include:
- Expat tax
- Estate planning
- Asset protection
- Capital gains tax advice
- Inheritance tax planning
- Property tax
For more information on income tax for expats, please get in touch with one of our chartered tax advisers.