It is not uncommon for people to move at least once during their lifetime or to work in several jurisdictions other than the country they would call home which can lead to people paying taxes abroad and perhaps paying tax in several countries at the same time.
So the first thing to consider when paying taxes abroad, is why you are paying that tax?
A few of the main reasons you could be paying taxes abroad together with relevant considerations are set out below:
A) I am paying taxes abroad because I have just made a permanent move from the UK to live in another country indefinitely
An individual’s liability to tax in the UK depends largely on their residence and domicile status.
Other countries have their own ways of deciding on what basis they levy taxes which in some cases can be similar to the UK but in others may be completely different.
It is possible to be treated as a resident for tax purposes in more than one country based on the domestic tax laws of those countries. This will mean that you are paying taxes abroad in both countries.
In such a scenario the first question is whether there is a double taxation agreement (“DTA”) in place between the UK and the other country. If so, the DTA will provide a so-called “tie-breaker” clause which will determine which of the two countries you will be considered resident in. The UK has an extensive network of DTAs with other countries.
The DTA will also set out which country has taxing rights in relation to certain types of income. This is important to prevent any double taxation. This can mean that you effectively suffer tax at the higher rate of the two countries.
If your move is permanent then you will need to consider not only income taxes, but all other forms of taxes, including tax on capital gains and also inheritance tax or other succession taxes.
UK Capital Gains Tax for Expats
In general, a non-resident will not be chargeable to UK capital gains tax on disposal of assets. This will apply to UK assets as well as overseas assets, except in the following scenarios :
- Temporary non-residence
An individual who has been non-resident for less than 5 complete tax years will be assessed in the year of his return to the UK on:
- any gains which were realised during his period of absence from the UK;
- on disposal of assets held at his date of departure from the UK.
This only applies to habitual UK residents i.e. those who had been resident in the UK for four or more of the seven years prior to their departure.
- Disposal of UK residential property
With effect from 6 April 2015, if as a non-resident you make a disposal of UK residential property, you will have a liability to UK capital gains tax. 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. There are exceptions to this, including if you already file UK tax returns. In this case you may be able to delay payment of the tax until your normal due date for payment.
The disposal must be reported on the form “Non-resident: Report and pay Capital Gains Tax on UK residential property” available on HMRC website. This includes a computation of the capital gains tax liability so you may require assistance from a tax adviser/agent to prepare the return. As there are automatic penalties and interest for late filing of the return and late payment of tax, so if you require professional assistance this should be sought immediately to meet the 30 day deadline.
- A non-resident individual (or trust) which trades in the UK through a branch or agency will be chargeable to UK capital gains tax on any assets used in the trade.
UK Inheritance Tax for expats
Even if you are deemed non-resident for tax purposes you could still be liable for UK inheritance tax. UK Inheritance tax is payable by all individuals who are UK domiciled (or deemed domiciled for IHT purposes). The concept of domicile is a legal one, not tax. However there are various situations where as a matter of general law you may be domiciled in a country other than the UK but will be deemed domiciled for UK tax purposes.
It is important that you seek advice when you move overseas to understand the domestic taxation system. You may be familiar with the UK system of taxation, but the tax laws of your new country of residence could be significantly different. This can mean you are liable to pay different forms of taxes which do not apply to the UK. For example some countries levy a “wealth tax” effectively you will pay tax at a certain percentage of the total value of your assets or wealth on a periodic basis.
B) I am paying taxes abroad because I have been seconded overseas by my employer
Whether you will be considered non-UK resident whilst you are working overseas will primarily depend upon how long your overseas employment will last but also the amount of time you will physically spend in the UK and your connecting factors.
If you are working overseas for more than year and do not have too many other connecting factors then you are likely to be considered non-UK resident from the day after you leave the UK until the day before you return. This means HMRC will not tax your income from employment. In this scenario you will be paying tax on your salary overseas, and making social security contributions or similar in that country.
This may not mean that you do not have to pay any UK tax whilst you are abroad. If you have any UK source income (basically income derived from UK assets), then you will still be liable to pay UK tax.
As a non-resident person you will be chargeable to UK tax on :
- 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
This list is not necessarily exhaustive but represents common income sources.
Whilst you are working abroad you may let your UK property – UK income tax will be payable on the rental income. You are likely to retain UK bank accounts – UK income tax will be payable on any interest.
You will be able to retain any UK ISAs which you already hold, and they will retain their tax exempt status. However you will be unable to make any investments in to an ISA whilst you are non-resident.
As a British citizen (or citizen of another EEA country) you will be entitled to a tax free personal allowance. As a non-resident you are required to claim the allowance. A claim should be made for any year in which you have UK income on a form R43. Any income in excess of the personal allowance will be taxed at the usual rates of income tax – basic, higher and/or additional rates.
Telling HMRC that you are leaving the UK
A form P85 should be filed with HMRC to inform them that you are leaving the UK. However those taxpayers who file a UK self assessment tax return should instead file a UK return for the year they leave.
If you file a P85 and are due a tax refund for the year of departure then HMRC will calculate the refund and arrange for the refund to be made once the P85 has been processed.
Am I required to file a UK tax return?
If you are a Non Resident Landlord you will have an obligation to complete a UK return.
In other cases if you are a non-resident with an obligation to complete a UK tax return because you have UK source income, then we would usually recommend that you seek professional advice. Form SA109 is a supplementary page to the main self-assessment tax return titled “Residence, remittance basis etc.” The correct completion of this form (and understanding of your residence position) is vital in ensuring that the SA100 self-assessment is correctly completed and the correct amount of tax paid.
Unfortunately it is not currently possible to submit this online using the free HMRC software.
C) I am paying taxes abroad as I originate from another country and have moved to live and work in the UK
In many ways this is the converse to scenario 1 and the issues and considerations will be similar.
You will need to consider the tax position both in the UK and your country of origin.
You will need to consider your residence and domicile for tax purposes.
Is there a DTA between the UK and your country of origin. If so, this can be useful in determining your residence status and which country has taxing rights over certain types of income and how double taxation is prevented.
Depending upon your situation you may need to make a will both in your country of origin and the UK.
Enterprise Tax Consultants can help you with paying taxes abroad
If you are unsure as to your tax position or obligations as a UK expat (or indeed inpat) we can assist. The services we offer include:
- Advice in relation to your residence position for UK tax purposes
- Advice on how to apply any relevant UK double taxation agreements
- Advice in relation to your UK income, capital gains and inheritance tax exposure
- Advice and assistance in relation to the disposal of UK residential properties and Non-Resident Capital Gains Tax.
- Advice in relation to tax efficient structuring of your affairs when leaving the UK and when returning to the UK
- Advice in relation to the Non Resident Landlords Scheme
Contact us for a no-obligation initial conversation with an experienced tax adviser.