As a UK expat living abroad, it isn’t always easy to understand which taxes apply to you and your income. New expats in particular may struggle to establish where their tax obligations lie under UK law, as well as any tax responsibilities they may hold in their new country of residence. Sadly, when it comes to tax law it is not as simple as just swapping your tax payments from one country to another. In fact, if you are living or working across more than one country then your tax status may be particularly complex.
To help you get a better understanding of how taxes for expats work, we have taken a closer look at some of the rules and regulations that encompass UK tax law. We hope we can shed a little light on how the rules may apply to your situation, so you can go on to seek expert expat tax advice with confidence.
How does residential status work?
Residential status is a legal issue that can have a significant impact on your tax status. For example, if you are still considered a UK resident but you are working abroad, you could be liable to pay UK income tax and capital gains tax — as well as inheritance tax — on your earnings and assets. However, this can change if you are no longer considered a resident of the UK.
Residence status is established using the Statutory Residence Test, which aims to distinguish which of three different types of taxpayer you are, including “arrivers”, “leavers” and expats who work away from Britain full time. The three tests that are used to establish this status include:
Automatic overseas test: You are considered a non-resident in the UK if you meet the following conditions:
- You were not a UK resident for the previous three tax years, and are in the country for fewer than 46 days in the current year.
- You were resident in one or more of the previous three years, and present for fewer than 16 days in the current year.
- You work overseas full time, with fewer than 30 days spent working in the UK.
2) Automatic residence test: You are considered a British resident if you meet the following conditions:
- You spent more than 183 days in the UK in the current tax year.
- • Your main home is in Britain.
- • You work full time in the UK for at least 365 days without a break.
3) Sufficient ties test: If the previous tests don’t determine your residential status, your ties to the country can be used as an indicator. This test considers:
- Family ties in the UK
- Accommodation accessible for at least 91 days
- More than 40 days spent working in the UK
- 90 days or more spent in the UK across the previous two tax years
- More days spent in the UK than in any other country.
While your tax liabilities will alter based on the way you respond to these tests, general UK law states that British expats who are resident overseas will only be charged tax in Britain on any income or assets that are UK based. However, some countries have a double tax treaty in place with Britain, which restricts the amount of tax you have to pay to the UK. Although double tax treaty law varies from country to country, most allow taxes for expats are capped based on the tax rules across the UK and an expat’s new home country, so tax is never paid twice.
What does domicile status mean?
When it comes to inheritance tax, things can get a little more complicated still. Moving away from the UK and even losing UK resident status is not enough to remove your inheritance tax liabilities. In fact, the law states that you must no longer be considered a UK domicile before you are able to avoid paying inheritance taxes for expats in the UK. The process of applying to lose your domicile status is complex, but it does involve proving to HMRC that you do not have close ties to the UK. There are three different ways of establishing that you have domicile status:
- Domicile of origin: a child takes their father’s domicile of origin (or of a single mother) at birth, and this is not necessarily the country where you are born.
- Domicile of dependence: applies to women who were married before 1974, children and mentally incapable persons.
- Domicile of choice: can be acquired by moving permanently to another country.
If you fall into any of these categories then you will struggle to change your status, but this does not mean that it is impossible. If you are able to contact HMRC with proof that you have cut ties with the UK then your evidence may be taken into account and your status relinquished. It is also important to remember that cutting ties with the UK doesn’t mean no inheritance tax at all; many countries have their own laws in place surrounding inheritance tax, so you will have to pay tax based on the rules in your new country of residence.
What about capital gains tax?
In general, relevant taxes for expats do not include capital gains tax, but there are exceptions to this rule. For example, non-residents who trade in Britain via an agency can be charged capital gains tax for any assets that are used for trading via that agency. In addition, any capital gains that are deemed by HMRC to be income will become taxable, even if you are no longer a resident of the UK. Furthermore, any non-resident who has not been classed as a UK resident for five years or less will be assessed upon returning to the UK, and this assessment will establish capital gains tax liability based on any assets you held when you left Britain.
Working abroad temporarily?
If you are planning to work overseas temporarily, then your tax liabilities could change once more. In general, your tax status is based on your residence or domicile status, but if you believe at any point that you are likely to have your stay extended then this could change how you are seen in the eyes of HMRC.
For example, HMRC’s expat tax advice states that those working abroad temporarily can register to pay their taxes via self assessment. However, this method of making tax payments is only available for UK tax residents. By overstaying in another country, you could be forced to switch your tax payments to a paper form and may even need to seek independent expat tax advice to confirm whether or not you are still liable for the same level of tax.
Navigating the tax minefield
It is not always easy to establish how much tax you owe as an expat as each individual will have their status established based on their own individual circumstances. We hope our guide has helped you understand more about what tax you may owe as an expert, but it is important to remember that we only offer general information rather than personalised advice. Thankfully, an independent financial advisor will be able to help you by considering all factors of your life that could influence how much tax you pay, and then helping you determine the tax liabilities that apply.