We all work hard for our money and are used to living in a low tax environment. But what happens when you return back home to the UK and become a tax resident? If not properly prepared, British expats could unfortunately be in for a nasty surprise.
Tax rules are highly technical, and can sometimes be counterintuitive or include exceptions to the more general rules. What taxes you have to pay depend not only on your UK tax residency, but on the specific taxes involved, your domicile, the specific years you were resident and nonresident, double taxation agreements and other factors. Consulting a specialist financial advisor could save you a lot of headache further on. We’ve put together a list of eight common issues to watch out for, and would be happy to discuss your specific situation personally.
1. File a tax return with HRMC
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 UK tax residency status. 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 who receives UK Pension income whether or not they live in the UK, and with no exemption for foreign nationals.
3. A Double Taxation Agreement (DTA) could save you thousands of 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 from 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.
4. 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 advisor.
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…).
5. Despite being non-resident you may still have to pay Capital Gains Tax (CGT)
In general, non-residents are not subject to UK Capital Gains Tax (CGT) 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 2015, 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. Also, gains realised on assets acquired during the absence are not caught, and the charge is subject to any applicable treaty.
6. UK Inheritance tax could still apply to your estate
Even if you are an expat living outside the UK, you will still be subject to UK inheritance tax 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 at 40%. 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 even though you may be classed as non–resident in the UK for tax purposes, your domicile is unlikely to have changed and you will likely 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.
7. Pay tax for your foreign earnings
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.
8. 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 are a UK expat and need help with any tax issues, speak to a qualified and licensed financial advisor.