Having touched upon the fact that you have to deregister your taxable presence in the UK before establishing your tax obligations in your new country of residence in chapter four, in this chapter we will expand on the theme of expatriate tax. The point at which you leave one country of residence and become tax resident in another country (which can be a period of up to one year) is an extremely beneficial time for you to structure your finances correctly.
Please note, before we go any further, at Expat Money Guide we have produced free tax factsheets for our readers, compiled with the help of reliable industry experts. If you wish to benefit from these factsheets all you have to do is contact us via email: [email protected], tell us where you’re resident, and we will send you the relevant sheet. The current list of countries for which we have dedicated factsheets available is expanding rapidly as we work on the collation of all pertinent material. What’s more, the sheets we have are constantly updated to ensure that they remain relevant. The list of countries already completed includes but is not limited to: –
Bahrain, Belgium, Cyprus, France, Germany, Greece, Hong Kong, Ireland, Italy, Portugal, Saudi Arabia, Spain, Sweden, The Netherlands, Turkey, Dubai & The UAE.
If you do not see your nation of residence in the above list, please contact us anyway because the chances are we have the information you need already available.
As mentioned, you need to make HM Revenue and Customs in the UK aware of your decision to become an expatriate, and limit your future liability to tax in Britain.
Your Residency Status
If you expatriate to live abroad for less than one full tax year you will still be considered by HMRC to be resident in the UK, and as a result you will still be liable for UK taxation. Following a ruling in 2006 in the case of Robert Gaines-Cooper v HMRC, many have begun wondering whether the taxman in the UK has changed the rules about when a Briton becomes non-resident for tax purposes. Form P85 is key.
But as the Revenue has subsequently pointed out, none of the rules have changed, but people need to understand how the rules are applied and interpreted before they assume that they are non-resident for tax purposes in the UK. The very first point to clarify is that the Revenue clearly states that the main factors taken into account when determining residence, ordinary residence or non-residence are defined, however a decision relating to the individual will depend on their particular case and situation. What this means is that we will show you the rules that the Revenue applies, but if you exploit these rules, skirt the guidelines or are in any doubt about your status, you should seek qualified legal advice about your status before you assume you are resident or non-resident. You should take nothing for granted when it comes to your tax status.
To be classed as resident in the UK and therefore liable to income taxation in the UK for example, if you are normally physically present in the UK at some point in a tax year then you are likely to be considered resident. If you are in the UK for more than 183 days in one tax year then you are always going to be considered resident, with no exceptions. These 183 days needn’t run consecutively. In terms of what counts as a day spent in the UK…before April 6th 2008 days of arrival and departure were not generally counted. From April 6th 2008, if you are in the UK at the end of a day that day will count as a day you have spent in the UK for residence purposes. That is unless it is a day spent in transit in an airport for example, where you arrive on one day and depart on the next. If you believe a day should be classed as a day in transit you must not do anything such as visit a property, attend a business meeting or engage in an activity such as that which is not related to your passage through the UK.
There is another class of residency that can affect your taxable status in the UK, and that is if you are considered ‘ordinarily resident’ – you may enter this status if, for example, you are usually classed as resident but you go on a long holiday and are in the UK for fewer than 183 days in the tax year in which you take your long holiday. Or, if you’re usually resident abroad but return to the UK for 183 days or more in one tax year you would become resident but not ordinarily resident.
As you make the transition abroad and become an expatriate, it may be the case that you are still classed as resident or ordinary resident in the UK whilst having become resident in your new nation for tax purposes. This is why the UK has double taxation agreements in place with many other nations. This prevents you being taxed twice. Additionally, for some people their tax liability will be split if for example, they arrive in or leave the UK at some point within a tax year. This split year treatment is particularly important for working expatriates and it applies in the following situations: –
- You have been not ordinarily resident in the UK and you come to live in Britain permanently or to stay for at least two years. You are then taxed as a resident from the date of your arrival.
- You have been resident in the UK and you leave to live abroad permanently or for a period of at least three years, and on your departure are not ordinarily resident in the UK. You are taxed as a resident only up to and including the date of your departure.
- You have been resident in the UK and you leave to take up full-time employment abroad, and you meet certain conditions. You are taxed as a resident only up to and including the date of your departure (and from the date when you return to the UK).
If you’re going to be living and working abroad and you have a full-time contract of employment then you may be treated as not resident and not ordinary resident from your point of departure, but only if you fulfil all of the following criteria: –
- Your absence from the UK as well as your employment contract last for at least a full tax year.
- During your period of absence you return to the UK for fewer than 183 days in one tax year, or less than an average of 91 days per tax year over a period of 4 years.
As soon as your contract ends and you return to the UK you will be classed as resident and ordinary resident again. Note: if during your period of residence abroad there is a break in your employment contract, HMRC will review your situation again. If you go from one contract to another you may still be classed as non-resident – but do bear in mind that HMRC can always review your status if you fail to meet or comply with any of their guidelines.
If you’re emigrating but you’re not going into a period of full time employment – perhaps you’re retiring abroad for example – then the rules differ once again. For example, if you are going to live abroad permanently then you must not spend an average of more than 91 days in the UK in a tax year, otherwise you can be classed as resident. It is possible that HMRC will want to see some proof of intention when looking into your case – they will want to see that you intend to live permanently abroad and will assess this over a period of 3 years or more. The evidence you could show might be that you have bought or long-term rented a home abroad to live in, and if you do still have property in the UK for your own use, the reason is consistent with your stated aim of living abroad for three years or more.
If HMRC accept that you have indeed left the UK permanently or for at least three years, you will be treated as not resident and not ordinarily resident retrospectively from the day after the date of your departure date. As long as your absence from the UK has covered at least one whole tax year, and any visits you have made to the UK since leaving have totalled less than 183 days in any tax year, and have averaged less than 91 days a tax year over an average of 4 years. If you remain an expatriate for five or more tax years, your non-resident tax status is extended to remove your liability to UK based capital gains tax as well.
Your Country of Domicile
There is no dictionary definition of ‘domicile’ when it comes to ´HM Revenue and Customs’ consideration of it in relation to your taxable status. However, the simplest definition of your country of domicile is where you are grounded and rooted. It is likely to be the nation in which your father was born and/or where you were brought up and schooled, and it is of importance when it comes to estate planning and inheritance tax. No matter what people may tell you, it is not easy to change your domicility, and it can certainly take at least seven years.
Whilst it is really relatively easy to change your country of residence with the help of time and the P85 form, changing your country of domicile is very difficult indeed. Cynics will tell you that HMRC are willing to let go of you and your income and capital gains tax liabilities in the UK, but they are unwilling to lose out on what can be a considerable sum of money upon your death if they determine your estate is liable for inheritance taxation.
Upon death, if you are deemed to have been domiciled in the UK, your entire worldwide estate becomes potentially eligible for UK IHT.
To change your country of domicile you have to sever all ties with the UK. This is not simply a case of closing bank accounts and disposing of tangible assets, again HMRC will consider your intentions at your time of death, any time you have recently spent in the UK, and the terms of your will – particularly relating to where you wish to be buried for example.
Understanding and Changing Your Status
There may be reasons for you to change your domicile status and there are certainly benefits to be derived from you changing your residency status. However, to do either you have to follow certain steps and procedures and HMRC does not make it particularly easy to do so. Ultimately it makes absolute sense to employ the services of an international independent financial adviser to assist you. We are more than happy to put you in direct contact with the right adviser or advisers to help you – no matter what your personal situation.