For British expats moving or living abroad, there are many traps and pitfalls in the UK’s complex tax regime to be aware of.
Based on my experience, these are the top five tax mistakes, assumptions and statements that are made, and how to avoid making them.
Expat Tax Mistake #1: “I am not UK resident, I only spend 90 days there each year”
The Statutory Residence Test has been in place since April 6, 2013, and it has significantly clarified the rules regarding UK residence.
Prior to its implementation, determining your residence status relied on limited laws, HMRC guidance, and case law.
However, the introduction of the Statutory Residence Test aimed to establish a clear legal framework, making it less viable for non-residents to rely solely on spending fewer than 183 days or 91 days on average in the UK to maintain their non-resident status.
Under the Statutory Residence Test, taxpayers are categorised as either automatically resident or non-resident.
In cases where the test results are inconclusive, individuals must consider other connecting factors they have with the UK.
If you are a non-resident who continues to spend time in the UK and maintains close ties here, such as having available accommodation, residing in the UK in the previous three years, having a spouse/civil partner/minor children residing here, or having UK work duties/businesses, it is crucial that you carefully evaluate your UK residence position in light of the Statutory Residence Test.
This will help you ensure compliance with the applicable regulations while making informed decisions.
Expat Tax Mistake #2: ”I will leave the UK for a year and go and live in Dubai to avoid paying UK Capital Gains Tax when I sell my investment portfolio/property/business”
This is a common misconception.
Some individuals believe that a brief period of non-residence in the UK is sufficient to avoid UK Capital Gains Tax (CGT).
Unfortunately, this is not the case.
Gains generated while an individual is temporarily non-resident in the UK are treated as if they were obtained in the year when the person resumes residence in the UK.
To put it simply, if you earn income or gains while residing in the UK but receive or sell them while being a non-UK resident for less than five complete tax years, they will still be subject to UK taxation.
Furthermore, as of 6 April 2015, non-residents who own UK residential property may be liable for UK CGT should they subsequently dispose of that property.
You can read more about UK Temporary Non-Residency rules here.
Expat Tax Mistake #3: ”I have left the UK and am no longer liable for UK Inheritance Tax”
British expats should be aware that they will remain subject to UK Inheritance Tax (IHT) rules unless they have taken deliberate steps to sever all ties with the UK and establish a domicile of choice in another country.
In this context, “domicile” refers to the place of your birth, meaning that if you were born in the UK and your father was British, your domicile will be considered to be the UK.
You can find out more about the distinction between domicile and residence here.
If you do not hold a British domicile, you are often referred to as a “non-dom.”
If you are uncertain about your domicile status or are considering acquiring a domicile of choice outside of the UK, it is crucial to seek expert advice to fully understand your options.
Finally, it is worth noting that if a British expat is married to a non-dom individual, there will be other material estate tax planning issues to consider. [You can read more on this subject here.]
Expat Tax Mistake #4: ”I pay tax on my pension in the UK, I don’t need to declare the income in the country that I am living in.”
Generally, the country where you are considered a tax resident typically holds the primary rights to tax your pension income, including UK State Pension.
The exception is civil service pensions, which usually remain taxable in the UK.
For instance, if you are a tax resident in Poland, it is advisable to report your pension income there and seek the option to receive your pensions without the deduction of UK taxes.
If you happen to reside in a country that has a tax treaty with the UK, it is crucial to take this into account because your country of residence may not grant relief for foreign taxes if the double tax treaty limits the other state’s taxation rights over your income.
Expat Tax Mistake #5: “My Pension Commencement Lump Sum will be tax free in the country that I am living in.”
A Pension Commencement Lump Sum (PCLS) is tax free in the UK.
However, there are many countries (e.g. popular expat destinations like Spain and France) where you will be taxed locally on your PCLS if you draw it while you are resident there.
If possible, it may be worth taking your PCLS before you leave the UK.
