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FAQs – Tax/Estate planning

HomeFAQs – Tax/Estate planning

Below you will find the most popular questions asked by my clients about Tax/Estate Planning. Simply click on the question which applies to you and you will be taken directly to the answer.

1. What are my tax obligations as a British expatriate living abroad?

2. How do I determine if I am still a UK tax resident?

3. What is the difference between residence and domicile?

4. What are Temporary Non-Residence rules?

5. Is my estate still liable for UK Inheritance Tax when I live abroad?

6. Is my Pension Commencement Lump Sum tax-free if I live overseas?

7. Do I need to declare my UK pension income in the country that I am living in?

8. How does UK IHT work when a spouse is non-domiciled?

9. What are the tax implications if I own property in the UK but live abroad?

Tax/Estate planning

1. What are my tax obligations as a British expatriate living abroad?

As a Brit living overseas, your tax obligations can vary depending on your specific circumstances, such as your residency status, the country you reside in, and the nature of your income. 

Here are some key points to consider:

UK Tax Obligations

  1. Residency Status

    • Non-Resident: If you are classified as non-resident for tax purposes, you are generally only taxed on your UK income, not your worldwide income. The Statutory Residence Test (SRT) helps determine your residency status.
    • Resident: If you are considered a UK resident, you are liable to pay UK tax on your worldwide income, although you may be able to claim relief or exemptions under double taxation agreements (DTAs).

  2. Capital Gains Tax

    • Non-residents are not typically liable for UK capital gains tax (CGT) on the sale of assets outside the UK but may be liable for CGT on UK property. You should be careful not to fall foul of Temporary Non-Residence rules.
    • UK residents must pay CGT on worldwide assets.
  3. Pension Income

How is UK residency determined?

Tax Obligations in Your Country of Residence

  1. Local Taxes
    • As a resident of another country, you will typically be subject to local tax laws, which may include income tax, social security contributions, wealth taxes, and others.
    • Ensure you understand the tax residency rules of your host country to avoid double taxation.
  2. Double Taxation Agreements (DTAs)
    • The UK has DTAs with many countries to prevent double taxation. These agreements determine which country has the taxing rights and provide mechanisms for tax relief.
    • You may be able to claim relief or exemption on certain types of income.

Reporting and Compliance

  1. Self-Assessment Tax Returns
    • If you have UK income, you may need to file a UK self-assessment tax return, even if you are a non-resident.
    • Ensure all your income, both UK and foreign (if applicable), is reported accurately.
  2. Foreign Asset Reporting
    • Some countries require you to report foreign assets and income. Be aware of these obligations to stay compliant with local laws.
  3. Keeping Records
    • Maintain comprehensive records of all income, expenses, and taxes paid, both in the UK and abroad. This will help in claiming tax reliefs and avoiding penalties.

Get in touch

If you want to get a handle on your finances, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

2. How do I determine if I am still a UK tax resident?

Determining your UK tax residency status involves using the Statutory Residence Test (SRT). 

The SRT is a set of rules established by HM Revenue and Customs (HMRC) to help individuals determine their tax residency status. 

Here’s a detailed guide on how to use the SRT to determine if you are still a UK tax resident.

Statutory Residence Test (SRT)

The SRT comprises three parts:

  1. Automatic Overseas Tests
  2. Automatic UK Tests
  3. Sufficient Ties Test

1. Automatic Overseas Tests

You are automatically considered non-resident for the tax year if you meet any of the following conditions:

  • You were non-resident in all of the previous three tax years and spend fewer than 46 days in the UK in the current tax year.
  • You were resident in one or more of the previous three tax years and spend fewer than 16 days in the UK in the current tax year.
  • You work full-time overseas (averaging at least 35 hours per week) during the tax year and spend fewer than 91 days in the UK, of which no more than 30 days are spent working.

2. Automatic UK Tests

You are automatically considered UK resident for the tax year if you meet any of the following conditions:

  • You spend 183 days or more in the UK in the tax year.
  • You have a home in the UK for at least 91 consecutive days, some of which fall within the tax year, and you are present there for at least 30 days in the tax year. You must not have an overseas home during this period where you spend more than 30 days in the tax year.
  • You work full-time in the UK for any period of 365 days, with no significant break from UK work (a significant break is 31 days or more without working more than 3 hours a day).

3. Sufficient Ties Test

If neither the Automatic Overseas Tests nor the Automatic UK Tests determine your residency, you must consider the Sufficient Ties Test. This test examines your connections or ties to the UK and the number of days you spend in the UK.

The ties include

  • Family Tie: You have a spouse or minor children who are UK residents.
  • Accommodation Tie: You have accessible accommodation in the UK where you can live for at least 91 days, and you spend at least one night there.
  • Work Tie: You work in the UK for at least 40 days in a tax year (working more than 3 hours a day).
  • 90-Day Tie: You spent more than 90 days in the UK in either of the previous two tax years.
  • Country Tie (only if you were UK resident in one or more of the previous three tax years): The UK is the country where you spend the most time in the tax year.

Number of days spent in the UK required for residency based on ties

  • If you were UK resident in one or more of the previous three tax years:
    • 4 or more ties: 16-45 days
    • 3 ties: 46-90 days
    • 2 ties: 91-120 days
    • 1 tie: 121-182 days
  • If you were not UK resident in any of the previous three tax years:
    • 4 or more ties: 46-90 days
    • 3 ties: 91-120 days
    • 2 ties: 121-182 days
    • 1 tie: More than 182 days.

Summary

To determine if you are still a UK tax resident:

  1. Apply the Automatic Overseas Tests: If you meet any of these conditions, you are non-resident.
  2. Apply the Automatic UK Tests: If you meet any of these conditions, you are resident.
  3. If neither applies, use the Sufficient Ties Test: Determine the number of days you spent in the UK and the number of ties you have to ascertain your residency status.

Seeking Professional Advice

Given the complexity of the SRT, it’s often beneficial to consult with a tax adviser who can provide personalised advice based on your specific circumstances.

Get in touch

If you want to get a handle on your finances, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

3. What is the difference between residence and domicile?

Find out the difference between residence and domicile in this post.

Get in touch

If you want to get a handle on your finances, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

4. What are Temporary Non-Residence rules?

The Temporary Non-Residence rules are provisions under UK tax law that aim to prevent individuals from avoiding tax by becoming non-resident for a short period and then returning to the UK. 

These rules are particularly relevant for capital gains and certain types of income. 

Here’s an overview of the key aspects of these rules

Key Features of Temporary Non-Residence Rules

1. Definition of Temporary Non-Residence

You are considered temporarily non-resident if you leave the UK and then return within a period of five full tax years.

2. Relevant Income and Gains

The rules primarily apply to certain types of income and capital gains realised while you are temporarily non-resident. 

These include:

  • Capital gains from the disposal of assets.
  • Certain pension payments and benefits.
  • Gains from the sale of shares or securities.

3. Implications

If you are temporarily non-resident, these types of income and gains may still be subject to UK tax when you return, even if they were realised while you were non-resident.

4. Exceptions and Exemptions:

Double Taxation Relief: If you have paid tax on your income or gains in another country during the period of temporary non-residence, you may be able to claim double taxation relief to offset your UK tax liability.

Split-Year Treatment: In some cases, the tax year may be split into a UK part and an overseas part. This can affect how the rules are applied, particularly in the year of departure and return.

Example Scenario:

  1. Departure – You leave the UK on April 5, 2022, becoming non-resident for tax purposes.
  1. Disposal – On May 10, 2023, you sell an investment portfolio while living in Dubai, where any gains are tax free.
  1. Return – You return to the UK on April 6, 2026, within the five-year period.
  1. Tax Implication – The capital gain from the property sale in 2023 will be subject to UK CGT in the 2026/27 tax year, the year you return to the UK.

The Bottom Line

The Temporary Non-Residence rules are designed to ensure that individuals cannot avoid UK tax on certain types of income and gains by becoming non-resident for a short period. 

Understanding these rules is crucial for anyone planning to leave the UK temporarily and return within five years. 

For personalised advice and to ensure compliance, it is advisable to consult with a professional familiar with UK expatriate tax issues.

Get in touch

If you want to get a handle on your finances, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

5. Is my estate still liable for UK Inheritance Tax when I live abroad?

This catches many an expat out.

They assume that just because they have left the UK, their estate is no longer subject to UK IHT rules.

However, in reality, even if you have left the UK for good, there is a good chance that your estate will still be subject to UK Inheritance Tax.

Get in touch

If you are interested in how to best structure your estate as an expat, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

6. Is my Pension Commencement Lump Sum tax-free if I live overseas?

When you take your Pension Commencement Lump Sum, it is tax free in the UK.

This is why it is often referred to as Tax Free Cash.

However, if you take it while you are resident outside the UK, it may be taxed locally.

Some examples of countries where this applies are:

🇨🇦 Canada

🇫🇷 France

🇬🇷 Greece

🇪🇸 Spain

Therefore, if you are planning to retire in one of these countries and want to draw your Pension Commencement Lump Sum, you should probably do so before moving.

Get in touch

If you are planning on retiring outside the UK, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

7. Do I need to declare my UK pension income in the country that I am living in?

Yes, you generally need to declare your UK pension income in the country you are living in.

Key Considerations

  1. Local Tax Laws
    • Each country has its own tax laws regarding the treatment of foreign pension income. You will need to comply with the local regulations and report your UK pension income in your country of residence.
  2. Double Taxation Agreements (DTAs)
    • The UK has Double Taxation Agreements with many countries to avoid the same income being taxed twice. These agreements typically specify which country has the taxing rights over different types of income, including pensions.
    • DTAs can provide relief from double taxation, meaning you might be able to claim a credit in your country of residence for the tax paid in the UK or vice versa.
  3. No Tax (NT Code)
  4. Pension Commencement Lump Sum
    • When you take your Pension Commencement Lump Sum at retirement, it is tax free in the UK. However, if you take it while you are resident outside the UK, it may be taxed locally.
  5. Types of Pensions
    • State Pension: The UK State Pension may be subject to tax in your country of residence, depending on local laws and any relevant DTA.
    • Private and Occupational Pensions: Similar to the state pension, these may also need to be declared and taxed according to the rules of your country of residence.
  6. Tax Residency Status
    • Your tax residency status in your country of residence will impact whether you need to declare your UK pension income. Generally, if you are considered a tax resident, you will need to report your worldwide income, including pensions.

How is UK residency determined?

Example:

If you are a British expatriate living in Spain:

  1. Local Tax Laws
    • Spanish tax residents are required to declare and pay tax on their worldwide income, which includes UK pension income.
  2. Double Taxation Agreement
    • The UK-Spain Double Taxation Agreement provides guidelines on how pensions are taxed. Typically, the country of residence (Spain) has the primary taxing right, but you may be able to claim relief for any UK tax paid on your pension.
  3. Pension Commencement Lump Sum
    • If you draw it while resident there, your Pension Commencement Lump Sum will be taxable in Spain. 
  4.  Professional Advice
    • A tax adviser in Spain can help you understand the specific provisions of the UK-Spain DTA and ensure you are not taxed twice on the same income.
  5. Tax Return
    • When filing your Spanish tax return, include your UK pension income and apply any relevant tax credits or reliefs.

Get in touch

If you are leaving the UK to live or work overseas, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

8. How does UK IHT work when a spouse is non-domiciled?

UK Inheritance Tax (IHT) can become quite complex when one spouse is UK-domiciled and the other is non-domiciled.

Here’s an explanation of how it works and what you need to consider:

General Rules for Inheritance Tax (IHT) in the UK

  1. IHT Threshold:
    • IHT is charged at 40% on the value of an estate above the nil-rate band, which is currently £325,000 (as of 2024).
  2. Spouse Exemption:
    • Transfers between UK-domiciled spouses are exempt from IHT, meaning no IHT is due on assets passed from one spouse to another.

Specific Rules for Non-Domiciled Spouses

  1. Limited Spouse Exemption:
    • When the recipient spouse is non-domiciled, the spousal exemption is limited to £325,000 (in addition to the standard nil-rate band). 
    • This means a UK-domiciled individual can transfer up to £650,000 to their non-domiciled spouse free of IHT (£325,000 standard nil-rate band + £325,000 spouse exemption).
    • Transfers above this combined £650,000 threshold could be subject to IHT at 40%.
  2. Election to be Treated as UK-Domiciled:
    • A non-domiciled spouse can elect to be treated as UK-domiciled for IHT purposes. This can provide the full spouse exemption for transfers but comes with significant implications.
    • By making this election, the non-domiciled spouse will be subject to UK IHT on their worldwide assets, not just UK assets.
    • This election is irrevocable while the electing spouse is resident in the UK and can only be revoked after three consecutive tax years of non-residence.

Practical Implications

  1. Estate Planning: Effective estate planning is crucial to minimise IHT liabilities. Couples should consider lifetime gifts, trusts, and other tax planning strategies to manage their estates.
  2. Professional Advice: Given the complexity of IHT rules and the significant financial implications, it is essential to seek professional advice from someone who is experienced in dealing with cross-border estates and non-domiciled issues.

Example Scenario

  • UK-Domiciled Spouse: John
  • Non-Domiciled Spouse: Maria
  • Estate Value: £1,000,000
  1. Without Election:
    • John can transfer £325,000 (nil-rate band) + £325,000 (spouse exemption) = £650,000 to Maria free of IHT.
    • The remaining £350,000 would potentially be subject to 40% IHT.
    • IHT Liability: £350,000 * 40% = £140,000
  2. With Election:
    • If Maria elects to be treated as UK-domiciled, John can transfer the entire £1,000,000 estate to her free of IHT.
    • However, Maria’s worldwide assets would then be subject to UK IHT upon her death, which could result in higher IHT liabilities in the future.

Get in touch

If you are curious about the ins and outs of cross-border estate planning, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

9. What are the tax implications if I own property in the UK but live abroad?

Owning property in the UK while living abroad has several tax implications. 

1. Income Tax on Rental Income

Non-Resident Landlord Scheme (NRLS)

  • Registration: If you rent out your UK property, you must register with HM Revenue & Customs (HMRC) under the Non-Resident Landlord Scheme (NRLS).
  • Withholding Tax: Letting agents or tenants may need to deduct basic rate tax (20%) from your rental income before paying it to you.
  • Annual Tax Return: You must complete a UK self-assessment tax return to report your rental income and expenses, and calculate any additional tax due or claim a refund if too much tax was withheld.

Deductible Expenses

  • You can deduct expenses related to managing and maintaining the property, such as repairs, letting agent fees, insurance, and mortgage interest.

2. Capital Gains Tax (CGT)

Disposals by Non-Residents

  • Reporting Requirement: Non-residents must report the sale or disposal of UK property to HMRC within 60 days of completion.
  • Payment of CGT: Any CGT due must be paid within the same 60-day period.
  • Rate of CGT: The rate is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
  • Principal Private Residence Relief (PPR): If the property was your main residence at any time, you might be eligible for partial relief on the gain.
  • Pre 6th April 2015 Purchase: If the property was purchased prior to 6th April 2015, and you have been living overseas since prior to that date, you should be able to rebase your purchase price to the value at that date.

3. Inheritance Tax (IHT)

UK Situs Property

  • UK property is subject to IHT regardless of your domicile status.
  • If the property is being passed to a direct descendent, the Residence Nil-Rate Band (RNRB) of £175,000 can be used in addition to the £325,000 personal allowance.

Non-UK Situs Property

  • Non-UK property is also potentially subject to IHT.
  • The RNRB of £175,000 can also be used when an overseas property is being passed to a direct descendent.

4. Stamp Duty Land Tax (SDLT)

  • Additional Property Surcharge: If you purchase additional residential property in the UK, you will be subject to higher rates of SDLT. An additional 3% surcharge applies to the standard rates.
  • Non-Resident Surcharge: From 1 April 2021, an additional 2% SDLT surcharge applies to non-residents purchasing residential property in England and Northern Ireland.

5. Council Tax

  • You are responsible for paying council tax on your UK property, even if you live abroad. Rates vary by local authority.

6. Double Taxation Relief

  • Double Taxation Agreements (DTAs): The UK has DTAs with many countries to avoid double taxation on the same income. You may be able to claim relief in your country of residence for UK taxes paid.
  • Foreign Tax Credit: If you pay tax on your UK rental income or capital gains in another country, you might be eligible for a credit against your UK tax liability, or vice versa.

Example Scenario

Non-Resident Landlord

  • Rental Income: £20,000 per year
  • Allowable Expenses: £5,000
  • Taxable Income: £15,000
  • Basic Rate Tax (20%): £3,000 (if no additional taxes are due)

Sale of Property:

  • Purchase Date: 1st January 2016
  • Purchase Price: £200,000
  • Sale Price: £300,000
  • Gain: £100,000
  • Annual Exemption (2023/24): £12,300
  • Taxable Gain: £87,700
  • CGT (28%): £24,556

Steps to Take:

  1. Register for NRLS: Ensure you are registered under the NRLS to manage your rental income effectively.
  2. Keep Records: Maintain detailed records of rental income, expenses, and property-related documents.
  3. File Tax Returns: Submit your UK self-assessment tax return annually to report rental income and any property disposals.
  4. Report Sales: Report the sale of UK property to HMRC within the required timeframe and pay any CGT due.
  5. Seek Professional Advice: Consider consulting with a tax adviser to navigate the complexities of UK tax laws, especially regarding double taxation relief and potential tax planning strategies.

Get in touch

If you are curious about the ins and outs of cross-border financial planning, please get in touch for a free no-obligation 20-minute call.

During the call, you will get:

  • Answers to your basic questions.
  • Informal guidance on the options available to you.
  • An overview of any services needed to get your expat financial affairs in order.

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by AES to be reliable and AES has reasonable grounds to believe that all factual information herein is true as at the date of issue. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. AES accepts no responsibility for loss arising from the use of the information contained herein.

 

‘AES’ refers to the AES Group’s separate but affiliated entities generally, rather than to one particular entity. These entities are AES Middle East Insurance Broker LLC registered with the UAE Ministry of Economy, United Arab Emirates, Licence no. 571368, and Commercial Registration no. 75162 and regulated by the UAE Central Bank license no. 189; AES Financial Services Limited, incorporated and registered in England and Wales with company number 06063185, authorised and regulated by the UK Financial Conduct Authority FRN: 464494; AES Financial Services (DIFC) Ltd, registered in the Dubai Financial Centre (DIFC) as a foreign company, license no.2128, and regulated by the Dubai Financial Services Authority (DFSA) Reference No F003476; AES International Limited, a private company incorporated and registered in the British Virgin Islands with company number 1839872; AES International Global Limited, a private company incorporated and registered in the British Virgin Islands with company number 1887885. Please visit our authorisations page for further information on regulation, redress and accessibility.

 

If you are outside the UK and we advise you or carry out other business, nearly all the rules, regulations and arrangements made under the UK regulatory regime (including the rules made by the FCA and the dispute resolution process provided by the UK Financial Ombudsman Service) will not apply to most aspects of the service you receive, such advice or business being provided from outside the UK. You should therefore clearly understand such rights and protection as are afforded in the jurisdiction where you receive advice. Local law, regulation and redress processes will apply in almost all cases, and will be different from that of the UK.

RISKS

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investment, when redeemed, may be worth more or less than the capital invested. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

 

Ross Naylor © 2024. All rights reserved.

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