Tax is a thorny issue for expats and what they pay depends on the country deemed their main residence.
The main point to remember is that tax is not a one-size fits all option for expats.
Every country has a different approach to taxing income and gains.
Expats with cash, investments and property in more than one country should have a local adviser in each one to make sure they are keeping up with the latest changes. Most tax advisers are qualified to give advice in one country and do not have the time or resources to give an expert opinion on taxation in more than one.
The two important aspects of tax are residence and domicile. Bother are explained in full below.
Residence affects where and how an expat pays income tax and capital gains tax.
Domicile comes into play over estate planning – the laws that dictate how someone’s wealth is divided when they die.
Although an expat can change their residence, domicile is determined by rules relating to their nationality and place of birth.
Most countries allow taxpayers to arrange their financial affairs so they pay the least tax after applying reliefs and allowances.
This type of tax avoidance is not illegal and the right of taxpayers the world over.
The proviso is that taxpayers conduct their finances in an open and honest manner.
Tax evasion is deliberately not telling the tax authority about income or gains.
To do so is a crime and generally involves secrecy and maintain offshore bank accounts and investments in the hope they cannot be traced.
To stamp out tax evasion and to ensure taxpayers declare any hidden money and investments, most countries in the world have signed up to two networks:
The trigger for US residents is $50,000 of cash or assets, while for US expats, reporting starts at the level of $200,000. The US also passes information back to reporting countries about the financial holdings of their taxpayers.
Around 110 countries have signed up to FATCA, and the IRS says $10 billion in tax has been recovered from 100,000 US taxpayers by the end of 2016.
Common Reporting Standard (CRS) – CRS is just winding up as an international tax reporting network from 2017. Early adopters include Britain and Spain.
Around 60 countries will swap information on taxpayer cash and investments
For expats should become tax compliant as soon as possible because the likelihood is the tax authority in the country where they live will be tipped off about undeclared income and gains in other countries.
Expats pay income and capital gains tax in the countries where they are resident, unless that country does not levy the tax.
But an expat cannot choose where to be tax resident to benefit from lower tax rates, it’s considered a matter of fact by the courts depending on several factors such as:
On leaving the UK, British expats should file a Form P85 to tell HM Revenue and Customs (HMRC) that they are leaving the country and to finalise any UK tax affairs.
Expat is not a helpful term for tax purposes as it simply means someone who lives in another country. Expats are not tourists, but people who spend longer than a few weeks abroad.
But someone who works for a year or two in a foreign country is an expat but can also stay UK tax resident if they maintain their ties with home and intend to move back at the end of their assignment.
Cases before the British courts have determined expats as UK tax resident for up to 20 years after they moved overseas, leaving them liable to pay huge sums in back taxes, fines and interest.
If tax residence is in doubt, because an expat might maintain a home for visits back to the UK, for example, take professional advice from a tax specialist.
If you are not an expat, you still pay income and capital gains taxes in the UK, but can claim the personal income tax allowance, pension contribution relief and other useful financial boosts from HMRC.
If you are non-resident for UK tax, you will pay taxes in the country where you live.
Double taxation agreements stop expats from paying taxa in the UK and their new home on the same income or gains.
The agreements allow taxpayers to show a certificate of tax paid from one country to the tax authority in the other to prevent double taxation.
For expats or non-residents with buy to lets, houses in multiple occupation (HMOS), commercial lets or holiday lets, HMRC runs the Non-Resident Landlord Scheme (NRLS).
NRLS allows HMRC to collect income tax on property rental profits from landlords who live outside the UK.
Tenants or letting agents must deduct income tax at the basic rate (20%) from rents before passing them to a landlord. To collect the rents gross, the landlord must gain approval from HMRC to join the scheme.
A non-resident landlord is any person whose ‘usual place of abode’ is outside the UK for more than six months at a time.
The usual place of abode is not tax residence, but would cover a landlord pensioner spending more than six months over the winter abroad, for instance.
Property investing expats and non-UK residents must pay capital gains tax on the disposal of any residential letting homes in Britain.
The trigger date is April 6, 2015, when property values were ‘rebased’, so instead of reporting the purchase price plus costs, the starting point for calculating CGT is the property value on that date.
CGT rates are currently paid at 18% or 28% and the non-resident does qualify for the CGT annual exempt amount.
If the property was the seller’s main home at any time, they also qualify for principle residence relief (PRR) and lettings relief, but the claim is subject to a residency test.
The test requires the seller or their partner to have spent 90 nights at the home during a tax year after April 6, 2015.
If they can show the property was a main residence before April 6, 2015, PRR is also claimable for that time.
Domicile is a complicated concept that is determined at birth.
The main factors are where someone’s parents were domiciled. So, if you parents are both British, then your domicile of origin is the UK.
If one was British and one American, then you have a dual domicile – British and US.
If the parents were unmarried, the domicile is typically the mother’s.
Domicile is unlikely to change, even when an expat makes a new home in another country.
Residence determines where someone pays income tax or capital gains tax, except for Americans and Eritreans, who must report their worldwide income and gains to the tax authority in their former country.
Domicile determines where inheritance taxes are paid and how someone’s estate is divided.
Other complications surround domicile for expats. To resolve any issues over inheritance and estate planning, always talk to a suitably qualified professional in each country where you have assets to avoid unforeseen errors that could become costly later.
Inheritance tax is a wealth tax levied on the estate of a dead person and some gifts they made during the seven years before their death.
Countries treat the way they handle dividing the estate of a dead person according to their own laws.
For British expats who now live in Europe or the Middle East, the way tax authorities treat inheritance is vastly different.
The popular expat destinations of France and Spain have laws dating back to the time of Napoleon for dealing with estates, while places like the United Arab Emirates and other Muslim states rely on Sharia’h law.
Dubai has new estate planning laws that allow expats to deposit a British will in the country to put their assets outside the reach of Sharia’h law.
The different rules under each type of law are why expats should make a will in each country they have cash, property or investments to make sure their wishes on disposing of their estate are followed when they die.
It is wrong to assume that other countries will follow British laws or that a will made in the UK will be followed abroad.
Always take will-writing advice from a suitably qualified tax professional as how taxes interact across borders is a highly technical and expert field.
Unspent cash held in pensions falls outside of inheritance tax rules in the UK – and these rules extend to Qualifying Recognised Overseas Pension Scheme (QROPS) as well.
QRPS are special pensions for expats and international workers that allow them to transfer their UK pensions offshore for easy access when they retire.
Although the pension funds are exempt from UK inheritance tax, foreign tax may be due and beneficiaries may pay UK income tax on any money they are left in a pension.
The tax paid on unspent pensions depends on where the beneficiary lives and if the person leaving the pension money died before or after the age of 75.
Everyone has an inheritance tax free limit of £325,000, but this can be extended if you give away certain amounts of money during your lifetime.
These include annual gifts and one-off sums, such as paying up to £5,000 for a wedding.
Couples can double-up on the allowance, making the tax-free amount £650,000 if one partner passes assets to the other on their death.
New rules starting from April 2017, phase in the main residence allowance over three years, which allows someone to pass a main home worth up to £350,000 to children, increasing the tax-free amount to £1 million.
The value of any estate over £650,000 without a main home, or £1 million with the property from 2020, will be taxed at 40%.
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