The tax considerations of living abroad

It is often all too easy to get carried away when planning a move abroad, forgetting the financial implications to be considered when relocating as UK national.

Offshore planning

While the thought of going abroad to work or retire may be exciting, the months leading up to departure are likely to be highly stressful. Finding somewhere to live in your chosen country, arranging the necessary visas and booking a suitable removal firm are just some of the issues you are likely to have to deal with.

Regardless of the rush, it is vital that you pay adequate attention to financial planning. In particular, the tax consequences of leaving the UK are quite complex, so it’s essential that you seek professional advice. Your residence status will be the main factor in determining your continuing liability to UK tax. Previously, it could be quite difficult to become non-UK resident for tax purposes, but since 6 April 2013 a set of statutory tests have made it much easier to establish.

Aerial view of Mediterranean marina town

Your residence status must be determined separately for each tax year, so even if you are treated as remaining resident in the UK after going abroad, it may be possible to change your status in subsequent years.

There are three aspects to the statutory residence tests; the starting point is whether you are automatically non-resident or automatically resident. If you are deemed to be neither, then your residence status will be determined by how closely you are still linked to the UK.

You will automatically be treated as non-resident in the UK when you stay in the UK for fewer than 16 days during the tax year or, when you leave the UK to work full-time abroad. In this case, you are allowed to visit the UK for up to 90 days each year, of which 30 can be days when you are working, however, you will still be treated as resident in the UK when you stay for 183 days or more during the tax year, or when your only home is in the UK. Very broadly speaking, you must have that home for a period of more than 90 days, and must live in it for at least 30 days during the tax year.

Superyacht marina between the hills of a Mediterranean location

If neither of the automatic tests apply, then your residence status for a particular tax year will be determined by what is known as ‘the Sufficient UK Ties Test’, in which, the more days you spend in the UK during a tax year, the less number of UK ties you are permitted before being treated as resident. You will have to tell HM Revenue & Customs (HMRC) about your residence status, normally disclosed as part of your tax return submission.

With careful planning, you can become non-resident when you move abroad should you so wish. If you have UK ties, such as a house in the UK, then it is easy to establish how many days you can safely stay in the UK each tax year. If you need to be in the UK for a set number of days each year, then you will know if you have to reduce your number of UK ties - maybe selling your UK house or reducing the amount of time you work here.

It's worth remembering that, if you remain UK resident despite going abroad, you’ll pay income tax on all your income whether it arises in the UK or overseas, and so if you’re employed, you will therefore pay income tax regardless of where your duties are carried out.

Mediterranean rocky outcrop with luxury yachts at anchor

The general rule is, if you become non-resident then you’ll pay tax on your UK income, but will not normally be liable to UK tax on your overseas income, meaning that if you’re employed, you will not pay UK tax in respect of remuneration for duties performed abroad. Earnings for duties performed in the UK will remain taxable unless they’re only incidental to the overseas duties.

However, it’s possible that some of your income could be taxable in the UK and also taxable in the country that you have moved to, with the worst case scenario being that you will effectively end up paying just the higher of the UK tax or the tax charged abroad. It is therefore important that you take local advice about the tax rules that will apply in the country where you will be living upon moving abroad.

If you are UK resident, then you will pay UK Capital Gains Tax (CGT) on gains from disposing of your assets wherever they are situated in the world. The tax treatment does not change if you’re only temporarily non-resident – essentially where you are away for a period of five years or less - but be warned that tax may be payable in your new country of residence, and this could be higher than the CGT that would have been paid in the UK.

Birds eye view of a coastal Mediterranean town and port

Unlike income tax and CGT, the determining factor with Inheritance Tax (IHT) is your domicile; the country that is regarded as your natural or permanent home. You can only have one domicile, which is normally, but not always, the country of your birth. You can change your domicile, but usually with some difficulty, and even if you do manage to change your UK domicile, for IHT purposes you will be deemed to still be UK domiciled for a further three years.

Even if you’re moving abroad permanently, until you are well settled in your new homeland, you should consider keeping a UK bank account open and keep at least one credit card, because in some countries it can be difficult to borrow before you have an established credit history there. It’s also worth considering opening a local currency bank account in the country that you move to, and opening an offshore bank account in a well regulated offshore centre. The latter can provide tax breaks by paying interest gross, and may offer 24-hour internet banking, multi-currency facilities and mortgages.

Becoming an expatriate will provide you with access to a range of tax-efficient financial planning opportunities, such as offshore pensions and investment bonds, but these should be considered in conjunction with professional advice to ensure that you pay due attention to currency and taxation issues, and achieve an appropriate level of risk, diversification and flexibility.

Moving abroad is a particularly complicated area where specialist help is essential. The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

For more information, visit Reedman Wealth Management.