Moving countries creates tax-saving opportunities for expats but seizing them involves more than just shifting a home to a new location.
Personal tax is paid in the country where an expat has their main home.
Just because you call a new country home does not mean all ties are lost with the place where you used to live.
Every country has a different approach to who should pay tax – in many Gulf State nations, such as the United Arab Emirates, no tax is paid, while the USA taxes Americans that live abroad and no longer have any social or financial ties with the country.
Both are extremes and most other countries fall somewhere in between.
But the key to expat tax is proving where you are resident.
The complications come when an expat has property, cash and investments in more than one country.
The aspects to remember are residence and domicile.
Residence determines where an expat pays income and capital gains taxes.
Domicile decides which country’s inheritance and wealth tax laws apply when an expat dies
Although expats can change their country of residence, domicile is generally based on nationality, place of birth and where their fathers are born.
Staying out of trouble – understanding avoidance and evasion
Most governments have a set of rules to apply to work out how much tax to pay on income and capital gains.
Taxpayers can use these rules to reduce the tax they pay, if they obey the principles and do not break them.
This is tax avoidance and is generally legal and considered a right for taxpayers to exploit if they are honest in their dealings and pay the tax they owe.
Tax evasion is a crime and typically involves not fully declaring income or gains in a bid to not pay any tax. Often, secret offshore bank accounts or investments are the hallmark of tax evasion.
Most countries have strict laws to fine or jail tax evaders.
How governments track expat cash
If you are not aware, two international tax networks allow governments to track money and investments held by expats.
The Common Reporting Standard (CRS) is a global group of more than 60 countries that routinely swap financial information.
For example, if you are a British expat in Australia, the tax authorities in both countries will tip the other off about your financial status and crosscheck the data against your tax filings.
Most popular UK expat destinations have signed up to CRS.
The Foreign Account Tax Compliance Act (FATCA) is the US version of the CRS with the USA at the centre.
More than 280,000 foreign financial institutions send the details of accounts controlled by Americans to the Internal Revenue Service in the US. The IRS then checks to see if US taxpayers have declared any income or gains from the holdings on their returns.
The chances are that if you have failed to declare income on a tax return as an expat, the authorities already know, so registering for to pay tax in the right country as soon as you move is important.
Check your tax residence status
This is the first job for any expat moving to a new country
Tax residence is not a choice, but a matter of fact determined by several factors, including:
- Where an expat lives for most of the time
- Where an expat spends their time
- Where an expat banks and pays day to day bills, such as utilities and local authority taxes
- Where their families live
When departing the UK, British expats should file a Form P85 with HM Revenue and Customs (HMRC). The form sets the date of leaving the country.
Then, take the statutory residence test to confirm non-residence.
Although most people who have left the country of their birth to live elsewhere consider they are expats, the term carries no legal weight.
Expats are not tourists on a temporary visit but people who spend. more than a few weeks or months living abroad.
The problem is someone who lives in another country for two years or more might consider they are an expat, but their tax residence can stay in the country they left.
In Britain, the courts have ruled that an ‘expat’ living overseas for 20 years or has remained UK tax resident for all that time as they have kept a home in the UK which they visit regularly.
The result is a huge bill for unpaid tax, fines and interest.
However, if you are a UK tax resident as an expat, you can benefit from pension tax relief, investing in ISAs and other British tax perks – such as the Seed Enterprise Investment Scheme (SEIS).
Tax residence can have such a financial impact for expats that taking advice from a tax professional or lawyer is essential.
Double taxation jeopardy
If you pay tax in two countries, you do not pay tax twice on the same income if they have a double taxation agreement.
The agreement, sometimes called a DTA, lets the tax authority in one country adjust how much an expat pays on income by considering tax already paid in the other country.
To do this, an expat gets a certificate of tax paid from one country and files the paperwork with their tax return in the second country.
Non-resident landlords
Expat landlords renting out homes in the UK can apply to join the Non-Resident Landlord Scheme (NRLS).
If a landlord is not in the scheme, the tenant or letting agent must deduct income tax on rents at the basic rate (20%) before paying the balance to the property owner.
To have the rents paid direct, the landlord must sign up for NRLS.
Confusingly, HMRC gives landlords a different definition of non-residence than other tax law.
For NRLS, a non-resident landlord is someone whose ‘usual place of abode’ is outside the UK for more than six months in a row.
This definition does not affect tax residence for other legislation, but captures a wider number of taxpayers, for instance a retired landlord who spends the winter overseas.
Capital gains for expats
Landlords who live overseas must pay capital gains tax on sale or gifting of property in the UK.
Regardless of how long an expat has owned a property, capital gains tax is calculated from April 6, 2015 or the date acquired, if later.
Tax rates are 18% or 28%, depending on how much income and gains are earned in the year.
Expats cannot reduce the chargeable gain with the annual exempt amount that UK taxpayers can claim.
If the property was the seller’s main home at any time, they can qualify for principle residence relief (PRR) and lettings relief, but the claim is a double-edged sword as passing the test for the extra tax relief is likely to make the expat a UK tax resident.
