A bizarre twist in Britain’s tax laws allows expats to take advantage of onshore tax breaks to boost their savings and investments.
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The rules say someone can be an expat and a UK tax resident at the same time – providing they stick to some complicated residency rules.
Normally, an expat becomes a tax resident in another country when they have spent at least six months living as their main home.
The legal distinction relies on the expat’s intention to live outside the UK or to return in the future.
For expats who are still UK taxpayers, it’s time to think about end-of-financial-year tax planning and investments to soak up any unused reliefs and allowances before the deadline of midnight on April 5.
Are You A UK Tax-Resident Expat?
You can live in another country yet still be a UK resident for tax. That means you can spend most of your time in a zero-tax place like Dubai but still pay taxes in the UK.
If HM Revenue & Customs (HMRC) judges you are a UK resident, you will pay taxes in Britain on payments from a pension, savings, rental income and other earnings.
Generally, no capital gains tax (CGT) is due on the sale of assets, apart from property in Britain.
Expats living overseas can check their UK tax residence status by taking the Statutory Residence Test (SRT).
The SRT has three tests that expats must take in the correct order.
If the first test judges expats as non-residents, most UK tax reliefs and allowances are unavailable to investors and savers. If the first test finds an expat is a non-resident, the other tests do not apply regardless of the results.
Similarly, if the second test applies, the third test is ignored.
However, suppose the test finds expats UK residents. In that case, they need to ask some questions about their finances to ensure they are taking advantage of all their available tax reliefs and allowances.
Get To Grips With The Personal Allowance
Expats have two personal tax allowances: income tax and the annual exempt amount for capital gains tax.
Both are frozen until April 2025 – the personal allowance lets expats earn up to £12,570 before paying income tax, while the CGT allowance excludes the first £12,300 of any disposal.
Tax resident expats should have both allowances.
Investors holding stocks and shares directly – not through a fund or other platform – have a £2,000 a year dividend allowance and a £1,000 savings allowance on top of the income tax and CGT allowances.
Expats need more than £200,000 in an onshore savings account to exhaust the savings allowance.
If you are married, you may move about some of your savings and investments to take advantage of a partner’s unused allowances.
Topping Up Expat Pensions
Expats tax resident in Britain can still claim tax relief on their UK pension contributions at the normal rates – 20 per cent for basic rate tax payers and 40/45 per cent for higher and additional rate taxpayers.
Most retirement savers can set aside up to £40,000 a year or 100 per cent of salary, whichever is the lowest. High earners with incomes of more than £200,000 a year will see their annual pension allowance drop to as low as £4,000 thanks to the tapered annual allowance.
Look back to check if any unused pension allowances are available – you can carry them forward for up to three years.
As a tax resident expat, a self-invested personal pension (SIPP) offers DIY investment and management options for hands-on savers.
Check your lifetime allowance. Expats can save £1.073,100 in total across all their pensions except the State Pension. Breaking the lifetime limit can trigger fines and other penalties.
Pensions and living outside the UK
Maxed Out Pension Alternatives
Investing if pension savings are maxed out, consider investing in the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS).
SEIS is an opportunity to stake money in start-ups. Expats can plough up to £100,000 a year into SEIS without impacting their pension allowances. In addition, SEIS comes with a clutch of tax benefits, like up to 50 per cent income tax refunds on invested cash, no CGT on gains in company values and loss relief if the deal goes wrong.
EIS has similar tax advantages to SEIS but on a grander scale. Tax relief is up to 30 per cent of the value of an investment, but the limit rises to £1.5 million.
Gifting To Loved Ones
The more you give away while alive, the less inheritance tax (IHT) your family and loved ones pay when you pass away.
Understanding how IHT works can leave you with a headache, so it’s a good idea to take professional advice.
However, you can divest your estate of cash and assets while still alive – and as long as you live for seven years after making the gift, your estate pays no IHT on the amount.
Other reliefs that reduce an estate – and the IHT due – included gifting you main home to close relatives and writing life insurance pay-outs in trust.
Find out more about inheritance tax
Can Expats Save Into An ISA?
Expats often ask this question and the answer is the same as for pensions – yes if you are still a UK resident taxpayer but no if your main home is outside the UK and you are tax resident in another country.
ISAs offer up to £20,000 tax-free saving every financial year.
Find out more about investing in an ISA
Paying Tax On The Same Money In Two Countries
Expats who pay tax on the same money in different countries should check out if the UK has a double taxation agreement (DTA) with the country in question.
A DTAS is a legal document detailing the pecking order for tax authorities over expat money to remove the double jeopardy over who gets the payments.
Britain has more than 80 DTAs.
Read more about the UK’s double taxation agreements
UK Tax Breaks For Expats Living Overseas FAQ
Can expats take out QROPS offshore pensions?
Moving a UK pension to an offshore QROPS is an option for expats – but not those who are still UK tax residents.
QROPS offer tax and investment efficiencies that are not available to UK residents.
Around 3,000 expats shifted £416 million from the UK into QROPS in 2020-21. The average transfer was £138,667, says HMRC, which keeps the stats.
What makes an expat a UK resident if they live overseas?
Once the Statutory Residence Test has looked at the time someone spends in the uk, other factors come into play.
These include where an expat intends to live once their contract ends, their family and social ties to the UK and even small details like holding a UK driving licence or bank account.
Expats need to confirm the tax residence before moving money between offshore accounts to avoid unexpected tax bills.
What’s the best investment for an expat?
QROPS pensions are worth a look, but many offshore financial providers offer bonds, savings plans, and other suitable products for expats. Working out the best investment for expats depends on your financial goals, income and personal circumstances.
Which tax year do expats follow?
This guide is aimed at UK expats living overseas, and for them, the tax or financial year runs from a minute past midnight on April 6 to midnight on the following April 5.
If expats have savings or investments in more than one country, they should follow the tax timetable for each.
Do expats pay IHT on their worldwide wealth?
The answer varies depending on the personal circumstances of each expat. If they are UK residents, IHT is due on their worldwide wealth. Different rules apply to determining residency than other taxes, as IHT is based on domicile.
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