Tax residence is a big issue for expats because making a mistake can lead to costly and unexpected tax bills.
Tax residence affects issues like tax on pensions, savings and other income from disposing of assets like homes and investments.
The rules also play a major part in financial planning decisions like whether to switch a UK onshore pension to a Qualifying Recognised Overseas Pension Schemes (QROPS).
QROPS offer generous tax breaks and investment advantages to British expats and international workers with UK pension rights – but these are wiped out if tax residence rules determine the expat is still UK resident.
The ruling would render the transfer to a QROPS as an ‘unauthorised’ pension switch, which would be followed by HM Revenue & Customs demanding significant tax penalties.
Residence status is not optional
Even if expats get the complicated tax residence rules right, deflecting the attention of HMRC and the tax authority in the country where they live can be lengthy and frustrating if the correct paper trail has not been carefully followed and filed.
Residence is not optional; it’s a legal status that depends where expats have their main residence and where they spend their time.
Many overseas workers say they are expats when they are merely out of Britain for a year or two but retain a home and their life in the country.
Not only is tax residence a problem for Brits abroad, but each country has tax residence rules as well.
In most cases these vary widely from the British rules and making sense of the puzzle can take a small army of tax specialists.
In Spain, expats are tax resident if spending more than 183 days there a year.
Spanish tax residence also involves considering an expat’s “centre of economic interests” or “centre of vital interests”.
Becoming tax resident in Spain means expats pay their income tax, capital gains and wealth taxes on their worldwide income there.
In France, tax residence applies if an expat’s main home is in the country; expats spend more than 183 days a year there. Like Spain, if France is an expat’s ‘centre of economic interest’, tax residence follows as well.
As a French tax resident, expats pay income tax, capital gains and wealth taxes on their worldwide income in the country.
In Cyprus, expats are tax resident if they spend more than 183 days on the island in a tax year.
Tax residents are taxed on their worldwide income, including all pension income, and chargeable gains on local property.
Keeping the good records, like dates of entering and leaving a country and the UK P85 tax form expats should file when leaving the country are sensible precautions for any expat whose tax residence may be called into doubt.