If you’re a British expatriate, or spend a lot of time overseas, the issue of expat tax will be an important topic. Simply moving abroad to avoid UK tax doesn’t always work, and your exposure to tax as an expat will be based on the number of days you spend in the UK, how long you spend overseas, along with any specific ‘ties’ you might retain with the UK. Understanding the current residence rules can help determine your status when it comes to UK tax.
What is a UK tax resident?
If you live or work mainly in the UK, you’re likely to be a UK tax resident. As a general rule, the British tax authorities will always treat you as such if you were in the UK for more than 183 days, have a home in the UK at which you were present on at least 30 days in the year, or work ‘sufficient hours’ in the UK during a full calendar year. There are other ways you can be ‘caught’ for UK tax residency too.
What tax will have to be paid in the UK?
If you are resident in the UK for tax reasons, with a few exceptions, your worldwide income and gains will be subject to UK taxes. These currently are:
Income Tax – if you’re UK tax resident your worldwide income is generally subject to UK Income Tax. If you are not it’s usually only your UK sources of income that attract UK tax. The rate which applies is based on how much you earn. Everyone has an Income Tax allowance each year (in 2020/21 it’s £12,500) after which rates of 20%, 40% or 45% (or 7.5%, 32.5% and 38.1% for dividend income) are then applied depending on how much you earn.
Capital Gains Tax – this tax is calculated on the profit when you sell or gift an asset that’s increased in value. Examples are property, shares or personal items including paintings, jewellery or art worth £6,000. There are a few exceptions including cars, the sale of your main or only home, ISAs and winnings from Premium Bonds or the lottery. Non-UK tax residents may have a more limited exposure to UK Capital Gains Tax. However, special rules can apply to non-UK tax residents who are not UK resident for five years or less as selling UK land and property is always within the scope of UK Capital Gains Tax, regardless of your UK tax residence status.
Inheritance Tax – this is generally charged on your estate (usually your property, money and possessions) when you pass away. It currently stands at a staggering flat rate of 40% and can have a significant impact on your heirs. This is one of the few taxes which it’s possible to reduce through careful planning and making full use of available exemptions and allowances. Your liability to Inheritance Tax is not determined by your UK tax residence status. Instead, it’s defined by your domicile status. It’s usually helpful to discuss this complex area of UK tax with a professional adviser.
What else is important to know about expat tax?
Expat tax can be a very complicated subject, and it’s almost always beneficial to discuss your own circumstances with a tax professional.
Would you like to find out more?
We are here to help with your tax planning requirements. For more information, whatever your circumstances, please contact us today.