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Living abroad tax-smart

A tax guide for british expats & digital nomads

As an international tax advisor, I assist individuals and businesses in reaching their cross-border goals. With borders come opportunities to explore. However, international tax laws also create complexity.

Facing these challenges are British expats aiming to optimize taxes across countries. With proper strategies, tax efficiency and compliance can be achieved.

I created this article based on frequently asked questions, concerns my clients have and common mistakes they did due to wrong or untimely planning, this article provides guidance on residency, host country selection, treaties, and approaches to avoid double taxation for British expats and remote workers pursuing the digital nomad lifestyle.

It feels good to be lost in the right direction— Unknow

Determining tax residency satatus

As a British expat living and working overseas, you've got some really interesting options to plan your taxes globally. With the right strategies, expats like you can optimize your taxes when earning income internationally. Let me break down some information for you on things like figuring out if the UK still considers you a resident, picking  countries to move to, making the most of tax treaties, reporting income and assets properly, and avoiding common mistakes.

First things first - you need to know if the UK still sees you as a tax resident based on HMRC's residence rules. This hugely affects what taxes you owe worldwide.

The UK tax year runs from April 6th to April 5th. If you spend 183 days or more physically present in the UK during a tax year, you are almost certainly considered a UK tax resident for that year.

The Statutory Residence Test has three main components to determine tax residency:

  • Automatic Overseas Tests - passing one of these means you are not a UK resident. For example, if you were a UK resident in one or more of the previous 3 tax years, spending less than 16 days in the UK during the current tax year passes this test.

  • Automatic UK Tests - passing one of these means you are a UK resident. For example, if you spent 183 days or more in the UK during the tax year.

  • Sufficient Ties Test - looks at your connections to the UK, like having a spouse or minor children in the UK, having accessible accommodation, spending 90 days or more in the UK in either of the previous 2 tax years, etc. This test is used if the Automatic Tests are inconclusive.

To stop being a UK tax resident, you must either pass one of the Automatic Overseas Tests, like working full-time overseas and spending less than 91 days in total in the UK with no more than 30 days working physically there, or you must sever enough ties and minimize days spent in the UK to fail the Sufficient Ties Test.

Carefully tracking days in the UK and cutting ties is critical to losing UK tax residency. Review the Statutory Residence Test guidance on GOV.UK and HMRC's RDR3 for specifics.

Once you are no longer a UK resident, moving to a different country can significantly reduce your taxes. Be sure to thoroughly research each country's specific tax residency rules and how they interact with the UK's rules to avoid becoming a tax resident of multiple countries.

Special cases such as remittance basis and split-year

The remittance basis provides an alternative tax treatment for UK residents who are not domiciled in the UK and have foreign income and gains. Under this basis, foreign income and gains are only subject to UK tax when they are remitted (transferred) to the UK, either directly or indirectly. To claim the remittance basis, taxpayers with unremitted foreign income and gains exceeding £2,000 must complete Form SA109. While the remittance basis can help avoid double taxation, it also comes with certain drawbacks to consider, such as the loss of some UK tax advantages. Careful evaluation of the pros and cons is advisable.

Split-year treatment refers to special rules that determine tax liability when an individual arrives in or leaves the UK midway through a tax year. The year is effectively split into a UK part and a non-UK part for tax purposes - the UK part is taxed on UK resident terms, while the non-UK part is taxed on non-resident terms. Split-year treatment may apply, for example, when a UK resident with foreign income leaves the country before the end of the tax year. The foreign income would not be subject to UK tax for the non-UK portion of the year under split-year rules, thus mitigating potential double taxation.

In summary, understanding and appropriately utilizing the remittance basis and split-year treatment can be beneficial for qualifying UK residents with foreign income and gains in order to minimize tax liabilities. However, the specific circumstances of each taxpayer will determine the applicability of these rules.

Once you are no longer a UK resident, moving to a different country can significantly reduce your taxes.

Choosing an optimal host country

Definitely compare places thoroughly when choosing where to move

Moving or spending lots of time in another country can get tricky tax-wise. Each place has different rules on who counts as a resident for tax purposes. The goal is to find the best overall tax situation for your lifestyle - not just pay the least tax possible. Here's my advice on how to handle it:

  • First, make a list of the countries you're considering. Do some research on each one's tax residency rules. How many days per year do you need to be there to count as a resident? Where's your "center of life"? Do you have a permanent home there?

  • Also check out tax treaties between those countries and the UK. They may impact how your residency gets defined.

  • Next, talk to a tax advisor. They can explain how the rules tend to work in practice and give advice based on your personal situation.

  • Try to avoid becoming a resident in multiple countries if you can. It gets complicated fast with double taxation and extra reporting. A hassle you probably want to avoid!

  • Look at the big picture - not just the tax rates, but also compliance costs, your lifestyle, how much time you'll realistically spend in each place. Also factor in non-tax issues like legal protections.

  • Be strategic about which residencies you claim and when. You may be able to time things to your advantage in terms of taxes.

  • Chatting with an international tax advisor can help analyze each country's rules and develop a personalized approach. That way you don't waste money or give yourself a headache from the complexity.

Remember, the goal is optimizing your taxes, not just minimizing them. Follow these tips and get professional advice. That'll put you in a great position to navigate international taxes and make the right financial decisions for your future.

Here are some examples of jurisdictions that I see as a good fit for British expats:

Bulgaria - They have a flat 10% income tax rate for both residents and non-residents there. Bulgaria also has tax treaties with the UK and other countries to avoid double taxation issues.

Portugal - The Non-Habitual Resident (NHR) program can exempt foreign income from Portuguese taxes for 10 years if you become a resident and haven't been one in the past 5 years. When thinking of foreign income please note that work provided from Portugal isn't considered as foreign-sourced, please check my article for more information.

United Arab Emirates - Individuals don't pay any federal income tax, so residents generally have zero tax on personal income.

Hungary - Residents there have a flat 15% income tax rate. Hungary also offers things like family tax breaks for kids and tax-free housing allowances if you meet certain conditions.

The key is looking at each country's specific tax rules and how they work with UK's to avoid being a resident for tax purposes in multiple places and predict how the income will be taxed. I'd always recommend consulting a tax professional before jumping into any decisions.

Using tax treaties and remaining compliant

UK tax treaties are designed to prevent double taxation and reduce expat taxes. There are over 100 active treaties that work by allowing taxpayers some helpful provisions.

For example, they may allow you to claim foreign tax credits against your UK tax liability. Treaties can also exempt certain income from tax in one country or offer reduced tax rates in one country on some income. Treaties also have tie-breaker residency rules to determine which country you are a tax resident of if you are considered resident in both.

UK tax residents must report their worldwide income and gains on UK tax returns, including income from employment, rentals, dividends, interest, capital gains, etc. Non-residents may still have UK tax obligations on UK-sourced income like rentals or UK investments, which would require non-resident tax filings.

UK tax residents must also report overseas assets like bank accounts, property, and investments. Not reporting these can result in penalties, which can be up to 200% of the unpaid tax. HMRC can also ask you to go pay retroactively up to 20 years.

To utilize the advantageous provisions, it's essential to review treaty terms and report any income subject to tax treaties properly in both countries. For UK residents, foreign income usually needs to be reported on a Self Assessment tax return. Non-residents with taxable UK income may also need to submit a Self Assessment return.

UK exchanges tax relevant information through CRS

The Common Reporting Standard (CRS) is an international system for countries to share financial account information to combat offshore tax evasion.

In the UK, financial institutions must identify foreign account holders and report their personal details and account information to HM Revenue and Customs (HMRC). This applies to account holders who appear to be tax resident in another jurisdiction.

The UK exchanges financial account information automatically with other countries under two frameworks - CRS and FATCA for the US. While FATCA focuses solely on US account holders, CRS covers many more countries.

By participating in CRS and FATCA reporting, the UK makes it more difficult for individuals to hide money abroad and evade tax obligations. Financial firms and account holders in the UK must comply with the reporting rules to ensure transparency around offshore accounts.

Overall, the CRS is an important tool for tax authorities to share key information and prevent offshore tax evasion on a global scale.

And if the CRS does not work

As from 2023, the UK requiring promoters and advisors to report certain offshore arrangements to the tax authorities. Basically, if they help someone set up an opaque offshore structure or help them avoid reporting under the Common Reporting Standard, they have to let HMRC know.

The UK isn't alone in this either. They joined a group of 22 countries that agreed to automatically share information about schemes designed to avoid reporting investment income from digital platforms. The idea is that each country will collect details on CRS dodges and offshore structures from the middlemen who set them up. Then every year they'll pass that intel along to wherever the taxpayers involved actually live.

The goal is to make it harder for people to hide money and investments overseas to dodge taxes. Promoters and advisors will think twice about helping with shady schemes if they know the authorities will find out. And with countries sharing info, taxpayers can't just move their assets around to stay ahead of the taxman anymore.

Tax planning vs tax evasion

Given increased financial transparency between tax authorities globally, it is imperative for taxpayers with overseas investments, operations and accounts to ensure complete compliance with applicable reporting rules. However, responsible international tax planning should not be misconstrued as intentional tax evasion.

There are lawful strategies taxpayers can utilize to arrange financial affairs in a manner that minimizes tax liabilities. These legitimate tax optimization approaches should not be confused with criminal concealment or avoidance of tax obligations.

While enhanced reporting standards help counter offshore tax abuses, individuals still have the right to structure finances transparently and legally to manage tax responsibilities. The distinction lies in full disclosure and openness concerning foreign holdings, rather than concealment.

In summary, those with offshore accounts must be diligent in compliance, but should still plan their finances and projects. The line between evasion and lawful planning comes down to transparency through proper reporting. With some care, overseas assets can be managed in a way that is both tax-smart and fully above board.

Avoiding pitfalls

Individuals with ties to the UK often encounter complex reporting requirements and obligations. Some common oversights include:

  • Inadequate record-keeping of days spent in the UK, which determines tax residency per the Statutory Residence Test.

  • Presuming non-resident status despite sufficient UK connections like family, employment, or housing.

  • Neglecting to report UK-sourced income, even as a non-resident.

  • Omitting disclosure of foreign income and assets when a UK tax resident.

  • Misunderstanding the breadth of inheritance tax, which applies based on domicile.

  • Misapplying treaty benefits and credits across jurisdictions.

  • Attempting to interpret intricate tax codes without professional guidance. Consultation with an advisor can help avoid errors and optimize planning.

In summary, diligent tracking of UK days, comprehending one's tax residency designation, and full disclosure of all relevant domestic and overseas income and assets is essential. To avoid surprises, individuals with cross-border ties should be extremely careful when planning their investments and global mobility.

Achieving global tax efficiency

Tax rules for globally mobile British expats are highly complex. Since there isn't a one-size-fits-all approach to international tax advice, individuals should seek personalized guidance tailored to their unique situations from an international tax professional. This ensures full compliance and maximizes planning opportunities. For additional information, refer to HMRC guidance and the UK government's resources for overseas residents.

 

REFERENCES:

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt
https://taxsummaries.pwc.com/hungary/individual/significant-developments
https://taxsummaries.pwc.com/united-arab-emirates/individual/significant-developments
https://accountsco.co.uk/resources/penalties-and-fines-undisclosed-foreign-income/
https://www.icaew.com/insights/tax-news/2023/jan-2023/mandatory-disclosure-rules-replace-dac-in-the-uk
https://eportugal.gov.pt/en/cidadaos-europeus-viajar-viver-e-fazer-negocios-em-portugal/trabalho-e-reforma-em-portugal/imposto-sobre-o-rendimento-das-pessoas-singulares-irs-em-portugal
https://www.gov.uk/government/publications/remittance-basis-hs264-self-assessment-helpsheet/remittance-basis-2021-hs264
https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm12030
https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm30000