The tax considerations of living abroad

While the thought of going abroad to work or retire may be exciting, the months leading up to departure are likely to be highly stressful.

It is vital that you pay adequate attention to financial planning. In particular, the tax consequences of leaving the UK are quite complex, so it’s essential that you seek professional advice.

Your residence status will be the main factor in determining your continuing liability to UK tax. Since 6 April 2013 a set of statutory tests have made it easier to establish your residence status. Your residence status must be determined separately for each tax year, so even if you are treated as remaining resident in the UK after going abroad, it may be possible to change your status in subsequent years.

There are three aspects to the statutory residence tests; the starting point is whether you are automatically non-resident or automatically resident. If you are deemed to be neither, then your residence status will be determined by how closely you are still linked to the UK. You will automatically be treated as non-resident in the UK: primarily when you stay in the UK for fewer than 16 days during the tax year or, when you leave the UK to work full-time abroad. (You are allowed to visit the UK for up to 90 days each year, of which 30 can be days when you are working.)

However, you will still treated as resident in the UK when you stay in the UK for 183 days or more during the tax year, or when your only home is in the UK. (Very broadly, you must have that home for a period of more than 90 days, and must live there for 30 days during the tax year.)

If neither of the automatic tests apply, then your residence status for a particular tax year will be determined by what is known as ‘the sufficient UK ties test’. The more days you spend in the UK during a tax year, the less number of UK ties you are permitted before being treated as resident.

You will have to tell HM Revenue & Customs (HMRC) about your residence status, and this will normally be done as part of your tax return submission.

With careful planning you can become non-resident when you move abroad. If you have UK ties, such as a house in the UK, then it is easy to establish how many days you can safely stay in the UK each tax year. If you need to be in the UK for a set number of days each year, then you will know if you have to reduce your number of UK ties – maybe selling your UK house or reducing the amount of time you work here.

If you remain UK resident despite going abroad, you’ll pay income tax on all your income whether it arises in the UK or overseas. If you’re employed, you will therefore pay income tax regardless of where your duties are carried out.

The general rule if you become non-resident is that you’ll pay tax on your UK income but will not normally be liable to UK tax on your overseas income. So if you’re employed, you will not pay UK tax in respect of remuneration for duties performed abroad. Earnings for duties performed in the UK will remain taxable unless they’re only incidental to the overseas duties.

It’s possible that some of your income could be taxable in the UK and also taxable in the country that you have moved to. However, the worst case scenario is that you will effectively end up paying just the higher of the UK tax or the tax charged abroad. It is important, however, that you take local advice when moving abroad about the tax rules that will apply in the country where you will be living.

If you are UK resident then you will pay UK capital gains tax (CGT) on gains from disposing of your assets wherever they are situated in the world.

The tax treatment does not change if you’re only temporarily non-resident – essentially where you are away for a period of five years or less. But be warned that tax may be payable in your new country o f residence, and this could be higher than the CGT that would have been paid in the UK.

Unlike income tax and CGT, the determining factor with inheritance tax (IHT) is your domicile. Your domicile is basically the country that is regarded as your natural or permanent home. You can only have one domicile, which is normally, but not always, the country of your birth. You can change your domicile, but usually with some difficulty. And even if you do manage to change your UK domicile, for IHT purposes you will be deemed to still be UK domiciled for a further three years.

Even if you’re moving abroad permanently, until you are well settled in your new homeland you should consider keeping a UK bank account open and keep at least one credit card, because in some countries it can be difficult to borrow before you have an established credit history there.

It’s also worth considering opening a local currency bank account in the country that you move to, and opening an offshore bank account in a well regulated offshore centre.

Becoming an expatriate will also provide you with access to a range of tax-efficient financial planning opportunities such as offshore pensions and investment bonds. But these should be considered in conjunction with professional advice to ensure that you pay due attention to currency and taxation issues, and achieve an appropriate level of risk, diversification and flexibility.

Moving abroad is a particularly complicated area where specialist help is essential.