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www.InvestmentGuide.co.uk One of the perks of living and working abroad is the expectation of a tax-free or near tax-free income and gains. Here we tell you how best to avoid tax and maximise your income:
Disclaimer: The information given here is detailed and covers a complex field of tax avoidance. While we are reasonably sure that the information and advice given is correct, the author and publishers regret that they cannot accept any liability for actions taken solely as a result of the information given here. Where large sums of money are involved it is imperative that you get a second opinion from a lawyer or accountant with experience of advising on international tax planning.
Tax on your earnings abroad
You won't have to pay UK tax on
earnings paid under the laws of a foreign country whether or not you are
non-resident. You pay the local tax and if you are lucky enough to work in a no
tax country, then you pay nothing.
If you are serving overseas with the armed forces or diplomatic service, your pay is taxable in the UK and your tax position is usually the same as anyone else back in the UK.
Rent from your home while you are abroad
One of the most
likely sources of income for an expat is the rental income you get from letting
your home or homes when you move abroad. Although this rent is always liable to
UK income tax, you should be able to avoid most or all of it.
The agent (or tenant if there is no agent) is supposed to deduct 20% tax from the rent for the year in which the rent is paid and pay it to the Inland Revenue on your behalf. Before 6 April 2008 the rate was 22%. However if you are not liable to the tax, you can reclaim it, or in some cases get authority from the Inland Revenue so no tax need be deducted. See HM Revenue & Customs Leaflets and Booklets Home page for more info.
If you rent furnished you can get a 10% allowance of the rent for wear and tear on the furniture. So if your rent is £10,000 a year, with a furnished letting you only have to pay tax on £9,000. You can also deduct your other expenses connected with the rental, e.g. ground rent, service charge, water charges, repairs etc. This applies whether or not you are abroad.
You also get a personal tax allowance which as you are abroad is not used up by your salary. So the first £5,435 in the 2008-2009 tax year of any rent is tax free. If you are a couple, then if the home is in joint names, you can get one each giving you the first £10,870 without paying any tax.
However bear in mind that your personal tax allowance in the tax years you leave and return to the UK may be used up by your salary or other UK income in the part of the year before you went abroad or in the part after you have returned. See below for the best times of year to come and go.
Tax relief on mortgage interest
Tax relief for owner
occupiers ended on 5 April 2000. However you can get tax relief at your highest
rate of tax by claiming the interest you pay on the loan taken to buy your home
as an expense in your rental business accounts.
If you plan to live abroad for a few years, it could be an idea to trade up your UK home. You can then fund your new home with a mortgage on which you get full tax relief and which can be set against the rent you are receiving.
The advantage is best illustrated by an example. If you pay mortgage interest of £6,000 a year, then you can save £1,200 a year in tax relief at the basic rate of 20%. That assumes you have extra rental income to set this interest against which you might have if your new home commands a higher rent than you pay in mortgage interest. It can usually only be set against rental income (on any properties you have, not just the one with the mortgage). If you don't get all the interest allowed against rental income in one tax year, it can be carried forward and be set against rental income in a future year.
Don't forget stamp duty and the costs of buying. Don't trade up just for this tax saving. It's just an idea on timing if you are in this position and would intend to trade up on your return to the UK.
Residence and income tax
For other investment income, UK
residence determines whether you are liable for UK income and capital gains
taxes.
If you go to work overseas continuously for more than a full tax year (which starts on 6 April and ends on 5 April of the following year), you will be non-resident in the UK for that tax year for the purpose of UK income tax. You can come back to the UK for trips but you have to be careful that these do not exceed 90 days in any one tax year.
You have to be abroad for a complete tax year. If you go abroad on 7 April and return on 7 April in the following year, you won't count as non-resident at all. However if you leave on 30 March and return on 7 April in the following year, the Inland Revenue will count you as being non-resident for the whole period you were away.
So if you went to work abroad in June 2002, you will have to stay abroad for nearly two years to count as non-resident. If you return before 6 April 2004, the Inland Revenue will count you as resident in the UK for the whole period. If you intend to stay abroad for several years, then this is no problem. If you can plan it, the best month to leave to live abroad is March and the best month to return is April after the 6th.
You can come back to the UK for trips which must not exceed 90 days in any single tax year. You need to be careful about trips in the tax year you leave and the tax year you return as you count as a UK resident in any tax year in which you spend 180 days or more in the UK. Until 2006, it had been accepted that the total of days spent in the UK which counts towards the 90 days did not include the day of arrival and the day of departure. However a ruling has now stated that any part day in the UK counts towards the 90 day limit although apparently if ypu arrive after midnight that counts as the next day.
While not liable for UK tax as a non-resident, UK banks and building societies can pay you without deduction of tax. But you may be liable for tax in the country in which you live or the country where you invest (which need not be the same). Taxmen in different countries swap information about interest paid on bank accounts.
If you intend to live abroad for long enough to count as non-resident in the UK, it's better to keep your money in an offshore bank account in a tax haven like Guernsey, Jersey or the Isle of Man. These accounts pay similar interest rates to their onshore counterparts and do not deduct tax at source. The income from them will not be liable to UK tax. Banks in these places now offer multicurrency accounts which can be accessed online.
Residence and capital gains tax
To be exempt from UK capital
gains tax on other UK assets, you need to become not ordinarily resident
which implies you intend to stay abroad indefinately (you can always change
your mind later). This applies to all assets you acquire after you have left
the UK.
But you now have to be careful about assets you bought or were given before you left. If you dispose of these while abroad, you have to be abroad for 5 full tax years instead of one, before the Inland Revenue accepts you as non-resident even if you can claim to be not ordinarily resident for the purpose of capital gains tax. If you are both non-resident and not ordinarily resident then such gains are exempt from UK capital gains tax.
The 5 year rule applies to any individual who left the UK after 17 March 1998, who has been resident in the UK for four out of the seven tax years before the tax year of departure. Gains made in the tax year of departure are taxable in that year. Gains made in following years are taxable in the tax year you return to the UK unless that is more than five complete tax years after the year of departure.
If you did not fulfil the 5 year criteria but want to sell your previous main home while you are abroad then you can benefit from the owner occupier exemption from capital gains tax on it.
Inheritance tax
Assets held by non-domiciled individuals in the UK are usually liable to UK inheritance tax which is why second homes in the UK are usually held by offshore companies. Certain UK assets however are exempt from inheritance tax if held by non-domiciled individuals. These have been extended to include all authorised unit trusts, OEICs and common investment funds for transfer on or after 16 October 2002 and include most UK Government stocks.
Coming back to the UK
If you eventually want to come back to
live in the UK after a period of being non-resident, you need to consider
whether or not you should sell and re-invest any assets you have which are
standing at a gain and which you would otherwise have to pay UK capital gains
tax on if you sold after you have returned.
You can no longer bread and breakfast such assets. However there is scope for similar alternatives like selling one index tracker fund and buying another or husband and wife exchanging share holdings. Selling one rental property and buying another is also perfectly legitimate, for instance. Bear in mind the transaction costs like stamp duty, legal fees, stockbrokers commission and fund fees.
Further information
The Inland Revenue has two detailed
booklets IR20
Residents and Non-Residents: Liability to Tax in the UK and
Non
Resident Landlords Scheme Notes .
 Last
updated 8 April 2008 |
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