How to avoid the top five tax mistakes made by British Expats

With the deadline for completing your tax return looming it’s important to understand what you need to declare to the HMRC via your tax return to ensure you pay the correct amount of tax and avoid expensive penalties.

As one of the leading tax advisers in the UK advising expat and non-domiciled taxpayers, every year we encounter many expats who believe they are free of any UK tax burden as soon as they leave the UK, as well as making a number of incorrect assumptions about their tax situation.

For British expats moving or living abroad, there are many traps and pitfalls in the UK’s complex tax regime to be aware of. 

Based on our experience, these are the top five tax mistakes, assumptions and statements made by British Expats, and how to avoid making them.

Expat Tax Mistake No. 1: Completion of UK Tax returns using HMRC’s Software leading to incorrect declaration of Non-resident status

Did you know you are unable to declare your non-resident status using HMRC’s on-line tax return software? 

The Tax Return you submit on-line must be supported by filing a hard copy of the supplementary return ‘SA109 - Residence, remittance basis etc.’  It is these supplementary pages which confirm your residence position to HMRC.

Without these pages HMRC will have no record of your non-resident status.  This could cause complications as they will assume you remain taxable in the UK on your worldwide income and gains on an arising basis!

Expat Tax Mistake No. 2: ”I will leave the UK for a year and avoid paying UK capital gains tax when I sell my property portfolio/take a dividend from my company”

Most expats know that if UK income and gains are earned while you are non-resident this may have significant tax advantages.  However, many believe they can leave the UK for just a short period of non-residence in order to achieve this advantage and avoid UK Capital Gains Tax.

This is not the case and subject to certain conditions, gains arising whilst an individual is temporarily non-resident in the UK are either treated as arising to the individual in the year they resume residence in the UK.  Broadly, this means income and gains earned while UK resident but received/sold while non-UK resident will remain UK taxable if you leave the UK for fewer than five complete tax years. 

In addition, non-residents who own UK residential property need to be mindful of the impending changes to the taxation of capital gains when the property is sold.  From 6 April 2015 onwards there may be a UK capital gains tax position depending on their particular circumstances.

Expat Tax Mistake No. 3: “I am not UK resident, I only spend 90 days there each year”

The Statutory Residence Test has been in place since 6 April 2013.

Prior to the Statutory Residence Test there was no detailed statutory law in respect of UK residence, your status was determined by limited law, published HMRC guidance and case law.  However, the aim of the Statutory Residence Test is to bring all of this onto a statutory footing and non-resident can no longer rely on spending less than 183 days or 91 days on average in the UK to remain non-resident.

The Statutory Residence Test determines whether a taxpayer is automatically resident or non-resident, however if these tests are inconclusive then they must consider the connecting factors they have to the UK.

If a non-resident continues to spend time in the UK and still has close ties to the UK i.e. available accommodation, residence in previous 3 years, spouse/civil partner/minor children resident here, UK work duties/businesses.  Then they should consider the Statutory Residence Test and their UK residence position very carefully.

Expat Tax Mistake No. 4: ”I pay tax on my pension in the UK, I don’t need to declare the income in <insert country of residence here>.”

The country you are tax resident in will usually have the primary taxing right over your income.  If you are tax resident in Spain (for example) you should declare your income there and apply to have your pensions paid without the deduction of UK tax.

When resident in a country which has a tax treaty with the UK, it’s very important that you consider this as your country of residence will not allow foreign tax relief if the double tax treaty restricts the other states right to tax the income.

Expat Tax Mistake No. 5: ”Now I have left the UK, I am no longer liable to UK Inheritance Tax”

All British Expats will remain with the UK’s Inheritance Tax net, unless they have taken steps to sever all ties with the UK and acquired a domicile of choice elsewhere.  Domicile for these purposes refers to your origins at birth i.e. if you were born in the UK and your father was British you will be domiciled in the UK.

Read our article on the difference between domicile and residence >

If you do not have a British domicile you are often referred to as a ‘non-dom’.  If you are unsure of your domicile or want to considered acquiring a domicile of choice outside of the UK expert advice is required.

It is recommend that British Expats take specific advice around inheritance tax exposure to ensure they can plan for this as appropriate.  If a British Expat is married to a ‘non-dom’ this may bring significant estate tax planning advantages and specialist advice would be required.