What is Expatriate Tax? The UK & Non-UK citizen differences

Personal Accounting, Tax

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If your business has staff who work for long periods on overseas postings – or you are considering working overseas yourself for any length of time – then you will probably already know that the tax situation for expatriates (expats) can be complex. But it’s important that you understand the expat tax commitments involved, to avoid facing significant penalties and an unnecessary tax burden.

The key to determining the tax treatment of UK citizens working abroad is their individual residency status – the number of days a year in which they actually reside in the UK – as well as a series of factors relating to issues such as family location and UK accommodation. The basic principle is that, as a UK resident, an individual is liable to pay UK income tax and capital gains tax on all income and gains; but as a non-resident, you will only pay tax on income and certain gains (including earnings from a trade or profession, profits from property businesses, savings income and pension income) which arise in the UK.

What is a UK tax resident?

The Statutory Residence Test was introduced by HMRC in 2013, with the main aim of determining whether an individual is regarded as UK resident for tax purposes. The finer points of the Test are quite detailed and complex, so again its important to seek professional advice to help correctly determine resident tax status. But the basic elements of the test are:

  • How much time you spend in the UK during the tax year
  • The Automatic Overseas Test
  • The Automatic UK Tests
  • The Sufficient Ties Test

As a general rule, if you spend more than 183 days in the UK during a tax year, you are likely to be regarded as a UK tax resident for that year (you are considered to have spent the day in the UK if you are here at midnight at the end of that day). There are other factors which can effect this determination, including the ‘deeming rule’, the number of ‘transit days’ and any exceptional circumstances (such as bereavement), and again, it’s good to get expert advice on these issues.

If you spend less than 183 days in the UK, you should look at the criteria for the Automatic Overseas Test. Under this test, you will normally be regarded as a non-UK resident if:

  • you were resident in the UK for one or more of the previous three tax years, but you spend fewer than 16 days in the UK in the current tax year; or
  • you were a non-UK resident for the preceding three tax years, and you spend fewer than 46 days in the UK in the current tax year; or
  • you work full-time outside the UK, spending fewer than 91 days in the UK, and working fewer than 31 days in the UK (for three hours or less in any given day).

If you meet the criteria of any of these tests, you will be considered a non-UK resident for that tax year. If you don’t, you should then look at the Automatic UK Tests; there are a number of varying criteria under these tests, but the main principles are:

  • If you spend a period of 91 consecutive days at your home in the UK, including 30 inside the tax year.
  • If you work in the UK for 365 days, with no significant break.

If you meet either of these tests, you will be regarded as a UK tax resident. Further readingNon-UK domicile status: Can you rely on a previous agreement with HMRC?

Finally, if you do not meet the criteria for any of these tests, then you fall within the Sufficient Ties Test. Once again, this is a complicated calculation, which combines the number of days you spend in the UK with the number of ties to the UK you are deemed to have (including issues such as family members in the UK, available accommodation, and time spent in the UK in previous tax years) to determine whether you are a UK tax resident.

There are also special rules concerning the tax year when an individual leaves or arrives in the UK which are designed to split the tax year in two.

What tax will I pay?

If you are deemed a UK resident, despite the fact that you work for considerable periods of time outside of the UK and may even have a residence overseas, then you are likely to be liable to pay UK rates of income tax and capital gains tax on worldwide income and gains. If you are deemed to be a non-UK resident then different rules apply – although many British expats make the mistake that they are instantly exempt from paying UK tax as soon as they move abroad, which is not the case.

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The general rule is that non-UK residents are only required to pay tax in the UK on income arising from a source in the UK. So you would still be expected to pay income tax on the profits of any trade or profession which you carry out in the UK, or on the profits of a UK property business if the land or property is situated in the UK, as well as on any employment income relating to UK duties, and any UK pension income. Tax is also likely to be payable on dividend income, interest, and other savings (although some of this income may be treated as ‘Disregarded Income’ – a full definition is available from HMRC).

The tax free personal allowance is available to certain non-UK residents (including British passport holders) and is the same as for UK residents – i.e. £11,500 for the tax year 2017/18 – and the income is chargeable at both basic and higher rate tax levels.

Remember, however, that while you may be treated as non-resident for UK tax purposes, anyone working abroad for long periods of time is likely to have personal tax compliance obligations in the country they are working in – and as an employer, you may also face reporting obligations for employment tax and social security in that country.

What else do I need to know?

This is only a brief guide to some of the issues surrounding expat tax issues, and there are a number of other areas to consider. For example, as a business owner, how long do you or your employee expect to work overseas as this will also influence the UK tax resident status, and there may be a need to consider the implications of ‘dual residency’.

There are tax planning opportunities for individuals planning to change their country of residence and it is important to take action long before making the physical move.

This post was written by Michael Morter from the Private Client Tax team. For more information or to ask Michael a question fill in the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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