Below are common tax mistakes of UK expats retiring abroad. Many who leave the UK incorrectly believe that they no longer are levied once they depart from the country. That can cause them to make erroneous deduction estimates.
HMRC can still audit British citizens even if they now permanently live in another country. Being a UK company director, getting rental income in the UK, or working in the UK in any capacity could all necessitate expats paying local tax.
It can be difficult for Brits living or working overseas to make sense of the UK’s tax system due to its complexity and the many dangers it contains. Maintaining familiarity with the UK tax environment when abroad is essential for avoiding unforeseen outcomes and ensuring compliance.
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This article isn’t formal tax advice.
Table of Contents
What are the tax mistakes British expats make when retiring overseas?
#1 Residency
For British expats, moving to a new country does not mean using their tax system at once. They must first comprehend the UK tax residence-to-new country residency transition.
UK residency is determined by two factors. First, UK residents spend 183 or more days in the country each year. Second, they need to have owned, rented, or resided in their only UK residence for an aggregate of at least 91 days if they spent at least 30 days there in the prior tax year.
However, the criteria for non-UK residency vary like if an individual was in the UK for fewer than 16 days or, over the last three tax years, was not designated a UK resident and spent fewer than 46 days in the country. Working abroad full time and staying in the UK for less than 91 days would also deem them non-resident.
UK residents are taxed on all income, regardless of its source. Foreign income may be exempt from UK taxation if the individual is non dom. British expats need to know these tax residency requirements to manage their tax liabilities and make smart financial decisions abroad.
For tax purposes, some nations use what’s called a “center of vital interest” criteria. This takes into account an applicant’s ties to their nation of residence, including their family, business, and primary residence. If their “essential interests” are predominantly oriented in the country, it doesn’t matter if they’re only there for fewer than 183 days before being considered a tax resident.
In addition, some nations divide the fiscal year in half. An opportunity for tax savings exists since they might not treat a British citizen as a tax resident until the day they move there. There is room for tax planning if others don’t consider you a tax resident since you didn’t stay in the country for 183 days in a given year.
The number of days a British citizen living abroad can spend in the country before being designated a tax resident is limited by the UK’s statutory residency rule. This evaluation takes into account how closely linked the applicant is to the UK. If they stay for longer than allowed, they may be considered a tax resident of two nations, which could have serious consequences for their finances.
#2 Timing
UK nationals must prove their tax resident status before selling an investment, asset, or property. They may be taxed in their home nation and where the property is, but they can usually offset one against the other.
It’s possible that people can sell their homes before or after they move, depending on how doing so will affect their tax liability. By timing the transaction in the country where they will incur the lowest tax, they can maximize their profit. Some nations’ tax policies may be more beneficial for the sale of certain assets, therefore it’s important to do study on the applicable laws in a variety of jurisdictions.
They should sell their primary residence in the UK before leaving since this will be the least complicated tax planning move. But if that’s not an option, they should learn about the most important domestic aid programs in their new country. UK reliefs may be better. Delaying the sale could result in a large tax penalty, therefore cautious planning is needed to minimize taxes.
#3 Filing Tax Returns via HMRC’s Software
Individuals must be aware that the HMRC’s online tax return software does not support the declaration of non-resident status. A paper copy of the supplemental form SA109 must be submitted alongside the electronic tax return. These additional pages are essential since they verify a person’s residency status with HMRC.
Problems may arise if the non-resident’s non-resident status is not recorded with HMRC if the required additional pages are not submitted. Therefore, they can conclude that the person is nonetheless subject to UK taxation on an arising basis for all of their income and gains, no matter where they are earned.
Submitting the needed supplemental return, clearly declaring the non-resident status, and providing relevant supporting paperwork when requested can help avoid any confusion and assure proper tax treatment.
#4 Pension Treatment
Retirees from the UK who are considering a relocation abroad should familiarize themselves with the local regulations regarding pensions and other retirement benefits. They can take advantage of useful conditions in different nations by moving there, although doing so may need careful planning. Knowing how their pension will be handled in their new nation is vital for their financial stability.
A retiree who wants to accept a 25% pension lump sum before leaving the UK should do so if at all possible. However, if they collect the lump payment after leaving the UK, they may have to pay taxes on it there.
To get the most of their retirement income in their new country of residence while minimizing tax responsibilities, expats must carefully plan the timing of pension withdrawals in light of the new tax system.
#5 IHT
Domicile, rather than residence, is used to calculate inheritance tax in the UK. Domicile in the UK is presumed for a person born to British parents who has spent their entire life in the UK. They can still be subject to inheritance tax in the UK on their global estate even if they relocate. As a result, they may be subject to double taxation if they move to a country that charges succession or estate taxes.
Expats from the UK may have to comply with local succession laws, such as forced heirship in Europe, which states that a predetermined share of the estate must be given to the children. To solve these problems, a local will in the new country and a revised UK will are important.
Moreover, for up to three years after leaving the UK, an individual might still be considered a UK tax domiciled resident. Proving that one has abandoned UK domicile in favor of another can be difficult if one must meet stringent evidence criteria.
A change in domicile necessitates careful planning and compelling documentation, as it can be reversed if the individual once again becomes a UK tax resident. HMRC may take a negative view on the situation even if the individual is physically present in the specified domicile.
Importantly, the limitless Inheritance Tax exemption for transfers between spouses does not apply if a UK domiciled spouse leaves a substantial inheritance to a non-British spouse.
Expats who own property in more than one country may end up paying more in taxes than necessary if their combined holdings surpass the inheritance tax levels in more than one country.
#6 Wealth Tax
Individuals’ wealth, including real estate and capital assets, is levied in several nations. Spain taxes most capital assets, while France and Portugal tax real estate. If an individual’s assets surpass their country’s tax exemptions and allowances, they may have to pay more in yearly taxes.
Individuals who are concerned about the effects of wealth taxes on their finances may want to offload real estate and research their investing possibilities in various financial instruments. Some investment vehicles are structured in a way that minimizes wealth tax and offers a more tax-effective means of managing money.
#7 Tax System Variations
Personal preferences and lifestyle aspects are often considered while choosing a country to live in. Some people may also base their selection on the country’s tax policy, which can considerably affect their finances.
Tax systems vary by country and scenario. Retirees can spend their golden years in countries with favorable tax policies. However, the same country may have higher income tax rates or social taxes that affect earned income.
UK expats and investors will flock to an attractive country with a favorable tax environment, driving up property prices.
#8 Tax-Wise Investment Options
When living outside of the UK, it’s possible that tax benefits offered by investment options like Individual Savings Accounts and National Savings and Investments accounts won’t be as beneficial. Therefore, expats should weigh their options and think about selling these financial instruments before they leave the UK.
Once a UK expat settles in a foreign nation, he or she may want to investigate investing and savings possibilities that are more advantageous from a tax perspective. To do so, it may be necessary to locate locally available investment vehicles or financial products that comply with applicable tax laws and provide the same or equivalent advantages.
#9 Missing the Deadline
Comparatively, the late tax return fine of a hundred pounds in the UK is often seen as manageable, so they may not deter late filers. Thus, a considerable number of taxpayers file late.
In contrast, countries like the US impose harsher penalties for late submission. US taxpayers who fail to file on time may be fined 25% of their tax amount.
Even if the taxpayer thinks HMRC made a mistake, missing the deadline for filing a Self Assessment tax return in the UK or non-payment can result in fines that can also be significant when piled up.
For being a day late, the penalty is £100, and for each day after that, £10 is added, up to £300. After six months, there’s another penalty of £300 or 5% of the tax outstanding. After 12 months, a penalty of £300 or 5% of the tax outstanding (whichever is greater) is added.
#10 Saving Money the Wrong Way
While it is true that hiring an accountant will cost money, doing so can often prove to be a good investment, especially if it helps reduce tax obligations or penalties. UK expats’ tax situations can be particularly complicated because of their investments and income earned outside the country.
Although some people choose to use online tax software, these programs are often tailored to simple scenarios or people with substantial tax understanding. Using such software alone could result in costly mistakes and erroneous filings for expats dealing with many tax ramifications.
The tax system in the UK is particularly complex, and only someone with extensive knowledge of it would be able to properly navigate them. Over or underpayment of taxes can have serious repercussions on one’s finances if these complexities are ignored.
Consultation with a skilled accountant or tax professional can provide peace of mind, assure compliance with tax legislation, and maximize tax planning methods in light of the potential difficulties and ramifications associated with expat tax matters.
Because it can result in large tax savings and aid in properly navigating the complexities of one’s tax duties, the cost of seeking professional guidance is typically outweighed by the benefits.
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