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Have laptop, will travel! The post-pandemic rise in remote working has triggered a realisation that many jobs can be carried out anywhere in the world. And with travel restrictions relaxed, it’s now much easier to head out of the UK. But moving abroad doesn’t mean you can forget your UK tax obligations. How does leaving the country affect your tax residency status and UK tax?
If you’re moving abroad with the intention of living outside the UK for at least one tax year, then you need to inform HMRC so that they can deal with your tax correctly.
If you don’t complete a self-assessment tax return, you will need to complete a P85 form. This can be done just before or just after you leave.
If you do complete a self-assessment tax return, you can use the residency section to let HMRC know about your move. However, this section is not available via the HMRC online tax return so you would need a paper version or to use some other tax software. Don’t forget, for the paper form the deadline is 31 October rather than 31 January.
You can still use the P85 form even if you do submit a tax return but want to let HMRC know about your residency situation straight away, rather than waiting until the next return is due.
HMRC will use the information from the P85 form or tax return to assess your residency and tax situation for the current tax year (and going forwards).
Tax residency is a complicated area and depends very much on your particular circumstances and your pattern of work and living in the previous few years.
Residency is not the same as nationality, citizenship or domicile. It’s a more temporary state and you can be resident in more than one place.
HMRC use the statutory residency test to assess whether you can be classed as resident or non-resident for UK tax in a particular tax year. You can use HMRC’s online test to check for yourself.
There are some automatic tests that determine if you’re automatically UK resident for the tax year or if you’re automatically overseas and therefore non-resident.
If you don’t meet the criteria for any of the automatic tests, then residency considers relevant ties such as family, accommodation, work or time spent in the UK in previous years.
You can also have a split tax year, where you are resident up to the point you leave the UK and then you become non-resident for the remainder of the year. For example, if you or your partner start full time work overseas or sell your UK home to move permanently abroad. Again, this depends on the individual circumstances.
Moving abroad during a tax year doesn’t automatically mean you are non-resident for that year or even the next. It depends very much on how far into the year you moved, how often you are back in the UK and many other factors too.
There are three ways to automatically be classed as a UK resident. Meeting any one of these three criteria will make you UK resident:
If you don’t meet any of these tests, you may still be classed as a UK resident on the basis of the number of ties you have. The number of ties required varies depending on how many days you’ve spent in the UK during the year. The longer in the UK, the fewer ties are required to be classed as a resident.
UK residents report and pay tax on both UK and foreign income and gains.
If you have foreign income to report, you usually have to register for self-assessment. The exception is foreign dividends, where there is no other reason to do a self-assessment and the total dividends (including those from the UK) are less than £2,000.
The UK has double taxation agreements with many other countries which means that for most types of income you can include some or all foreign tax paid on your UK tax return. This means that you’re not being taxed twice on the same income. However, it may be easier said than done, as tax periods can vary from country to country so it can sometimes be tricky to work out.
There are some different rules that can apply if you are resident in the UK, but your domicile is abroad.
This residency complexity can apply if you are resident in the UK but have strong connections in another country. Domicile is important for a number of taxes including employment income, foreign income, capital gains and inheritance tax.
Being a UK resident but having a domicile outside the UK gives you an additional option as to how your foreign income is taxed, so that only income remitted to the UK is included. It’s a very complex area and one that would need an entire blog post in its own right!
It’s possible to be classed as resident for tax in the UK and in another country at the same time if you are living and working between countries. If you’re living and paying tax in more than one country, then you may be classed as a dual resident.
Double taxation agreements allow you can claim relief on tax paid to avoid being taxed twice. But you need to decide which country will be your residence for the purposes of claiming relief. You can’t claim relief in both or as a mixture.
There are some tie breaker rules to use to determine your residence for claiming relief when you’re a duel resident. They consider aspects such as your permanent home, centre of vital interests, habitual abode (where you live most regularly or habitually) and your nationality.
If you’re dual resident and you want to claim relief from UK tax in your UK tax return, then you need to obtain a certificate of overseas residence to include with your UK tax return. No certificate is required if you’re a resident of the USA.
There are three ways to be automatically classified as be non-resident for UK tax. Again, you can use any of the following:
Non-residents don’t have to declare their foreign income in their UK tax return.
The only income that needs to be declared in your UK tax return is your UK income. This could include salary and pension (depending on the tax code), property, savings interest and dividends and some capital gains.
In many situations you will still be allowed the UK personal allowance, giving you a tax-free amount to use against your UK income.
For example:
You’re still liable for tax on income such as salary that is earned in the UK. If you’re non-resident but carry out some of your duties in the UK, then the UK duties would be liable to UK tax, unless they were “merely incidental” to the employment abroad.
If you work for a UK employer but carry out all of your work duties outside the UK then the income would not be counted as earned in the UK.
Depending on your P85 form or tax return information, you may find that HMRC issue an NT tax code. This would typically happen if all or almost all of your work is outside the UK. An NT tax code means that your UK salary (or pension) is no longer taxed in the UK. Instead, it will be taxed in your new country of residence. It prevents the same income being taxed twice.
If you complete a UK tax return for other UK income such as property, you don’t need to include any salary or pension with an NT code. However you need to make sure you are declaring that income where you are now resident.
If you don’t have an NT code (or not immediately) then your income will be taxed as normal, using your personal allowance if you receive one. It should be included in your UK tax return. Any tax deducted will need to be claimed as relief against the salary income in the tax return for your country of residence.
Any UK dividends and savings income does need to be declared on your UK tax return, however you may not have to pay any tax on it. You can choose to have certain types of investment income (including dividends and savings) disregarded for tax.
Doing this means that you lose your personal allowance for the year, but in many circumstances it can still save significant tax. However, it’s a very complicated calculation and one that’s best to work through with an accountant.
The disregard doesn’t apply to any years with split year tax residency. So, if you’re intending to take a large dividend and want to benefit from the tax disregard, make sure it’s in a year when you are non-resident for the whole year.
But beware if your dividends are from your own company and it’s a close company (five or fewer shareholders, some or all of whom are also directors). If you’re abroad for less than 5 years, the dividends could become taxable on your return under the temporary non-residence tax avoidance rules, depending on when the profits were generated. See below for more details on temporary non-residence.
Income from UK property is taxable in your UK tax return as a non-resident including Buy to Let and Furnished Holiday Lets.
If you have property income in the UK which is managed through an agency, then you need to let them know that you are a non-resident landlord. Non-resident landlord means that your normal place of abode is outside the UK or that you are absent from the UK for more than 6 months. The letting agents will register you as a non-resident landlord and deduct 20% tax from any payments that they make to you.
You can apply to have the payments made gross without the tax deducted and then settle any tax due in your tax return instead. Whether you have your payments gross or net, you still need to complete a tax return as well.
If you let directly rather than using a letting agency, then your tenant will have to operate the Non-resident Landlords scheme if the rent they pay is more than £100 per week.
Assets are normally taxable in the country where you are resident, so as a non-resident you should not be taxed in the UK on most capital gains. But there are some extra rules and exceptions around property.
If you’re non-resident selling UK land or property, then you need to report this within 60 days through the Capital Gains on UK property service and pay any tax due. You still also need to fill in the capital gain section on the relevant tax return.
This is another one to watch out for in terms of temporary non-residence If you return to the UK as a resident within 5 years, your untaxed capital gains could become taxable under the temporary non-residence rules. See below for more details.
If you’re only overseas for a limited time, then you need to be careful not to fall foul of the rules around temporary non-residence. These rules were designed to stop tax avoidance on large gains by people becoming non-resident for a short period. However, they can still catch you out even if you’re not deliberately trying to avoid tax.
If you were resident of the UK for at least 4 out of the 7 tax years before you went overseas, and you return as a UK resident within 5 years, then you’re classed as temporarily non-resident for the period that you were overseas.
If you had certain capital gains while you were abroad that were not taxed because you were non-resident, they may become liable to tax on your return if you meet the criteria for temporary non-resident.
As well as capital gains, there are some types of income that can end up being taxed under the temporary non-residence rules if you don’t meet the 5-year threshold. In particular these include some flexible pension withdrawals and distributions paid by close companies e.g., dividends.
Tax residency and its knock-on tax effects is a really complicated area. Your tax residency can change from year to year and should be assessed annually if you’re living abroad. It’s something that would definitely benefit from seeking specialist advice whether it’s for your current situation or for future tax planning. If you’re living or working in more than one country, having an accountant in both countries can be worthwhile, particularly if you have significant income or gains. You want to make sure you’re achieving the optimum tax solution for your situation.
If you have a tax residency query that you would like to chat about the please get in touch with us at tax@cooperfaure.co.uk.
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