How to reduce UK income tax by becoming non-resident
For a detailed analysis of the key tax individual tax regimes in Europe for 2021, including an analysis of the Netherlands, Spain, Portugal, Sweden, Austria, Greece, France, Italy and Switzerland see:
SPECIAL REPORT: Analysis of the key beneficial tax regimes for individuals in the EU for 2021
The basic rule is that UK residents are taxed on their worldwide income. Non-residents are only taxed on their UK income.
A person leaving the country to avoid income tax needs to remember that the UK, like most countries, claims the right to tax income arising in the UK, irrespective of whether it is earned by a resident or a non-resident.
You also need to take account of double tax treaties. A double tax treaty is an agreement between two countries that determines which country can tax which income, where an individual is a resident of both countries. The rules laid out in these treaties override the domestic tax legislation.
Most double taxation agreements provide for a substantial degree of exemption from UK tax for residents of treaty countries. This means the income is not taxed in the UK but is taxed in the other country. The drawback with this set-up is that most treaties are with countries with tax systems similar to our own -- there are very few treaties with tax havens.
So what can you do to minimise your UK income tax bill?
One solution is to dispose of all assets that generate UK income. Such a disposal would also provide evidence of your intention to move abroad permanently and would help to demonstrate that you are not UK ordinarily resident. Of course, the capital gains tax consequences of selling your assets would also have to be considered.
If selling your assets is not viable, it is worth noting that, apart from rental income, most UK investment income received by non-residents is not liable to additional tax beyond what is deducted at source. Let's take a closer look at the tax treatment of different types of income.
RENTAL INCOME
Non-residents have to pay tax on rental income from UK properties. There is a 20% withholding tax on the rent. If a firm of letting agents looks after your property, they are responsible for paying the withheld income tax to Revenue and Customs. Where there is no letting agent, it is the responsibility of the tenant. The letting agent/tenant has to account for this basic rate tax each quarter.
Where a tenant's gross rent is less than £100 per week, there is no requirement to deduct tax unless instructed to do so by HMRC.
Any tax withheld is allowed as a credit against your eventual UK tax liability calculated on your self assessment tax return.
Non-residents can also obtain permission to self assess any UK tax liability. This option avoids the withholding tax and is applied for by using form NRL1 (www.hmrc.gov.uk/cnr/nrl1.pdf). Separate forms must be submitted for jointly held properties.
HMRC will generally give its approval provided:
• Your tax affairs are up to date, or
• You do not expect to be liable for any UK tax, or
• You have never had any UK tax obligations.
The tax on the profits of the rental business is then calculated on the self assessment tax return, with any income tax liability usually payable by the 31st January following the end of the tax year.
It is still possible to obtain a deduction for qualifying loan interest as long as it has been incurred 'wholly and exclusively' in relation to the rental income.
INTEREST & ROYALTIES
Interest and royalties paid overseas from the UK are subject to a 20% withholding tax, with no further liability -- in other words, no higher rate tax is payable. If you are not ordinarily resident in the UK you can apply to have your interest paid without any tax deducted, by completing a 'not ordinarily resident' declaration (www.hmrc.gov.uk/pdfs/r105.pdf). It should be noted that the interest would still have to be accounted for in the annual tax return.
It may be worthwhile considering whether to transfer any cash in a UK bank account to an overseas account.
There would be no capital gains tax implications (as cash is not a chargeable asset for capital gains tax purposes) and no UK tax would be payable on your interest, provided you are non-resident.
And what about ISAs? Individuals can only make payments into Individual Savings Accounts (ISAs) if they are UK resident and ordinarily resident. So, for example, an individual who works abroad for a complete tax year and is regarded as non-resident will not be able to make ISA contributions during the period of non-residency. However, it's worth holding on to your existing ISAs as you will continue to enjoy the tax benefits no matter how long you live abroad.
There is also a special rule for investments in Government bonds (also known as gilts). Interest from these investments is completely tax free if you are non-resident.
Note that companies have beneficial treatment as a UK company could either make interest and royalty payments to another EU company free of UK withholding tax or claim a repayment of UK tax withheld due to the EU Interest and Royalties Directive. Similarly a UK company receiving interest and royalties from another EU company could receive these free of tax or reclaim the tax withheld thanks to the directive.
DIVIDENDS
There is no withholding tax on dividends, and for UK tax purposes, there will be no higher rate income tax charge. All dividends are treated as having been subject to a 10% tax charge at source and for non-UK residents, this will satisfy any basic rate income tax liability, so effectively dividend income is tax free in your hands if you're non-UK resident. Just as for UK residents, the 10% 'deemed' tax credit cannot give rise to a repayment of income tax.
However, depending on the terms of any double taxation agreement, income tax may STILL be payable in the home country.
In the 2007 Budget it was also announced that, from 6th April 2008, a UK resident who receives dividends from an offshore company can reclaim the 10% 'deemed' tax credit. For the 2008 tax year this is restricted as it will only apply where a person owns less than 10% of the offshore company.
However, these restrictions are removed for dividends received after 22 April 2009. Therefore any overseas dividends received by a UK resident will be entitled to the 10% deemed tax credit (providing the company is subject to overseas corporation tax).
So an overseas dividend of £900 paid after April 5 2008 will be 'grossed-up' for UK tax purposes to £1,000 -- in other words, giving a tax credit of £100. A basic-rate taxpayer's UK tax bill on the grossed-up foreign dividend will be entirely satisfied by the £100 tax credit; a higher rate taxpayer's liability at 32.5 per cent will be £325 less the £100 tax credit, leaving a £225 liability.
However, this £225 liability could then be reduced by any withholding tax suffered. The new rules mean that, for the first time, basic rate taxpayers will not have to pay any income tax on overseas dividends.
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PENSION INCOME
The general rules applying to investment income also apply to pension income.
A UK resident/ordinarily resident and domiciled individual is subject to UK income tax on UK and overseas pensions. However there is one key tax relief. A 10% deduction is given against certain overseas pension receipts. This means that such an individual is only taxed on 90% of his or her pension income. If the pensioner is non-domiciled and is using the remittance basis to account for overseas income, then the 10% deduction will not be available.
Such a pensioner is fully liable to UK tax on UK pensions but overseas pensions will only be taxed when remitted to the UK, and the 10% deduction is not available.
If you are non-UK resident you will not pay UK tax on any overseas pensions.
If you are a UK expat pensioner who is receiving a UK pension you would usually be subject to UK income tax on your UK pension. However, this is where double tax treaties could come to the rescue. Certain double tax treaties allow UK tax to be avoided and instead allow only the overseas country to levy tax. For example, the UK-Cyprus treaty grants sole taxing rights over UK pensions to Cyprus.
The beauty of this is that Cyprus offers a pension income tax rate of just 5%! This may explain why Cyprus is becoming a popular destination for those wishing to retire abroad. Other countries with sole taxing rights on UK pensions include Australia, Canada and New Zealand.
PERSONAL ALLOWANCE
Until recently the UK personal allowance of £8,105 (for 2012/13) could be claimed by most non-residents and offset against UK income to reduce any UK income tax charge.
However, the ability of non-residents to claim the personal allowance has been significantly reduced from April 2010.
Before April 2010 anyone who was a Commonwealth citizen or who was a resident of a relevant treaty country could claim the UK personal allowance.
As the personal allowance is worth £8,105 per person, couples can shelter up to £16,210 of UK income from income tax.
However, in the 2009 Budget the Chancellor announced that claiming a personal allowance solely because you are a Commonwealth citizen was not compliant with the Human Rights Act. The Government has therefore withdrawn the personal allowance entitlement of non-resident individuals who currently qualify solely by virtue of being Commonwealth citizens.
The withdrawal will apply from 6 April 2010 and will apply to the:
• Basic and age-related personal allowances
• Married couples allowance
• Blind person's allowance
• Relief for life assurance
There are, however, a number of cases when you can still claim a personal allowance as a non resident. The main one is that you qualify under the terms of a double tax treaty.
What Impact Will This Change Have?
It will only be a cause for concern if you are currently a non-resident Commonwealth citizen, with UK income and do not otherwise qualify. In particular, most double tax treaties will provide for a UK personal allowance if you are treaty resident abroad. It will therefore mainly affect UK emigrants who live in countries that do not have a tax treaty with the UK such as:
• The Bahamas
• Cameroon
• Costa Rica
• Cook Islands
• Dominica
• Maldives
• Mozambique
• Nauru
• Niue
• St Kitts & Nevis
• St Lucia
• St Vincent & the Grenadines
• Samoa
• Tanzania
• Tonga
• Turks & Caicos Islands
• Vanuatu Even if you are entitled to claim the UK personal allowance you should in any case consider whether this is worth doing. For non-residents it's generally worth around £1,600 per year in saved tax.
However, to take advantage of the personal allowance you would need to claim it in your UK tax return. This could result in a review of your non-resident status.
If you have limited UK income in some cases it may simply be preferable not to claim the personal allowance and suffer the 20% basic-rate income tax at source.
If a claim is made, this will be dealt with by the Centre for Non Residents. They may take a detailed look at your affairs to determine whether you are truly non-resident. This could prove an inconvenience and the Revenue may also be bound under the terms of an exchange of information treaty to provide details they discover to any overseas tax authorities.
Many non-residents will prefer the additional privacy and reduced disclosure that goes with not claiming the personal allowance.
MAKING PENSION CONTRIBUTIONS
The tax breaks associated with UK pension contributions are well known. When you make a qualifying contribution you obtain tax relief at the basic rate (currently 20 per cent).
For every £80 you put into a pension scheme this is grossed up by the taxman to £100. If you are a higher rate taxpayer you can claim a further tax refund of £20 when you submit your tax return.
Your pension investments are then allowed to grow free of income tax and capital gains tax.
That's all very well, but what about UK expats? The good news is that under the pension rules introduced in April 2006, expats can continue to make contributions into a UK personal pension plan.
However, in order to obtain tax relief on your contributions you must either have UK taxable earnings or meet one of the following conditions:
• You must be resident in the UK in the tax year during which the pension contributions are made or,
• You must be UK resident at some time in the five years preceding the UK tax year in which the contributions are paid.
Therefore a long-term expat with no UK earnings would not qualify. In these cases it's worth looking at other saving vehicles.
One option would be to invest in an offshore insurance bond. The investment income and dividends should be tax free and these can be extremely flexible investments. There is no restriction on when cash can be extracted and you can leave the bond to your spouse or family in your will.
EMPLOYMENT INCOME
Employment income will be taxed differently depending on the residence/domicile status of the employee and where the duties are actually performed. There are three different circumstances under which employment income could be taxed. I'll call these the three 'cases':
Case I
This applies to individuals who are UK resident and ordinarily resident and covers both UK and foreign work duties.
The tax charge is on a receipts basis and the full amount of worldwide emoluments/salary is subject to UK income tax, except for one specific situation that falls within Case III (below).
Case II
This applies to non-resident individuals, or individuals resident but not ordinarily resident in the UK and covers only salary arising from UK duties.
Case III
This applies where an employee is either
• Resident but not ordinarily resident in the UK or
• The employee is UK resident/ordinarily resident but is of foreign domicile, works for a foreign employer and performs all duties outside of the UK.
In either of these cases the overseas salary may be assessed on a remittance basis, and is only subject to UK income tax when received in the UK.
Example
David, of Jamaican domicile, has been working in the UK for a computer company. He is UK resident and will be fully taxed on his employment income under Case I.
Robert is a non-resident, yet he earns a salary from being a director of a UK company and pays regular visits to the UK head office throughout the year (but stays within the 90-day limit and has no other UK ties or property). He will be subject to income tax on his UK employment income under Case II. As he is non-resident, any overseas income will be exempt from UK income tax.
Peter, UK resident but non-UK domiciled, is to work overseas for four months for an overseas subsidiary of his UK employer.
The duties of the employment will be performed wholly abroad. He can claim to be taxed on his overseas employment income under Case III on a remittance basis -- in other words, he is subject to UK tax on income that is brought into the UK. From 6th April 2008, when claiming the remittance basis, Peter may also lose certain UK allowances and could be subject to a £30,000 or £50,000 annual tax charge.
It is therefore important to understand the definition of UK and overseas duties.
A non-UK resident individual is not subject to UK income tax on salary received for duties performed wholly abroad. Any 'incidental duties' performed in the UK will not create a problem, provided these duties are clearly ancillary or subordinate to the overseas employment, for example going back to the UK for meetings at head office.
Example
Freddy has been offered a secondment to the Paris office of his employer. It is proposed that this is from 4th April 2010 to 3rd April 2012. Freddy is happy with this as he is likely to be regarded as non-resident and not ordinarily resident from the date of his departure. (If you go abroad under a full-time contract of employment you will usually be regarded as non-resident and not ordinarily resident from the date of departure)
Freddy must then look at the duties that he will be undertaking, as it is the earnings from the overseas employment that are exempt from UK income tax.
Let's assume Freddy's job is to source French products that may be in demand from the British market. If as part of his role he is to return to the UK on a monthly basis and produce and advise on the production and marketing of these products, it may be that these duties are not incidental to the overseas employment, particularly if he is to spend, say, one week each month in the UK advising on this. If HMRC successfully argued the case, the employment income would need to be apportioned between UK and overseas income, with the UK income subject to UK income tax.
There were also provisions introduced in the 2008 Budget to provide for a similar apportionment where employee share options were exercised at a profit and part of the employment would qualify under 'case I or II' above.
PENSION PLANNING
Where an individual goes to work overseas there are a few issues to bear in mind as regards pensions:
• Will any benefits already accrued in a UK scheme be capable of being transferred into an overseas scheme?
• If you remain a member of a UK scheme, will any employer and employee contributions be taxed/tax deductible?
An individual sent overseas for a long period of service may wish to join a pension fund established in the overseas country.
The pension regime has undergone significant changes as from 6th April 2006.
Before 6th April 2006 it was very difficult to transfer your pension overseas but the 'A Day' changes also brought with them 'Qualifying Recognised Overseas Pension Schemes'. These are known as QROPS for short and they now allow UK pensions to be transferred overseas.
Provided a UK pension is transferred to a QROPS it is, in principle, allowed. A QROPS is an overseas pension scheme that meets various criteria and is authorised as a pension scheme overseas. To obtain QROPS status the pension fund needs to meet Revenue reporting requirements for five complete tax years after you've left the UK.
This time limit doesn't apply from the date of the transfer of the pension benefits but rather applies to the date of your move abroad.
What Do I Have to Do to Transfer the Pension?
In order to transfer your pension overseas you need to have left the UK for tax purposes. Therefore you need to lose your UK residence status.
The pension rights can then be transferred to the QROPS tax free and this can be done either before you start taking the retirement benefits or even after you've started receiving payments.
You don't have to establish the pension in the same jurisdiction that you are moving to, so you can choose any offshore tax friendly jurisdiction.
OUT OF THE FRYING PAN INTO THE FIRE
A key problem is that most countries tax individuals on their worldwide income. On obtaining Spanish residence, for example, you would become liable to Spanish income tax on your worldwide income. With Spanish tax rates of up to 45%, avoiding UK tax is not as big a benefit as it seems!
However, not all countries tax residents on their worldwide income. In Malta, for example, individuals who are of non-Maltese domicile, and who are resident but not ordinarily resident in Malta, pay tax only on income arising in Malta, or income remitted there and this could be at rates as low as 15%. Similarly many of the well known tax havens such as the Bahamas, the Cayman Islands and Monaco don't levy any income taxes at all.
If you seek to minimise income tax, your choice of country of residence is critical. In addition, the terms of any applicable double tax treaty should be examined carefully. Double tax treaties are covered later in the book but it is worthwhile noting that you would be entitled to a 'set off' where tax was suffered in two countries on the same income.
UK COMPANY OWNERS MOVING OVERSEAS
You may currently be UK resident but intend to become non- resident at some point in the future.
If you also own a UK company you may be wondering what opportunities there are to reduce tax.
One of the key tax planning opportunities is for the company to hold onto as much of its profits as possible, with you only withdrawing enough cash to fully utilise your basic-rate tax band (these dividends will be tax free). Any dividends over the basic-rate tax band would be taxed at an effective rate of 25% (if below the £150,000 super tax band).
If you retain cash in the company and only extract it when you are non UK resident, you will not be subject to UK income tax. There is also no UK withholding tax on dividends paid overseas. So if you are based in a tax haven or other jurisdiction with favourable tax rates, the money you take out of the company will be tax free.
The tax would then be limited to the corporation tax originally paid by the company on its profits, possibly as little as 20% at present. Alternatively, you could sell your shares in the company. Non-residents can do this free of UK capital gains tax.
If you are thinking of launching new products or services before you become non UK resident, you should think about doing this personally or through a partnership. Then when you leave the UK, and assuming the trade is not classed as a UK trade, the profits generated after you leave will fall outside the UK tax net.
Another option would be to transfer any new products into an offshore company or trust or use the offshore company as a form of recharging company to accumulate profits tax free overseas.
Provided the company is non UK resident it will not be taxed in the UK (because there is no UK trade). If any cash is extracted from the company it would clearly be subject to UK income tax. However, providing the entity is established in a low tax jurisdiction and no cash is extracted until after you become non UK resident, there could be no tax on the company's profits.
Note that we refer to 'new' products here. Any transfer of an existing trade to a new offshore company would be difficult. If the current trade is already making profits it would be likely to have significant value. As such, a transfer from the UK company to an offshore company would crystallise a capital gain which would be subject to corporation tax.
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Moving to the UK requires consideration of a number of tax issues. One key issue is the treatment of any foreign incorporated companies that are owned or controlled. In this article we look at the key issues....keep reading
Following a members tax question we've looked at the tax position of non resident partners. This article looks at how non UK resident partners are taxed in the UK and how they could structure their affairs to reduce UK tax...keep reading
If you trade via a UK company, the general rule is that it would be subject to UK corporation tax even if the controlling directors or shareholders were non UK resident. However as a non resident individual you may be looking at options to reduce the UK corporation tax charge. In this article we look at the UK tax planning options...keep reading
Individuals moving to the UK who hold an interest in, or have other connections with a non-resident company should carefully consider the impact of their personal change in residence with the residence of the foreign company. In this article, we look at some of the key considerations....keep reading
In this Practitioner Zone report we look at the tax residence of foreign trust companies including relevant procedures and actions to have in place to ensure the non residence status...keep reading
When considering your UK ties, what you must avoid at all costs, if you have been resident in any of the last three years, is to trip three of the sufficient ties tests. If you do, there is a special deeming rule whereby days of presence (and not only nights) will be counted. This article looks at this in detail...keep reading
In this article we take a look at recent cases and their impact on the tax residence position of trustees....keep reading
If you're looking at providing services from abroad to customers in the UK, it would be beneficial to pay careful attention to the terms of any double tax treaty. In this article we look at how using double tax treaties can significantly reduce your UK tax liability...keep reading
Working internationally (whether that is on a foreign secondment or simply being based in a different jurisdiction to your employer) can give rise to a number of UK tax issues. In this article, we look at the key tax issues and suggested measures....keep reading
As remote working is becoming more and more popular we thought we'd look at how a tax treaty would impact on someone working on the tax position for someone operating remotely....keep reading
We've received a number of questions recently relating to the tax position of gifts of income or capital from non resident/non doms. In this article we look at when such gifts can be subject to UK tax....keep reading
This brand new (December 2022) edition of our best selling offshore tax planning book tells you what you need to know to take advantage of offshore opportunities and slash your UK tax bill. It's a pretty comprehensive look at plenty of UK and offshore tax planning techniques including residence, domicile, emigration, using offshore companies and trusts, buying property overseas and much more....keep reading
Determining tax residence status for the 2021/2022 tax year requires a consideration of the statutory residence test. HMRC have issued specific clarifications for determining residence status for the 2021/2022 tax year....keep reading
In this article we look at the role of directors in ensuring that the central management and control of a non-UK company is located overseas to ensure the company is non-UK resident....keep reading
In this Practitioner Zone Report we look at the tax issues a non UK resident would need to consider on the purchase of UK residential property, including whether a corporate vehicle should be used...keep reading
Treaty residence determines the application of taxing rights under a double tax treaty. Its impact can be significant as shown in a recent case that saved over £10 million in income tax due to a taxpayer having his centre of vital interests overseas....keep reading
The new UK-Luxembourg double tax treaty includes specific articles that impact on property structures. In this members article we look at the impact this will have....keep reading
Capital gains for non-UK residents are subject to a number of specific rules. The interaction of these rules with the CGT rules for divorcing couples is interesting. In this member's article we look at the impact of the rules....keep reading
In this article we look at how an individual would be treated if they moved overseas to disposal of crypt assets. This includes an analysis of the statutory residence test, the temporary non-resident provisions and the source rules for crypto assets....keep reading
The 2% non-resident surcharge for SDLT purposes uses a different test of residence than the statutory residence test for income tax and capital gains tax purposes. In this article we look at the differences and how this impacts on the ability to file for a refund of the SDLT surcharge...keep reading
Determining whether tax needs to be withheld on the payment of interest to a non-resident depends on whether the interest has a UK source and whether it is short or yearly interest. A recent case looked at both of these issues. We look at the case in detail in this article....keep reading
In this practitioner zone report, we look at some of the key low-tax alternative jurisdictions, residence requirements and specific residence programs...keep reading
A new public register of overseas entities that hold or acquire or mortgage UK land has been established. In this article we look at the key requirements and the impact on foreign entities holding UK land....keep reading
The exceptional circumstances carve out from the usual day counting requirements of the statutory residence test allow up to 60 days to be excluded. This can therefore have a significant impact on a taxpayers tax residence position. In this article we look at a recent case, and the impact going forward....keep reading
The UK Government have released proposals for a corporate re-domiciliation regime to allow a non UK incorporated company to become a UK incorporated company. This is not the same as corporate residence (which is based on the place of incorporation or the location of central management and control). In this article we look at the corporate re-domiciliation proposals...keep reading
The new UK-Luxembourg double tax treaty was signed in early June 2022. Although it's not entered into force yet, there are a number of aspects worthy of consideration. In this article we look at some of the key impacts of the new double tax treaty....keep reading
Both trusts with UK trustees as well as non-resident trustees are required to register with the UK trust registration service (in the latter case generally when they have a UK tax liability on UK source income or assets or acquire UK land). Following a question from a site member, in this article we look at to what extent that information can be accessed....keep reading
Use our International Tax Personal Assessment Tool to identify the latest 2022 tax residence requirements and income tax rates in over 120 jurisdictions...keep reading
In this book we look at a variety of tax planning strategies that arise from the terms of the UK's double tax treaties. This book is updated for the 2022 changes....keep reading
For many people the family home is the most valuable asset they have. As such protecting its value will be of key importance. In this tax guide we look at the key tax planning opportunities for the family home and private residences....keep reading
This brand new (December 2022) edition of our best selling offshore tax planning book tells you what you need to know to take advantage of offshore opportunities and slash your UK tax bill. It's a pretty comprehensive look at plenty of UK and offshore tax planning techniques including residence, domicile, emigration, using offshore companies and trusts, buying property overseas and much more....keep reading
Inheritance tax is a particularly nasty tax as it's a tax on your capital that you've accumulated from your after tax earnings. In this book we look at some of the top ways you can legally reduce your inheritance tax liability....keep reading
This book looks at a number of tax planning issues for company owners and considers both corporate and personal tax planning opportunities available. It is updated for the latest changes for 2022/2023....keep reading
Buy-To-Let ("BTL") landlords have to consider Income Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax on their property holdings. In this book we look at tax planning techniques that all BTL landlords can consider to reduce the amount of these taxes they pay....keep reading
This guide is essential reading for anyone providing digital or online supplies of goods and services. It looks at the international tax treatment from both an income tax/corporate perspective as well as VAT/GST....keep reading
The aim of this guide is to give context to the considerations for 99% of international tax planning scenarios. Without understanding the information contained here, you will find it very difficult to apply or structure any kind of tax planning to your international transactions/assets....keep reading