Understanding the complex taxation guidelines for UK citizens living abroad

1. Overview

The intricacies of tax law can be overwhelming for almost anyone. We will discuss and outline some of the basics you need to know about your tax obligations under the law if you are a UK citizen living abroad. In most cases, you are still legally required to pay tax on your UK income, even if you’re not a UK resident. Income categories include sources of revenue such as:

·         Retirement or pension earnings

·         Income earned from rental property

·         Interest earned on savings and investments

·         All wages and earned income from employment

You may be eligible for a Personal Allowance under which you only  pay Income Tax on your income above that amount. Otherwise, you pay taxes on all your income sources.

Your country of residence may also tax you on any income earned from UK sources. If your country of residence has a ‘double-taxation agreement’ with the UK, you may legally be entitled to claim this tax in the UK prevent being double-taxed on your income.

Under most circumstances, you are not taxed during the sale of an any asset, other than the sale of UK property or land.

When tax is not required

Non-UK-residents do not normally pay UK tax on:

·         any State Pension

·         any interest earned from UK government-backed securities or “gilts.”

If you are a resident of another country outside the UK and are working in the UK, your tax is assessed automatically based on the total number of days you work in the UK.

Income Tax is not deducted automatically from interest earned on savings or investments.

When should you report your income to HM Revenue and Customs (HMRC)?

Typically, you are legally required to send a Self Assessment tax return:

·         If you rent any property in the UK

·         If you are self-employed in the UK

·         If you receive pension benefits outside the UK and you were a UK resident in at least one (1) of the five (5) previous tax years

·         If you have other income which has not been taxed

You are not legally required to report income to HMRC if you’ve previously claimed tax relief under any legal “double-taxation agreement.”

If you are a non-UK resident and were unable to leave in UK due to the coronavirus (COVID-19) between 5 April, 2020 and 5 April, 2022

You are not legally required to pay UK tax on employment income if you:

·         Have earned the income between the dates you projected to leave and when you left

·         Have already been taxed on this income in your home country

Example: You missed your departing flight because you were self-isolating due to covid and you worked in the UK until you could arrange a flight to your home country. As long as you are being taxed on your wages in your home country, you are not legally required to also pay tax in the UK.

You are required to file a Self-Assessment tax return, along with a completed SA109 form. You must utilize the “other information” section of your SA109 to include:

·         the dates you were unable to leave the UK because of coronavirus

·         the amount of income you earned in that time period

·         a confirmation you have already been taxed on the aforementioned earnings in another country

If you are not sure how to file a Self-Assessment return, you can get advice from a professional at Borderless Counsel. We are always ready to help you with any aspect of this complicated web of legal requirements.

HMRC may ask you to prove:

·         that you could not leave the UK when you desired, for instance, by providing an NHS isolation note

·         that you paid tax in another country on earnings while in the UK due to covid

·         that you departed the UK as rapidly as you possibly could

It is possible that you will be legally required to pay tax in the UK if you cannot sufficiently prove you were unable to leave the UK and that you did not leave as quickly as you could.

How do I use a Self-Assessment tax return?

You may not use HMRC’s online services to inform them about your income if you are not a UK resident. Rather, you are required to use one of these options:

·         complete a Self Assessment tax return and an SA109 form and mail it

·         get a tax professional, such as one of our experts at Borderless Counsel to report your UK income on your behalf.

You can be legally fined if you miss the deadline – and the deadline is sooner if you are sending your tax return by mail (31 October).

What happens when you have overpaid?

You may formally submit an application for a refund if you have reason to believe that you have overpaid your tax. This may happen if the tax amount has been deducted automatically (for example by your bank) but your total UK income is less than your Personal Allowance.

Send form R43 to HMRC, or claim the refund in your Self Assessment tax return if you’re already doing one.

HMRC will typically refund you in the form of a check. If you would like HMRC to refund you directly to your bank, you will need to include your bank account number and sort or routing code on your tax return and you will also need to include this information again every time you complete a tax return in the future.

Get help from a professional such as our expert team at Borderless Counsel, if you need advice.

2. Rental income

You are legally required to pay tax on rental income if you rent out property in the UK.

You might also be required to pay tax if you make any capital gains when you sell property or land in the UK.

If you live abroad for six (6) months or more annually, you are then legally classified as a “non-resident landlord” by HM Revenue and Customs (HMRC) even if you’re a UK resident for any other tax purposes.

How taxes are paid

You can collect rent either:

·         in full and pay tax through Self Assessment if HMRC permits you to do so

·         with the tax previously deducted by your rental agent and/or tenant

To get your full rent

If you want to pay tax on your rental income through Self Assessment, you must complete a form NRL1i and send it to HMRC.

In the event that your application is formally approved, HMRC will inform your letting agent or tenant not to deduct tax from your rent and you will be legally required to declare your rental income on your Self-Assessment tax return.

HMRC will reject your application if your taxes are not current, for example such as if you are late with your previously filed tax returns or tax payments.

Receive your rent with the tax already deducted

Your letting agent or tenant will:

·         deduct the basic rate tax from your rent after allowing for any expenses paid

·         provide you a certificate at the close of the tax year detailing the amount of tax that has been deducted

In the event that you do not have a letting agent and your tenant pays you an amount greater than £100 in weekly rent, the amount will be deducted directly from any rent payments made to you.

Completing your tax return

You are legally required to declare your rental income in a Self Assessment tax return unless HMRC explicitly states that you are not required to do so.

You may not use HMRC’s online services in any such case. Rather, you must:

·         send your tax return by mail

·         get help from a professional, such as our team of experts at Borderless Consel

Additionally, you are legally required to complete the “residence” section in form SA109 if you’re sending it by mail as well as the “property” section in form SA105.

You will be assessed a fine if you miss the deadline, and again, the deadline is earlier if you’re sending your return by mail (31 October).

What about Trusts and Companies?

Legally, a company is classified as a “non-resident landlord” in the event that it receives income from UK rental property and if:

·         its main office or business location is physically located outside the UK

·         it is legally incorporated outside of the UK

Your company will receive its rent in full if it is resident within the UK for tax purposes. This includes any UK branches of companies based abroad if they are registered for Corporate Tax.

A trust is a ‘non-resident landlord’ if it receives income from renting UK property and all trustees usually live outside the UK.

How do you apply to get your rent in full

Companies wishing to apply must use form NRL2i to legally petition HMRC to get rental income in full. Legal Trusts are required to complete form NRL3i.

3. Selling or inheriting assets

If you are not a UK resident, you do not typically pay:

·         Capital Gains Tax if you sell common assets (apart from property as mentioned above) in the UK

·         Inheritance Tax if you inherit assets located within in the UK

When might you be taxed?

You are legally required to pay Capital Gains Tax under the following scenarios:

·         you make any capital gains upon the sale of property or land in the UK

·         the assets you sold were utilized by any UK branch of a foreign business

·         you were at one point in the past a UK resident and you return to the UK within five (5) years of leaving

What if you inherited an asset?

You are legally required to pay Inheritance Tax under the following circumstances:

·         you inherited property, money, or shares in the UK

·         the deceased’s estate does not have the funds necessary to pay the Inheritance Tax assessed

The typical rules for paying Income Tax apply if you gain income from an inherited asset, for example such as rental income from a UK property.

If you are a non-UK resident and you inherit UK property or land you are legally required to pay tax on any capital gains you make in the event that you sell it at any future date. You do not need to pay tax if you inherit and sell other assets, such as, for example UK shares.

4. Personal Allowance

You’ll get a Personal Allowance of tax-free UK income each year if any of the following apply:

·         you hold a British passport

·         you’re a citizen of a European Economic Area (EEA) country

·         you’ve worked for the UK government at any time during that tax year

You might also get it if it’s included in the double-taxation agreement between the UK and the country you live in.

Claim the Personal Allowance

If you’re not a UK resident, you have to claim the Personal Allowance at the end of each tax year in which you have UK income. Send form R43 to HM Revenue and Customs (HMRC).

5. If you're taxed twice

You may be taxed on your UK income by the country where you’re resident and by the UK.

You may not have to pay twice if the country you’re resident in has a ‘double-taxation agreement’ with the UK. Depending on the agreement, you can apply for either:

·         partial or full relief before you’ve been taxed

·         a refund after you’ve been taxed

Each double-taxation agreement sets out:

·         the country you pay tax in

·         the country you apply for relief in

·         how much tax relief you get

If the tax rates in the 2 countries are different, you’ll pay the higher rate of tax. The tax year may start on different days in different countries.

Double taxation agreements do not apply to tax on capital gains such as those previously discussed, like selling UK residential property.

What types of income can you claim?

You can legally claim income in the following categories:

·         most pensions - most UK government, such as civil service pensions are only taxable within the UK

·         wages and other pay, including those who are self-employed

·         bank interest earned

·         dividends, in such cases, special rules apply, which HM Revenue and Customs (HMRC) explain in section 10 of “Residence, Domicile and the Remittance Basis”

How can I claim tax relief?

Examine HMRC’s “Double-taxation digest” specifically for countries that have a tax agreement with the UK to understand the rate at which income earned from such categories as pensions and interest is taxed.

It is also important to examine the relevant tax treaty to understand the rules on taxation for other kinds of income, such as wages and rent.

You can live abroad and still be a UK resident for tax, for instance, if you visit the UK for more than 183 days in a tax year.

 How many days can you legally be out of the UK and avoid taxation?

You are automatically considered a non-UK-resident if either:
you spent fewer than 16 days in the UK (or 46 days if you have not been classed as UK resident for the 3 previous tax years)

you work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working.

If you are a UK resident

You can live abroad and still be a legal UK resident for tax purposes if, for example, you visit the UK for more than 183 days in any tax year.
As you can see, there are many detailed aspects to tax law for UK citizens, both earning abroad and earning domestically. We hope you will allow Borderless Counsel to serve as your expert guide to understanding and optimizing your tax filings.

For more information, contact us at info@borderlesscounsel.com today!