In the second part of our article, ‘Financial Planning for Expats’, we look at the various tax wrappers available and whether the income is taxable in another country. We also consider an area that is often overlooked by people moving overseas, that of estate planning and wills.
Are my dividends tax-free?
You may have your investments in various tax wrappers, for example, pensions, bonds or ISAs but are wondering if the growth or income is taxable in another country. Any income from a British-based deposit account, investment funds, shares, pension or annuity may be subject to UK tax. However, any savings or investments held within your tax-free ISA wrapper will not be taxed in the UK, even if you live abroad. You do, unfortunately, lose the other advantages of an ISA when you move overseas. For example, you cannot open a new ISA if you are no longer a UK tax resident, although you can keep your existing ISA investments. It’s also possible that other countries may not recognise the tax-free ISA wrapper and may tax the underlying savings. It will all depend on your country of residency.
If you’re connected to the UK as an expat, you may have what is known as non-dom status. This refers to a UK resident whose permanent home, or domicile, is outside of the UK. They must provide evidence about their background, lifestyle and future intentions, such as where they own property or intend to be buried, as proof to the tax authorities. Under the statutory residence test, there are various automatic UK tests and a sufficient ties test you can take to work out your status. This is an extract from the Government’s leaflet:
Step 1: Consider whether you spent 183 days* in the UK in that tax year. If you did, you will be resident in the UK. If not:
Step 2: Consider the 3 automatic overseas tests. If you meet 1 of these you are not UK resident. If you did not:
Step 3: Consider if you meet the second and third UK tests. If you meet 1 of these, you are UK resident. If you did not:
Step 4: Consider the sufficient ties test. If you meet this you are UK resident, if you do not meet this, you are not UK resident.
Automatic overseas tests 1.4 If you meet any of the automatic overseas tests for a tax year, you are automatically non-resident for that year.
First automatic overseas test 1.5 You were resident in the UK for 1 or more of the 3 tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year. If an individual dies in the tax year this test does not apply. The statutory residence test RDR3 10
Second automatic overseas test 1.6 You were resident in the UK for none of the 3 tax years preceding the tax year, and you spend fewer than 46 days in the UK in the tax year.
Third automatic overseas test 1.7 You work full-time overseas over the tax year, without any significant breaks during the tax year from overseas work, and: you spend fewer than 91 days in the UK in the tax year the number of days in the tax year on which you work for more than 3 hours in the UK is less than 31
Find out more about how to check your status here.
Estate planning and wills
If you are resident overseas you may be wondering if you are excluded from inheritance tax (IHT) in the UK. If at the date of death, you are not deemed to be domiciled in the UK, UK IHT is only paid on your UK assets; for example, on property or bank accounts you have in the UK. It’s not paid on things like foreign currency accounts with a bank or the Post Office, overseas pensions or holdings in authorised unit trusts and open-ended investment companies. However, it is important to be sure about your domicile because those who intend to return to the UK in the future or have not sufficiently cut ties with the UK can still be considered a UK domicile, meaning their worldwide assets could be subject to UK IHT. The rules do differ if you have assets in a trust or government gilts. All your worldwide assets will be assessed for UK IHT if you either lived in the UK for “at least” seventeen of the last twenty years or had your permanent home in the UK at any time in the last three years of your life, although this is due to change from April 2017.
Where wills are concerned, different countries have different rules so it is important to familiarise yourself with them. For example, failure to observe inheritance laws in France can mean that people inheriting expat-owned property face significant tax bills in the future. One key aspect to consider if you have assets in both the UK and abroad is to ensure that your will in the UK is compatible with your overseas will. For example, if you own a house in the States, you will need to draw up a will in relation to it over there but it is crucial that this will ‘talks to’ your will in the UK too so that everything is accounted for. Having a will can help your relatives to avoid unnecessary tax charges whereas, without one, your assets could be at the mercy of intestacy rules.
The issues all differ according to individual circumstances and can be quite involved. Cross Border Financial Planning specialise in working with British expatriates and are happy to help if you have any queries.