Non resident capital gains tax for UK Expats
ProACT Sam explains how non resident Capital Gains Tax works for UK Expats. Specifically, we look at how income or capital gains liabilities arise in another country for Expats who are non resident to the UK, are Living and Working Abroad and looking to make tax efficiencies cross-borders.
An Expat who is a tax resident in any worldwide location is likely to have their tax affairs in order specific to that location. In some jurisdictions, Expats may pay no tax at all (for example, in Dubai). In others, they may only pay tax on a remitted income (for example, in Cyprus).
However, even though an Expat pays zero or reduced tax in the country of their residence, it doesn't mean that income they receive around the rest of the world will be tax-free.
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A UK Expat Living and Working Abroad could own property in the UK. When that property is sold, a potential Capital Gains Tax liability arises. In the past that has been handled in many different ways, but since 2015 the laws relating to these UK-based gains have tightened up.
You will be taxed at source on that capital gains income.
An Expat can’t mitigate this liability if the property is held in their personal name.
Additionally, since April 2020 you must produce a tax return for the sale of a UK property at the time of sale (we talk more about this in our article/vlog ‘UK Property Sales to Pay Capital Gains at Source’) . The small print says within 30 days, but in practice, this requirement means that when you complete the conveyancing, you must also have completed the tax return and confirm that you've made that capital gain and paid the taxes (which are due immediately).
There might be ways of mitigating and offsetting against other things, but the tax needs to be paid first and any rebate claimed afterwards. This is a significant change for Expats Living and Working Abroad who own property back in the UK. If they are British (or any other nationality) and a UK non resident, a capital gains tax liability will still arise in the UK.
For UK nationals, Capital Gains Tax is a tax on lifetime gains, but Inheritance Tax is also a form of Capital Gains Tax. It's called a different name for two reasons. Firstly, because it's only charged on death and on the estate of the deceased. Secondly, it's charged at twice the rate i.e. 40%. When you die, all of your assets (after any relevant allowances) are taxed at 40%. There are some exemptions, but even if you're outside the UK and you own a property in the centre of London worth £1 million, there is a potential capital gains liability on the sale at the time of sale during your lifetime, or an Inheritance Tax liability upon your death.
As a UK Expat, if you are liable on worldwide assets and income for Inheritance Tax on death because of your domicile, that means your liability is 40% on your worldwide assets, not just the UK assets.
To be clear, this is not to say that an Expat can't offset income overseas.
However, the UK is going to tax you on your property rental income if you're Living and Working Abroad. So if you've got £30,000 a year property rental income, and you've got a £12,500 personal allowance, you've got around £17,500 of taxable income at 20%, equating to £3,500 of tax to pay every year. This tax is paid under self-assessment (if not deducted at source by a rental agent). Effectively that income will be taxed in the UK at UK rates.
Another type of income that may be taxed in the UK at UK rates is a public service pension. Under the latest double taxation treaties, a country like the UK has the right to tax public sourced pensions in its home country. This is not dissimilar to what America and Canada have been doing for years. If you have a local authority, NHS, civil service, or any form of public civil service (local or national) or forces type pension income, when you retire (even as an Expat), you could still have to pay tax on that income at source back in the UK. This is a relatively new change but it will restrict the choices of Expats and your liability will be impacted by the country in which you're living.
How can you manage your own situation?
It's like having any investment account: If you've got a savings account in the UK, you'd look at using an ISA, or a property ISA, an investment bond or a pension fund. There are different ways you can wrap your account up to change the ownership so that it doesn’t become a personal tax liability.
The money sits within an investment vehicle. These can have associated fees/charges, but they can save tax and you need to balance that up.
There are simple, effective ways that the UK Expat non resident can plan not to pay Capital Gains Tax at 20%, 28%, or 40% in the UK. It is a matter of organising assets to protect family and business down the generations and across the borders.
Which country you're a resident in will dictate the amount of tax at risk. So even if you've got the lifestyle of your dreams, Living and Working Abroad, there's still action that you can take to protect your family and to protect future generations.
For more information on how you can save capital gains taxes and address cross-border taxation questions, contact us at proactpartnership.com.
UK Expats and Expats around the world will always potentially have two or three tax locations. We must look at the individual’s circumstances, their home country, the country of tax residence, and the country where the investment asset is held.
For more guidance, contact us at proactpartnership.com.
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