General guidance for British expats

 

This post has been superceded by another with more up to date information. Please go to https://financialuae.me/2011/05/23/guidance-for-british-expats-updated-may-2011/

Taxes

British expatriates are generally not liable for UK income tax on their earnings whilst resident in the UAE, but specific rules apply. The date from when overseas income is not taxable depends on when a person leaves the UK and how long they remain non-resident. The UK tax year runs from 6th April to 5th April and if someone leaves the UK part way through a tax year they may remain liable for UK income tax for the remainder of that year.  This is particularly the case for anyone who intends to remain overseas for just a few years as after a period in excess of five years living overseas you become more than temporarily non-resident for tax purposes and any partial years become exempt from UK income tax. At this time there is also no liability to Capital Gains Tax.

When leaving the UK, HMRC (Her Majesty’s Revenue & Customs) form P85 should be completed. This is an application to be treated as non-resident for tax purposes.

Should a non-resident Brit receive income in the UK, this is subject to UK tax, although only in excess of the Personal Allowance (£6,475 for the tax year 2010/11). Even if employed overseas, income could be received from savings accounts, investments or from property. Anyone who owns a property in the UK and rents it out should complete the paperwork for the HMRC Non-Resident Landlord Scheme which is basically an arrangement for taxing the UK rental income of non-resident landlords. Generally tax will be deducted at source, although it is possible to apply for gross payments with the landlord then being liable for self-assessment. This is often preferable as certain costs, such as maintenance charges, may be offset against the rental income. If a property is jointly owned, then two sets of Personal Allowances can be used in order to reduce the tax payable.

Non-residents can apply for income on savings accounts to be paid without the deduction of savings rate tax by completing HMRC form R85, but the income received is taxable. It is therefore often more practical to move savings offshore.

Brits can spend up to 90 days in the UK per tax year without liability to UK tax. Provided a person is non-resident for tax purposes in a particular tax year there should be no liability to tax on monies earned overseas but remitted to the UK.

Pensions

UK pension legislation is complex and several areas need to be considered. To start with; state pensions. UK national insurance contributions can be paid whilst living overseas, provided that certain eligibility conditions are met. There are three classes on contributions that are relevant to non-residents, Classes 1, 2 and 3, but classes 2 and 3 are those that can be made voluntarily in order to help maintain a national insurance record, which could affect entitlement to the basic state pension and other contributory state benefits. Class 1 is usually payable when a person has been posted abroad by their employer for a specified period.

British adults have the option to pay voluntary national insurance contributions, as either Class 2 or 3 dependent on their circumstances  and it is necessary to pay 52 voluntary national insurance contributions in a tax year for that year to be a qualifying year for UK state pension entitlement..

An individual will need to consider their entitlement to state pensionbased on their existing national insurance record in order to find out if there is any benefit in making voluntary national insurance contributions.  This is simply done by sending in form BR19 to HMRC and a response is usually issued in a few weeks. Individuals wishing to make voluntary national insurance contributions whilst abroad should apply using form CF 83 which is attached to the guide Social Security Abroad (NI 38), available from the HMRC website.

In most cases only limited ongoing pension contributions can be made whilst someone is non-resident. Provided a personal pension or stakeholder scheme is already in force, an individual can continue to make contributions of up to £3,600 per annum for up to five years after their departure from the UK. With tax relief the cost of contributions would reduce to £2,880.

A UK employer can make contributions to a UK registered pension scheme for one of their employee’s who is working overseas. There must however be continuous employment and the individual must have a UK employment contract.Tax relief on such employer paymentswill be at the discretion of the Inspector of Taxes. In practice, it is rare for the Inspector of Taxes to deny or restrict tax relief.

Whilst non-resident it is possible to transfer existing pension benefits to other UK pension schemes, although independent advice should be sought regarding suitability.

At retirement the proceeds of UK pensions, whether state or personal, can be paid to a pensioner living overseas in accordance with the provisions of the plan. With a state pension, although this can be remitted overseas, if the individual is living outside of the EEA (European Economic Area) or in a country which does not have a reciprocal social security agreement with the UK, the amount of UK state pension they will receive each year will be frozen at the amount initially paid when it was first claimed. There are petitions to the UK Government on this subject each year, but in the current economic climate this is unlikely to change.

Offshore

British nationals may open bank accounts anywhere that they wish and whilst it is practical and indeed necessary to have a Dirham account, many will want an offshore bank account. In most cases these are subsidiaries of international banks with offices in one of the UK offshore jurisdictions such as the Channel Islands or Isle of Man. Advantages include no liability to UK tax on the interest earned whilst UK non-resident for tax purposes and the ability to time the repatriation of funds in a tax efficient manner.

Investment

For Brits living abroad, a number of investment options in the UK are available, but some are best avoided as there would be tax liabilities on growth or income.  Existing Individual Savings Accounts (and PEPs) can be retained, but no new funds can be contributed to these plans. Investments can be made to bonds and unit and investment trusts, but the potential tax liability means that it is generally more advantageous to use offshore investments.

There are a number of well known insurance companies who have offshore divisions and these offer a range of plans to suit most circumstances, both for regular payments and lump sums. Generally these providers offer access to several hundred funds for each plan, many managed by well known international fund managers, so suitable portfolios can be constructed in accordance with an individual’s personal attitude to risk, preferences and timescale.

It is also possible to invest locally, but as assets in the UAE may be subject to Sharia law this may not suit all. A popular alternative to a savings account are National Bonds, which have been covered in detail by this newspaper. These are a little like Premium Bonds but with an annual return.

Protection

Many people have life assurance policies that they took out whilst resident in the UK, but in a few cases these become invalid after moving overseas, especially if the policy includes critical illness cover. Plans that were taken out after knowing there would be a move overseas are also invalid. It is often worth double checking to ensure that plans are valid.

Once you are non-resident it is not possible to take out UK life assurance policies, but offshore providers offer a range of policies to suit most circumstances, including term assurances, whole of life plans and critical illness cover.

All residents should have suitable medical insurance to cover them whilst abroad, but many people do not realise that once they move overseas they are not eligible for free treatment by the National Health Service (NHS). Under the Health and Medicines Act 1988, health authorities may set their own charges for non-resident patients and these are reviewed annually. The only areas for which there is no fee is for people admitted to Accident & Emergency Departments, but follow up treatments and admissions may have fees. The exact rules and costs will vary between health authorities. With this in mind international medical insurance policies that include the UK are recommended.

Estate Planning

Having a will is important for financial planning, but the rules relating to inheritance in the UAE are different to those that apply in the UK. Sharia law will take precedence over assets held in the UAE and although this is not necessarily overridden by a will, a properly written Will may mean that your wishes are taken seriously into consideration. More importantly a Will allows parents to specify guardians for young children and to make arrangements for monies to be set up in trust for the children should both parents die.

UK Inheritance Tax is payable on worldwide assets for those that are UK domiciled. Domicile is a concept of general law and is used to determine the system of personal law (dealing with matters such as marriage, divorce and Wills) that should be applied to an individual who has connections with more than one jurisdiction. Domicile is distinct from nationality or residence and you can only have one operative domicile at any given time.

Having a Will allows for assets to be distributed in accordance with the wishes of the settlor and if properly worded can also reduce the inheritance tax due. Wills should be written mainly in accordance with British law, taking into account assets held elsewhere, but these can be arranged in the UAE.

Returning home

British Nationals do not have to repatriate their assets should they return to the UK and may keep them overseas for as long as they wish. Any growth or interest however, will be subject to UK tax. In an ideal world a return to the UK is planned well ahead of time, particularly if there are considerable assets offshore or overseas that may have tax liabilities upon return.

As soon as someone takes up employment in the UK again they will come to the attention of the tax man and will usually be put on a, generally less favourable, emergency tax code whilst HMRC works out whether there is any outstanding tax liability. Form P86 ‘Arrival in the UK’ should be submitted upon return.

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About financialuae

A qualified and experienced Independent Financial Adviser based in Dubai, UAE. Professional and ethical. Freelance writer on personal financial issues & the On Your Side column in The National. Regular radio guest. Senior Partner at Holborn Assets LLC, Dubai, UAE.
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10 Responses to General guidance for British expats

  1. Nicola says:

    Hi, i have stumbled upon your website and this has been most helpful. Our situation is that my husband works in Somalia, he is paid in US Dollars from a Dubai based company. His salary for the past year has been paid into a normal current account but we have recently opened an offshore Dollar account and they will go into that account from now on. He did not complete a P85 before he left as I have only just learned of it. What would be best to do regarding the P85? And can you confirm that his earnings are infact Tax Free? All his colleages say his earnings are tax free. I should also add that he is in the UK on leave for less than 90 days a year. We have just had a reminder to fill in his self assessment due to being previously self employed in the UK a few years ago and i’m not sure what to do for the best. Please can you help? Any knowledge you could pass on would be great. thanks.

    • financialuae says:

      Nicola
      Thank you for your comments. It is likely that your husband’s income will be tax-free but there are a number of issues to be clarified before I could confirm. A P85 can be completed restrospectively.

      It would be best if you could contact me directly on this issue at keren@holbornassets.com

      Kind regards
      Keren

  2. Hesham says:

    This has been incredibly helpful – I am heading to the UAE in a few weeks and this is the first bit of useful & usable info I have come across – especially as I have a house which will be rented

    Thanks!
    Hesham

  3. Chris says:

    Hi,

    I have a couple of questions, I assume that if I were to commence employment in May this year (in UAE), this would still be classed as tax free as I am entitled to be in the UK for a period of 90 days in any tax year (leaving me approx 60 days of the current financial year?).

    Also, I have a HM Forces pension, which is taxed at the higher rate (was informed by the taxman that it is classed as a second income?). Could I also be entitled to receive this pension tax free if I reside in UAE?

    Any pointers advice would be appreciated.

    Many thanks

    Chris

    • financialuae says:

      To be treated as UK non-resident for tax purposes you must spend no more than 90 days in the UK in a tax year, so leaving in May still allows you to keep under the limit and for your overseas earnings to be free from UK tax. HMRC has been cracking down on what they class as qualifying for non-resident status and I will be posting about this shortly, so keep reading this blog or subscribe to be kept up to date.

      For your second question, I have just answered a similar query in today’s On Your Side column in The National newspaper (all March columns to be posted at the end of the month), but in short, if you are UK non-resident you can apply for your forces pension to be paid to you with deduction of basic rate tax only, rather than higher rate. Forces pensions in payment cannot be paid tax-free, although options exist for those who have not yet started to take benefits.

      Hope this helps.

  4. Zahid says:

    Great article. Very useful. I have shared the link with a group of teachers that are leaving UK this summer to move to Abu Dhabi.

  5. Raj says:

    Very good information on this website – I want to clarify one point you make. I intend to move to UAE in Nov/Dec this year. Which means that I have to pay tax until April 2012. My company may pay me in UK account whilst I am in UAE – can I not save tax after 6th April 2012? I haqve two options either take an Expat package and get paid here in UK or get a local contract and get paid in UAE. There are many cons in taking a local contract and I want to stick to the label of “expat” – are there any solutions?
    Thanks
    Raj

    • financialuae says:

      dear Raj

      Please refer to a later post under a similar heading as this is more up to date.
      https://financialuae.wordpress.com/2011/05/23/guidance-for-british-expats-updated-may-2011/

      You would be liable to pay UK Income tax until 5th April 2012 if you spend less than five full tax years as a non-resident. If you are being paid in the UK and have registered as non-resident and all your work is taking place out of the UK, then the income can be paid to you without deduction of tax. Ideally it should be paid to an offshore account to avoid complications.

      If you will be working in the UAE and have a residency visa, then by law you must have some sort of local contract as it must be registered with the Ministry of Labour. You can still be on expat terms whilst on a local contract, as that is dependent of the minimum requirement of UAE labour law as well as the general terms from your employer. The situation is not as black and white as local or expat contract.

      Two points to note: if you are going to be a UAE resident, but paid in Sterling, then you will be subject to daily exchange rate fluctuations. Secondly, there are likely to be changes to residency rules with effect from April 2012. These will not be finalised by HMRC for some time and I will be writing about this shortly, so you may wish to subscribe to this site to be kept updated.

  6. shetal says:

    hi

    i am a british living and working in dubai and will be here for a full tax year, which i hope to claim back the tax i am currenly paying in the UK. I will have to go back and work in the UK office, do you know if there are any time limitations that I can go back and work for?

    Any info would be of great help.

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