Please note that the information in this post refers to the 2012/13 tax year (6th April 2012 to 5th April 2013) and bear in mind that the proposed Statutory Residency Test should become effective from 6th April 2013. Information can be found here:
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 arising income in the UK, this is subject to UK tax, although only in excess of the Personal Allowance (£8,105 for tax year 2011/12). 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.
Anyone 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.
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 pension based 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 payments will 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.
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.
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 (ISAs) 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.
A word of warning: certain salespeople are known to recommend long term savings plans but forget to mention that if such plans are encashed after returning to the UK the planholder is likely to have a significant tax charge. For most plans shorter terms will suit the majority of people, so be wary of anyone pushing a 25 year term plan as this will be in their interest, not yours.
There are investment products available offshore that have tax advantages for people returning to the UK, even if that is within five tax years of departure.
It is also possible to invest locally, but as assets in the UAE may be subject to Sharia law this may not suit all.
Many people have life assurance policies that they took out whilst resident in the UK, and provided there was no intention to move overseas when it was set up and premiums are paid from a UK bank account the plan should be valid. Critical illness plans, or those that include it may not be valid so it is worth checking this.
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.
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. The Inheritance Threshold for the tax year 2012/12 stands at £325,000.
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. Always ensure that your will is arranged by a lawyer.
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.
If you have any queries on this post, want to discuss your tax situation, or any other financial planning topic, please contact me firstname.lastname@example.org