Just imagine it: you are a British expatriate, living in your new home in Portugal or anywhere outside the UK, enjoying the lifestyle you dreamed about. This is what you worked very hard for, and now is the time to reap the rewards.
Then you receive a letter from your local tax office, saying that you owe them thousands of Euros in unpaid taxes, interest and penalties.
Your reaction is that you have been paying taxes all along – in the UK. The problem is: if you are not resident in the UK, your income is taxable in your new country. Arguing that you pay your taxes in the UK is no defence. You may have to pay back taxes in Portugal, and have to try and recoup the taxes you paid incorrectly in the UK. You may also face penalties and interest in Portugal.
You cannot choose where you pay taxes. If you live in Country A, then that is probably where you have to pay taxes, as is the case in Portugal. Some income (e.g. UK rental income) remains liable to tax in the UK but is also taxable in Portugal, subject to double tax relief.
You will have to go through the whole process of a tax investigation and pay for advice as well as the tax bill. In some countries, tax evasion is a criminal offence.
It is now even more important to ensure you are paying tax in the right place. The new automatic exchange of information regime has started and next year the Portuguese tax authorities will receive data (from participating countries around the world) on your overseas income and assets. For some countries, including Portugal, the UK and its offshore centres, the first data received will relate to 2016.
Or what if you have been living between the UK and Portugal and are using the local tax residency rules in each country to make you resident in one particular place? If you get this wrong, and the tax authorities challenge you, you could find yourself with a large bill for unpaid taxes, interest and penalties.
This can also apply for people letting a property in one country and living in another who have not been reporting the income to the tax authorities in one or both countries.
Many UK nationals move abroad and continue to pay taxes in the UK. They may believe they have a choice as to where they can pay tax; they might not realise they have become resident in another country; they might simply think that as long as they pay tax somewhere they will be safe.
Residence is a matter of fact. It is where you are spending your time. However, each country has different domestic rules to work out who is resident there for tax purposes. If you satisfy those rules you are liable to tax in that country according to local tax legislation.
In Portugal, you are tax resident if you spend more than 183 days cumulatively in a 12-month period. You may also be deemed resident for tax purposes if you have a ‘permanent home’ available as of December 31, even if you spend less than 183 days here. As a tax resident, you are liable to Portuguese tax on worldwide income and, to some degree, on capital gains. The exception is for those accepted into the non-habitual resident regime.
Equally, many people claim not to be resident in the UK when in fact they are. Most double tax treaties have ‘tie-breaker’ clauses to establish where someone is resident if they fulfil both countries’ domestic requirements, but you need to take specialist tax advice and be careful to follow the rules. The UK’s Statutory Residence Test is very detailed and complex. Your interpretation of your circumstances may not be the same as the tax authorities’, and circumstances can change – through illness or in other ways which may unexpectedly change your position.
Finally, UK expatriates also need to consider their domicile status since this affects your liability to UK inheritance tax. It is different from residence and shaking off your UK domicile is hard to do. If you get this wrong, your heirs could end up with an unexpected large inheritance tax bill.
You should take professional financial planning advice regarding your situation from an adviser who has in-depth knowledge of the taxation regime of both countries and the interaction between them. You want to be certain that you have your tax residency right, and then move on to implement effective and compliant tax planning strategies.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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