Imagine this scenario: you are a British expatriate, living in Portugal and enjoying the lifestyle you have dreamed about. Then you receive a letter from your local tax office claiming 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 no longer resident in the UK, your income will be taxable in your new country.
While cross-border taxation is complex, you need to understand how to meet the basic rules to ensure you pay the right tax in the right place. Ignorance or arguing that you pay your taxes in the UK is no defence.
Where are you liable for taxation?
There are various reasons why many expatriates continue to pay taxes in the UK. They may think they have a choice about where they pay tax, or not realise they have become resident in another country. Or they might simply think that as long as they pay tax somewhere they will be safe.
However, you cannot choose where you pay taxes. If you live in Portugal, then you are likely to be deemed resident here and will be liable for Portuguese taxes. In this case, some income – like UK rental income – may still be taxable in Britain while also being liable in Portugal. To prevent tax being paid twice on the same asset, the UK-Portugal double tax treaty determines which country has the taxing rights, and you can usually receive a credit for any tax incorrectly paid in either country.
Things get more complicated if you split your time between the UK and Portugal, or you let a property in one country while living in another.
Understanding your tax residency
Each country has different rules used to work out who is resident there for tax purposes. In Portugal, you are tax resident if you spend more than 183 days here within a 12-month period. Even if you spend less time here, you may also be deemed resident for tax purposes if you have a ‘permanent home’ available as of December 31. Tax residents are liable to Portuguese tax on worldwide income and some capital gains. The exception is for those with ‘non-habitual resident’ status.
Conversely, many expatriates assume they are not resident in the UK when they still are. Spending just 16 days back home could unintentionally trigger UK tax residency, so if you are living in Portugal but return to the UK for extended periods, take care to understand your liabilities.
If you meet the residency requirements in more than one country, the ‘tie-breaker’ rules within most double tax treaties are there to determine where you should be resident. But this can be complex. Without expert guidance, your interpretation of your situation may be different to the tax authorities’ view, and your circumstances can change which may unexpectedly change your position.
Note also that your domicile status – which can affect your liability for UK inheritance tax – is different from residence. Shaking off your UK domicile is extremely difficult. Take specialist advice on how to best avoid leaving a significant inheritance tax liability for your heirs.
The cost of getting it wrong
If you fail to pay the taxes you owe or report relevant income to the tax authorities in one or both countries, you could find yourself with a large bill for unpaid taxes, interest and penalties. You could even find yourself at the centre of a tax investigation, possibly in a foreign language, and having to pay for advice as well as the tax bill. You will also need to try and recoup the taxes you paid incorrectly in the other country.
It is more important than ever to ensure you are paying tax in the right place, as new rules leave no room for tax evaders – intentional or otherwise – to hide. With the new automatic exchange of information regime, over 50 countries – including Portugal and the UK – are now sharing data on residents’ overseas income and assets. This means your local tax office will receive financial information about you without having to even ask for it. Next year, another 50 countries will join them. Remember, in some countries, tax evasion is a criminal offence that can result in prosecution.
You should take professional, personalised advice from an adviser with in-depth knowledge of the taxation regime of both countries and the interaction between them. Once you are certain you have your tax obligations right, you can focus on securing tax-efficient ways to make the most of your finances and get back to enjoying your time in Portugal.
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 Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.