By DAVID FRANKS [email protected]
David Franks is an accomplished and experienced practitioner in both UK and overseas taxation. He lectures widely on taxation issues, in particular in relation to investment planning. David holds the Investment Management Certificate and is the Chief Executive and Finance Director of the Blevins Franks Group.
Just imagine it: you are a British expatriate, living in your new home in Portugal or anywhere outside the UK, enjoying the new pace of life, the food and the lifestyle you have dreamed about.
You’ve left behind the weather, your old lifestyle, and all the things that annoyed you about the UK. This is what you’ve worked very hard for, and now is the time to reap the rewards.
Then you receive a letter (or even a visit) from the tax office of the country in which you are living. They say that you owe them thousands of euros, or dollars, or whatever the currency is in that country, in unpaid taxes, plus interest and penalties.
Your reaction is that you have been paying taxes all along – in Britain. The problem is: if you are not living in the UK, your income will be taxable in your new country. Arguing that you pay your taxes in the UK is no defence, nor is ignorance.
You may be made to pay back taxes in your new country, and have to try and recoup the taxes you paid incorrectly in the UK. You may also face penalties and interest in your new country.
You cannot choose where you pay taxes. If you live in Country A, then that’s probably where you’ll have to pay taxes – as is the case in Portugal. Some income (e.g. UK rents) remains liable to tax in the UK, but may also be taxable in your new country, subject to any double tax relief.
You’ll have to go through the whole process of the investigation, possibly in a foreign language, and pay for advice as well as the unpaid taxes, interest and penalties – all because you didn’t take proper advice or pay to have tax returns done in the first place.
In some countries, tax evasion is even a criminal offence, so you may end up having a criminal record which may not bode well for continued residence there.
Or what if you have been living between the UK and another country, perhaps relying on the UK’s ‘91-day rule’ to either make yourself resident or non-resident in the UK?
If you’ve got this wrong and the tax authorities in either country challenge you, you could find yourself with a large bill for unpaid taxes, interest and penalties. In some countries, such investigations can go back many years, particularly if it’s suspected that you deliberately didn’t declare your position. You will then also have to pay for advice to sort this all out.
The same can also be true 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.
Would you really want to face this scenario?
There are many people who move abroad and continue to pay taxes in the UK. They may believe that they have a choice as to where they can pay tax; they might not realise that they have become resident in another country; they might simply think that as long as they pay tax somewhere they will be safe. They won’t be.
Residence is a matter of fact. It is where you are spending your time. However, each country has different domestic rules used to work out who is resident there for tax purposes. If you satisfy those rules, you are resident there for tax purposes, and are liable to tax in that country on whatever income or gains they say you are earning (some countries tax worldwide income, others only income arising in that country and sometimes income or gains that are brought into a country may be taxed). Therefore, you cannot choose where to pay tax.
Equally, many people claim not to be resident in the UK when in fact they are – or at least, when HM Revenue and Customs thinks they are. Most double tax treaties have ‘tie-breaker’ clauses to find where someone is resident if they fulfil both countries’ domestic requirements, but it can be dangerous to rely on these – your interpretation of your circumstances may not be the same as the tax authorities’ view, and circumstances can change – through illness or in other ways, which may make your position different from that which you believed it to be.
It is possible not to be resident somewhere, although this isn’t always as easy as you would think. HM Revenue & Customs take the view that you have to have left the UK for a ‘settled purpose’, so even if you spend less than 91 days in the UK on average over up to four UK tax years, they may still view you as UK resident if they consider you haven’t left the UK for a settled purpose. They will also look at your family, business, professional and investment positions as well.
You should always take professional advice regarding your situation from an adviser who knows the tax rules in both countries. It is preferable to do so before you move since this gives you much more scope for realising assets at a minimum of tax.
If you’re already living in Portugal, you should still seek advice to ensure you understand your tax residency situation and requirements and put in place planning that can save you taxes on your income and when assets pass on your death.
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