You may believe you are an expat because you have lived overseas for a while, but under complicated rules this may make no difference to your tax status.
These rules are important because they determine if you are resident in the UK for paying tax on your earnings and capital gains – or if the tax authority in another country has a call on your cash.
HM Revenue & Customs applies the statutory residence test to decide if you are tax resident in the UK.
The test goes through four steps – and the details are explained in online guidance notes or an online tool on the HMRC web site.
Here’s an outline of how the statutory residence test works for British expats:
How many days did you spend in the UK during the last tax year?
If you spent 183 days or more in the UK during the last tax year, which runs from April 6 to April the 5 of the following year, you fail the test and are automatically listed as resident in the UK for tax.
If you spent fewer than 183 days in the UK, then you must take the three automatic overseas tests and pass them all.
Automatic overseas tests
Take the tests in order and If you fail any, you are resident for a tax year, but if you pass one, you need not take the others.
Test 1 – You lived in the UK for one of more of the three tax years before the one for which you are applying the test and you stayed in the UK for fewer than 16 days in the tax year.
For example, you are trying to determine tax residence for the 2017-18 tax year, then you must work out if you were UK resident in 2014-15, 2015-16 or 2016-17 and if you were in the UK for fewer than 16 days in 2017-18, you pass the test.
Test 2 – You did not live in the UK for the three tax years before the one for which you are applying the test and you stayed in the UK for fewer than 46 days in that tax year
For example, you are trying to determine tax residence for the 2017-18 tax year, then if you were not UK resident in 2014-15, 2015-16 or 2016-17 and if you were in the UK for fewer than 46 days in 2017-18, you pass the test.
Test 3 – If you work overseas full-time during the tax year without any significant break, and spend fewer than 91 days in the UK during the year and do not work more than three hours a day in the UK for more than 31 days, you pass the test.
Go to the HMRC guide to find out more about how to calculate your working days in a tax year.
If your circumstances do not meet the automatic overseas tests, the next step is to apply the automatic UK tests.
Automatic UK tests
These tests run along the same lines as the overseas tests.
Test 1 – Do you spend more than 183 days in the tax year in the UK? If yes, you are UK tax resident.
Test 2 – If you spend enough time in a UK home and have no overseas home or spend fewer than 30 days a year in an overseas home, you may be deemed to be tax resident in the UK
Ties to the UK
An expat can pass all the automatic tests and still be UK tax resident if they have strong ties to Britain.
These ties include if a close relative or children are resident in the UK, if they have a home available in the UK and if they work in Britain for an extended time.
Working out your tax residence
Establishing non-UK residence is the first step for financial and tax planning for expats, but the rules are fiendishly difficult to navigate.
Most people concentrate on the time ties – such as how many days are spent in the country during a tax year.
But the rules that catch them out are the personal ties to family, a home and work.
Besides determining where an expat pays income tax and capital gains tax on their worldwide income, residence is also important for pensions and savings.
For a UK resident living overseas for a while, all the tax benefits of pensions and ISAs are still available.
Non-residents lose these benefits but are eligible for QROPS offshore pensions – which are not an option for UK residents.
Find out more about your residence status
HMRC has reams of online guidance and examples of how the statutory residence test works.
But be aware that the documents are guidance and do not have any legal status. HMRC guidance is often successfully challenged in the courts.
If in doubt about your residence status, always consult a qualified professional who can demonstrate knowledge in the field, such as a specialist lawyer or accountant.
Some independent financial advisers may offer the service from a specialist as part of their advice package.
Don’t forget that legal and accountancy qualifications are generally country specific, so it’s unlikely an Australian lawyer could advise on British residence. In most cases, an expat would need a British and Australian expert to gain the best advice in both countries.