Tax implications for UK expats

By Marc Beattie, Chief Operating Officer at Arlo Wealth   

Moving abroad for work can often feel like a daunting experience. Not only do you have to settle yourself and possibly your family into a new environment but it’s also a different culture and way of life to adapt to, which is all happening in a language you may not yet understand.  Under these circumstances, it’s understandable that sorting out your finances is pushed on to the backburner, but it’s vital you gain an understanding of the tax implications that comes with earning and investing as an expat.

Establishing an end goal

Having a clearly defined goal is the golden rule of investing – this is as true for expats as it is for everyone else. If that end goal entails returning to the UK for retirement, the tax implications and investment strategy will need to be very different than if you are intending to retire in your new country of residence. Below, I’ve outlined the core tax and investment considerations for each of these end goals:

For expats planning a return to the UK

Moving back home isn’t always as straightforward as it may sound, so you should plan ahead at least a year or even 18 months in advance to get your finances in order.

Even the date you return can have a big impact on the complexity of your tax situation. Many countries adopt a tax year that is the same as the calendar year, so you may have a tax liability in both countries and will certainly have to file a return in both. However, the UK’s tax year runs from April 6th to April 5th and if you’re planning to move back, it is recommended that you return on or after 6th April to keep your tax situation simple.

The next step is to consider what assets you might need to sell to keep your tax bill once you return to the UK as efficient as possible. This can be particularly important if you are planning to retire in the UK and need to make the most of any funds you’ve saved or investments you’ve made abroad.

One mistake many people make is forgetting to sell off the investments they had abroad before returning, and this can attract a substantial Capital Gains Tax (CGT) bill. Some destinations for UK expats such as Hong Kong and Dubai have no CGT, so selling off investments before you return could help save you thousands of pounds. Meanwhile, more tax-favourable investments such as offshore bonds can be worth keeping hold of.

For expats who plan to remain abroad in retirement

If you were planning to retire abroad, it’s likely you’ll have set up a pension in your country of choice and transferred any UK pension savings to your new fund. This is referred to as a Qualifying Recognised Overseas Pension Scheme (QROPS). Unlike a UK pension, this type of pension isn’t subjected to the pension lifetime allowance, which can mean sticking with this option throughout your time abroad rather than transferring into a Self-Invested Personal Pension (SIPP) could save you money.

Transferring into a SIPP will mean that you are liable for the pensions lifetime allowance, which is currently set at £1,055,000. Any savings accessed over that amount will be charged at 25% tax if withdrawn as an income or 55% as a cash lump sum. That’s a substantial tax bill which could be avoided with QROPS.

However, if flexibility with your pension trumps all, contributing largely into a QROPS might not be right for you. Some providers don’t allow flexi-access for instance, which means you’re restricted to the amount of income you can withdraw over 12 months. This can particularly affect you when you return to the UK and need extra funds to realign with the cost of living in the country, By contrast, a SIPP will give you more control and flexibility over your income, so you can choose to invest or withdraw funds as and when you want.

Going green? A consideration for both those retiring at home and those staying abroad

Sustainable investments are nothing new but it’s a trend that has certainly picked up steam in light of recent extreme weather events and the Greta Thunberg-inspired climate protests across the globe, causing its very definition to change. It used to involve simply excluding certain shares – namely guns, oil, coal and tobacco. Now, it’s more a proactive effort that is influencing companies to adopt planet-friendly policies or champion diversity in their leadership teams. Companies like Shell are prime examples of those which have sought to change their image by shifting their focus from ‘Big Oil’ to putting sustainability at the heart of everything they do.

More and more regulators across the world are now supporting the Environmental, Social and Governance (ESG) agenda, particularly popular expat destinations. For example, Dubai’s financial regulator published its own guidance on sustainable finance, while Hong Kong’s Securities and Futures Commission has announced a Strategic Framework for Green Finance. Last year, the UK even went as far to implement major law changes that mean UK pension funds today have an explicit responsibility to integrate sustainability issues into their investment approach, as defined in their ‘Statement of Investment Principles’.

With this in mind, it’s important to consider whether you also want to take this approach. Whether it’s excluding industries you don’t feel represent your vision, to making ESG a primary focus, sustainable investments can become a core element of your strategy.

Chasing the sun

Getting your taxes in order when earning and investing as an expat needn’t be difficult. With the help of specialist advisers and some extra research, you can outline what the tax policy is in whichever country you’re based in and what the implications are for investing and earning.

As ever, your financial situation and plans are unique; a specialist adviser can help you every step of the way but it’s ultimately up to you what route you decide to go down.