It can be quite a chore trying to understand the tax consequences of leaving the UK. Every year thousands of people leave and most never give much thought to whether they still have obligations to HMRC; worse still, many leave and never reclaim overpaid tax. Here we’ve put together some top tips to help you avoid the most common mistakes:
One of the most common mistakes made by taxpayers leaving the UK is the failure to claim a refund of overpaid tax.
All UK taxpayers (and some non residents) are entitled to a UK Personal Allowance (basically a tax free allowance). For PAYE taxpayers, their personal allowance is split into weekly or monthly amounts and offset against their weekly or monthly wages. A taxpayer who leaves the UK part way through a tax year therefore does not get the full benefit of their personal allowance and in most cases, overpays UK tax.
To reclaim the overpayment a claim must be submitted to HMRC. Many departing taxpayers however are not aware of this and needlessly leave their money with HMRC. The timeframe for making this claim was 6 years but it is being revised down to 4 years very shortly.
Self–employed (self assessed) taxpayers on the other hand are subject to a different method of tax collection. Rather than the tax being taken via PAYE, they must file a Tax Return annually, declaring their income and working out their tax liability.
The tax itself is paid as follows:
- 31st Jan – 1st Payment on Account (POA);
- 31st July – 2nd POA;
- 31st Jan next – Balancing payment – the difference between the amount paid as POA’s and the final liability becomes due.
A self-assessed taxpayer who leaves the UK part way through the year may therefore have overpaid tax as a result of their POA’s. The POA’s are an estimate of the current year liability based on the prior year. If a trader ceases part way through a year therefore, the POA’s are likely to be excessive.
Any overpaid tax should come out in the wash when the taxpayer files his final Tax Return but it’s important to remember that the Tax Return must be submitted.
This is only relevant to taxpayers leaving the UK and letting their UK property. It is however an immensely common area of confusion.
The term non-resident landlord (NRL) is a misnomer; in reality someone is classified as an NRL if they let UK property and their usual place of abode is outside the UK.
The main consequence of being an NRL is that the tenant or letting agent is legally obliged to deduct basic rate tax (20%) from the rental income and pay it direct to HMRC. The problems with this are two-fold:
- As the 20% is deducted from the rents before any allowance is given for tax deductible expenditure (e.g mortgage interest), it will be in excess of the real tax liability.
- While this excess can be reclaimed, it will only be received after the Tax Return has been submitted. The result is a loss of cash flow.
The above scenario can be avoided by registering with HMRC’s NRL scheme. Once a taxpayer is registered, the tenant/letting agent is not required to deduct tax at source. The NRL can receive the rental income gross. A word of warning though, while the NRL does allow for gross rent receipt, it does not exempt the income from UK tax and the NRL will need to file a UK Tax Return annually and pay the corresponding UK tax due.
Finally, most countries operate a Residency tax system – this means they levy tax on their residents’ worldwide income. While some countries (notably Hong Kong) operate a Territorial system, the majority are Residency based. As such, a taxpayer departing the UK is likely to be subject to tax in his new home country on his worldwide income – including his UK rental income.
In these scenarios advice should be taken on the specific rules in the foreign jurisdiction but in general there should be some form of double tax relief available in that country for UK tax paid on the UK rental income.
- Sort out your Bank Accounts
For those UK taxpayers leaving the UK but intending to retain their UK bank accounts, one aspect often overlooked is the fact that it is possible to receive interest without the deduction of tax.
Savers who are ‘not ordinarily resident’ in the UK can complete Form R105 to receive their interest without UK tax taken off. Unfortunately Banks are not required to accept a R105 so not all Banks offer this facility.
As in the case of the UK rental income discussed above, while it may be possible to avoid UK tax, advice should be taken in the foreign jurisdiction to which the taxpayer is emigrating as to the tax status of the UK interest in that country.
- Pension Issues
The whole area of pensions is highly complex and confusing to many taxpayers and this is not surprising given the number of changes we’ve had since April 2006.
While there are many things we could say about the good and bad of migrating to a QROPS (Qualifying Recognised Overseas Pension Schemes), that would be an article in itself.
Instead we’re just going to focus on the scenario where a UK taxpayer is receiving a UK pension and moves overseas.
As a general rule, non residents of the UK are taxable on their UK source income. That said, many Double Tax Treaties (DTT) specifically address the topic of pensions. Double Tax Treaties do exactly what they say on the tin – they are bilateral agreements between countries which ensure the residents of those countries do not suffer double taxation.
The pension article in most DTTs allocates the taxing rights to the country of residence. A good example is the UK-Australia Treaty.
So as an example, consider a UK taxpayer in receipt of a UK pension who moves permanently to Australia: in the absence of the DTT, the UK pension would be subject to UK PAYE at source. However, because of the terms set out in the UK-Australia DTT, the UK pension is in fact exempt from UK tax but taxable in Australia.
In order to ensure the pension is not subject to UK PAYE the correct form must be completed. The forms are available for download at http://www.hmrc.gov.uk/cnr/app_dtt.htm
A taxpayer who has moved to Australia but has not filled out the correct form is likely to be receiving his pension net of UK Tax through PAYE. As a result, he will have overpaid UK tax. Fortunately a refund can be claimed so all is not lost. The deadline for claiming the refund is 4 years.