UAE: How British expats calculate taxes on income earned overseas and back home

Dubai: The UAE has historically been a tourism and business destination for the UK, with more than 5,000 British businesses in the country, according to data from the British Business Group in Dubai, a representative body of British companies and individuals.

There are more than 120,000 British citizens living in the UAE, attracted by the lure of new job opportunities, more visa options and a tax-free salary. Relatively, around 300,000 or so British expats were working throughout the GCC pre-pandemic.

Statistics further show that between 2007 and 2012 more than 10,000 British people relocated to the UAE every year, however the influx rose in recent years, UK regulatory data showed. So there is an increasing need to know how British expats calculate taxes on income earned overseas and back home.

Are you a UAE expat drawing a pension in the UK?

Majority of the UAE-based British expats work across industries spanning from construction, banking, oil or tourism among other trades – and fewer than 700 people are drawing a UK state pension here, research showed.

If you are an expat living in the UAE, dealing with your tax affairs can feel complicated. Yet careful planning will ensure you are paying the right UK taxes, and maximising the financial opportunities available to you as an expatriate.

There are a number of key factors to bear in mind if you are a British expat in need of tax guidance. Your UK tax status is ultimately dependent on your residence and domicile status. Both of these are complex terms, with their own rules, so it’s usually helpful to understand how it is defined.

Should a UAE-based British expat file tax returns back home?

If you are an expat that has moved to the UAE from the UK, it often means a continuing obligation to prepare and submit UK tax returns – for example, if you have a property in the UK that is being ‘let’ or rented out following your move to the UAE.

UK tax returns have to be prepared and submitted within strict deadlines: tax returns that are submitted late are likely to result in the charging of late filing penalties.

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Are you a tax resident in the UK even after you move overseas?

Are you a tax resident in the UK even after you move overseas?

Working out whether you are a UK resident for tax purposes depends on several factors including how much time you have spent in the UK during any given tax year. The Statutory Residence Test (SRT) in the UK provides a framework for how residence is determined for British expats.

What is the UK Statutory Residence Test (SRT)?

The test allows you to work out your residence status for a tax year. Each tax year is looked at separately, so you may be a resident in the UK in one year but not the next, or vice versa. The SRT takes into account: the amount of time you spend and, if relevant, work in the UK.

‘Domicile’ generally relates to the country where you have a permanent home. You are automatically assigned a domicile at birth, usually based on the domicile of your father.

It’s certainly possible to change your domicile status, but it can be a very complex process. Domicile is so important because if you are UK domiciled then your worldwide assets will attract UK Inheritance Tax (regardless of your UK residency status).

However, if you are not UK domiciled, only your UK assets are liable to Inheritance Tax (IHT).

What is UK Inheritance Tax (IHT)?

Inheritance Tax (IHT) is a UK-based tax on the estate of someone who has died, including all property, possessions and money. Even if there’ is no Inheritance Tax to pay, you’ll still need to report it.

You don’t usually pay tax on anything you inherit at the time you inherit it. You may need to pay: Income tax on profit you later earn from your inheritance, for example, dividends from shares or rental income from a property.

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Your residence status is important because it affects how much income tax and capital gains tax you pay in the UK.

Why is my residence status important?

Your residence status is important because it affects how much income tax and capital gains tax you pay in the UK. If you are a resident in the UK, you may even have to pay tax on your worldwide income.

(Income tax is a tax you pay on your income, but you do not have to pay tax on all types of income. You pay tax on money you earn from employment, profits you make if you’re self-employed, most pensions, rental income, benefits you get from your job, income from a trust, interest on savings, among others.)

(You do not pay tax on the first GBP1,000 (Dh4,802) of income from self-employment, the first GBP1,000 of income from property you rent, income from tax-exempt bank account for UK citizens like ‘Individual Savings Accounts (ISAs)’ and a tax-exempt product like a ‘National Savings Certificate’, dividends from company shares.)

However, if you are a UK non-resident you will generally only have to pay tax on any income that you earn in the UK (perhaps from renting your UK home).

Although a fairly uncommon situation, if you hold dual residency things may be even more complicated. However, the UK has a double taxation agreement with the UAE, meaning there is no income tax on salaries or wages paid in the UAE.

The income and capital tax treaty between the UAE and the UK covers UAE income tax and corporate tax, and covers UK income tax, corporation tax and capital gains tax. Depending on the Emirate, there may be taxes on some services and goods, municipal taxes and customs duties.

How UK non-residents have access to personal allowance

Expats who are UK non-residents do still have access to the tax-free personal allowance (the amount of income each individual is entitled to receive free of tax each year) in the UK, if any of the following applies:
• You hold a British passport
• You are a permanent citizen of an EEA (European Economic Area) country
• You have worked for the British government at any time during the last tax year
• This may help you reduce tax on any income arising in the UK.

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It’s important to remember that your obligation to pay UK tax doesn’t end just because you have left the country.

How do UAE-based UK expats taxed on capital gains?

Capital gains tax (CGT, which is the tax on the profit you make when you sell something that has increased in value) can also apply to UK non-residents.

Generally, you will need to be UK non-resident for more than five years to avoid UK capital gains tax (CGT) on the disposal of most assets.

However, keep in mind that that the disposal of UK land and property and assets used will always be chargeable to UK CGT no matter how long you have been UK non-resident.

5 tax-related factors to keep in mind for UAE-based UK expats:

1. It’s important to remember that your obligation to pay UK tax doesn’t end just because you have left the country.

2. Even if you become a UK non-resident in the UAE, any of your income arising from the UK after you have become UK non-resident, will still generally be taxed as normal.

3. For example, if you own a UK home but live abroad, you will still need to pay tax on any income your property receives, such as rent.

4. If you do rent out a UK property while you are overseas, it is worth signing up to the Non-Resident Landlord Scheme (NRLS). (NRLS is a scheme to tax UK rental income of those UK citizens who resides outside the UK – known as non-resident landlords. The NRLS imposes obligations on the tenant, if there is one.)

5. If you are an expatriate and UK non-resident, and you are looking to buy a house in the UK, you will be liable for Stamp Duty Land Tax. (A Stamp Duty Land Tax (SDLT) is a tax imposed by the UK government on the purchase of land and properties with values over a certain threshold.)

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So do you pay UK tax if you work overseas? Whether you need to pay depends on if you’re classed as ‘resident’ in the UK for tax.

Final thoughts

The tax system for British expatriates can be complex and your residence status which determines your liability to UK tax is usually determined by the number of days you spend in the UK during a tax year (a year as reckoned for taxation (in Britain reckoned from April 6).

So do you pay UK tax if you work overseas? Whether you need to pay depends on if you’re classed as ‘resident’ in the UK for tax.

• If you’re not a UK resident, you will not have to pay UK tax on your foreign income. If you’re a UK resident, you’ll normally pay tax on your foreign income. But you may not have to if your permanent home (domicile) is abroad.

• Even if you are not a UK resident you can still be liable to pay UK tax. You must also be mindful of any taxes due where you are living overseas.

So the UK is one of the countries which can tax their citizens living abroad if they are still classified as a resident. If you’re not a UK resident, you will not have to pay UK tax on your foreign income, but your UK income remains taxable and if you sell any land and property in the UK that will remain taxable too.

But how can you avoid UK tax when working abroad? In order to be classed as a non-resident and exempt from UK tax, you will need to work abroad for at least one full tax year, spend no more than 182 days in the UK in any tax year and spend no more than 91 days in the UK on average over a four-year period.

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