Why moving abroad to pay less tax is harder than you think

Dubai: a vibrant city with a huge international community, very little rain and no personal taxes. When your UK income tax rate can be as high as 45 per cent, it is easy to feel tempted. But whether it's to the United Arab Emirates or elsewhere, moving abroad to cut your tax is easier said than done.

First, a premise: lifestyle should come first. Putting tax considerations in the driving seat is hardly ever a good idea, given you could be living far from home, in a place with a different language, culture and climate. Having more money certainly doesn't hurt, but on its own it will not automatically make you happy. So think through your decision carefully.

Even if you are keen on the move, be aware that the tax planning side can be quite messy. Do not assume that moving somewhere where taxes are lower will automatically reduce your bill.

Residency issues 

If you do decide to live in another country for most of the year, you may still be treated as a tax resident in the UK, and have to pay taxes accordingly. David Denton, technical consultant at Quilter Cheviot, says people need to be aware of these complications. “People say to me: ‘David, I want to come to the UK, but I don't want to become a UK tax resident’. The only safe answer I can give you if I know nothing more about you is that you can spend fewer than 16 nights in the UK. People look at me completely horrified.” 

In a nutshell: if you spend more than 183 nights in the UK, you're a UK tax resident; if you spend fewer than 16, you aren't. In between, it all depends on your ties to the country and what assets you own where, as established by the complicated set of rules that govern the so-called “statutory residence test”. 

If you are splitting your time between the UK and another country, and end up owing taxes in both, the UK has double tax treaties with several other nations – which usually at least saves you from paying the same tax twice. But whether a certain source of income or capital is taxed in the UK or in another country can vary, and you might have to take advice tailored to your circumstances to find out more.

You may wish to live abroad but keep your UK home, perhaps by renting it out. However, income and gains from UK property are taxed here regardless of your tax residency status. “Very broadly, if you leave the UK and you are a non-UK resident, but you have wealth in the UK, most income and most capital gains won't be taxable in the UK. But the exception is property,” says Denton. 

Of course, you can try to prioritise the country with the better tax treatment and focus as much of your time and assets there as possible. But this can be quite difficult to put into practice, says Robert Salter, director at Blick Rothenberg, because you have to live accordingly. People often stick to the plan for a few years, and then find themselves with a tax issue when they want to spend a bigger portion of the year in the UK again – for example because their children have had kids. “I tell my clients: your life is more important than the tax system,” Salter says.

The other problem is that if you try living in a different country, then dislike it and decide to come back, you might set yourself up for a nasty tax surprise, says Rachel de Souza, tax partner at RSM.

If you reside outside the UK for less than five years, you may get caught by temporary non-residence rules, which were first introduced to stop people from dodging UK taxes. “Some people think they can leave the UK, spend some time outside the country, sell stuff and come back to the UK, and they'll have washed out some tax. There are rules put in place to deliberately stop people from doing that,” Denton explains.

These rules broadly establish that capital gains and certain forms of income you take when temporarily residing abroad are then subject to UK tax once you return to be a UK tax resident.

For example, say you move back to the UK after three years in Spain, during which you accessed your pension pot. Depending on how you accessed the pension and your circumstances, when you move back you may have to pay UK taxes on the money you took out over the period. De Souza notes: “That would be really nasty, because you'll then have a position where the UK has the primary taxing rights… you paid tax in Spain on that, but in earlier years; who knows whether you'll be able to get the tax paid in Spain back as a refund?”

Inheritance tax

When thinking about where to move to lower your tax bill, the focus is often primarily on income tax – which indeed has a crucial impact on your annual earnings and so on your lifestyle. But it’s important to consider the treatment of different assets and taxes and how this might impact your finances overall. As we have explained previously ('Everything you need to know about retiring abroad', IC 6 Dec 2024), tax-free wrappers such as individual savings accounts (Isas) are not typically recognised in other countries, and your pension may be treated differently too.  

Moving overseas to avoid an inheritance tax (IHT) bill can also be especially tempting. But once again the practicalities are less than straightforward – although there has recently been some good news on this front.

At the moment, IHT normally applies to your worldwide estate if you are domiciled in the UK when you pass away. Denton notes that losing your UK domicile is very complicated, even if you spend a long time away from the country, the upshot being a “grossly unfair” system. The UK only has double taxation treaties for IHT with a handful of nations – so depending on what inheritance or wealth tax applies in the country you move to, there’s even a chance your estate could be liable twice.

But from April 2025, IHT will become dependent on your residency rather than your domicile; 10 years after leaving the UK, you will cease to be a long-term resident and no longer be subject to the tax on assets you hold outside the UK. Note that for UK assets, including property, IHT will still apply. Also note that, as announced by the government in the Autumn Budget, pension funds will form part of a person’s estate and become subject to IHT from April 2027 onwards. 

Overall, it is possible to move abroad and enjoy more favourable tax treatment than in the UK – but you need to plan early, come up with a solution that really works for your lifestyle in the long term, and stick to it. “No two countries are the same, and understanding the interaction between the two and planning in advance gives you the best outcomes,” says Denton.