Are you taxed more than once on the same income? Double taxation is a key issue for many British people living abroad (expats). How can you identify whether you are at risk of double taxation, and what can you do about it?
In this guide, our financial advisers at Scottsdale identify the key areas of double taxation to be aware of as a non-UK resident and how to navigate them confidently.
What is double taxation?
Double taxation refers to a situation where an income stream is taxed twice. This can happen in at least two scenarios:
- At the corporate level. For instance, a company generates revenue from its sales, and the profits are subject to corporation tax. The remaining profits are distributed to the shareholders, who must pay dividend tax. This can happen to UK residents with a UK company, not just British expats who hold shares in international companies.
- At the personal level. This can occur when a British national resides in another country whilst receiving an income from abroad. For example, an expat living in an EU member state might unwittingly pay income tax in their host country and the UK.
Why it matters
The second scenario is most common amongst British expats. Double taxation can significantly erode your income and wealth if you are not careful.
Fortunately, British nationals are better positioned to plan for this than citizens of certain other countries. US citizens, for instance, are subject to US taxes on their worldwide income. This is not the case for British citizens in 2024-25.
However, it is your responsibility to ensure you are paying the right taxes, in the correct manner, and to the right authorities if you live abroad. For most British expats, this is determined largely by your residency status.
Most countries use some form of residency-based test to determine if you are a tax resident. A common rule is the “183-day” rule, which determines someone to be a tax resident in a country if they have been physically present for 183 days out of the last 12 months.
If so, that person will likely be regarded as a tax resident by the local authority. However, your home country may not be automatically updated about your new tax status. In which case, a double taxation situation can arise.
Navigating double taxation
To mitigate corporate double taxation, company owners have a few different options.
One idea is to set up a business as a “pass-through” entity (e.g. a UK LLP) so corporate income is reported on the owner’s individual income tax return and taxed at their local income tax rate.
Another option is to limit dividend payouts and focus your profit extraction in the form of salaries (which are typically treated as a business expense). We suggest seeking financial advice to explore these options more carefully in light of your own goals and situation as an expat.
For most expats (non-business owners), the main port of call will be using double taxation agreements (DTAs). These exist as bilateral treaties between many countries – e.g. the UK and an EU member state – to help individuals avoid getting taxed twice on their income.
DTAs are typically quite lengthy and complicated documents. It can be difficult to know how to apply their provisions to your specific case as a British expat without expert help. Here at Scottdale, our financial advisers are on hand to help you if you want professional guidance.
Foreign Tax Credit Relief
DTAs will be the main mechanism for a British non-resident with UK income. However, for a British national living abroad and earning foreign income, a situation could arise where both your host country and the UK government tax you.
In this case, you can apply for a special relief to help get some (or all) of the tax back. You can do this ahead of earning the foreign income, and the process might involve asking the local authority for a specific form (or applying by letter).
Claiming Foreign Tax Credit Relief involves filling out a UK tax return. This can create a long waiting time before you receive the money back. As such, it is important to factor this risk into your financial plan well in advance (e.g. building up a cash reserve before moving abroad).
If you do get money back, the precise amount will largely depend on whether the UK has a double taxation agreement with your host country (and its specific provisions). The rules can also get more complicated for other types of income, such as capital gains tax.
Seek advice if you need help navigating DTAs, Foreign Tax Credit Relief or other areas of international tax planning as a UK national living overseas.
Invitation
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.