Gavel on a page saying 'Tax Law'; Residence rules and tax obligations

UK expatriates need to understand the residence rules and meet their tax obligations in all relevant countries or it could prove costly.

Imagine this scenario: you are living abroad and enjoying the expatriate lifestyle you have dreamed about. Then you receive a letter from your local tax office claiming you owe them thousands of euros in unpaid taxes, interest and penalties… 

While this may not concern you, some expatriates do mistakenly continue to pay tax in the UK. Others may get most of it right but not realise they should be paying tax in the other country on certain assets. As long as you are paying tax somewhere, it is ok, isn’t it?

Cross-border taxation is complex, and not something you should only partially get right. You need to understand the basic rules to ensure you pay the right tax to the right tax authority, or you could risk potentially serious consequences. Ignorance or arguing that you pay your taxes somewhere else is no defence.  

Where are you liable for taxation?

You cannot choose where you pay taxes; if you live in a country and meet certain rules, then you are likely to be deemed resident there and be subject to domestic taxes. 

As with most things tax-related, however, this is not always straightforward. Some income – such as UK rental income – may still be taxable in Britain while also being liable in your country of residence. To prevent tax being paid twice, the relevant double tax treaty determines which country has the taxing rights; you can usually receive a tax credit for tax paid in the other country.  

Things get more complicated if you split your time between the UK and another country, or you let a property in one country while living in another. 

Understanding your tax residence

Each country has different rules used to work out who is resident there for tax purposes. 

Portugal residence rules

In Portugal, you are tax resident if you spend more than 183 days here within a 12-month period. Even if you spend less time here, you may be deemed resident for tax purposes if you have a 'permanent home' in Portugal as at 31 December. Tax residents are liable to Portuguese tax on worldwide income and some capital gains, although those with ‘non-habitual resident’ (NHR) status can receive most foreign income tax-free for their first ten years in Portugal.

See more about Portuguese residence rules

Spain residence rules

In Spain, you are tax resident if you spend more than 183 days in the country within a calendar year. Even if you spend less time here, you may be deemed resident for tax purposes if your main professional activity or most of your assets are based in Spain, or if your spouse and/or dependent children live here. Tax residents are liable to Spanish tax on worldwide income, capital gains and wealth. This includes most income that is also taxable elsewhere.

See more about Spanish residence rules

France residence rules

In France, you are deemed ‘domicile fiscal’ if your main home (‘foyer’) is in France or you spend more than 183 days here within a year. Even if you spend less time here, you may be considered resident if your job is in France, or if this is where your ‘centre of economic interests’ – like business or investments – are located. Another trigger for residency is if you spend more time in France than any other one country. Tax residents are liable to French tax on worldwide income, capital gains and wealth. This includes most income that is also taxable elsewhere. 

See more about French residence rules

Wherever you are resident, the responsibility falls on you to make yourself known to the local tax authorities and fully declare all your income and wealth according to the rules.

Cross-border confusion 

Conversely, sometimes expatriates assume they are non-UK resident when they actually still are. Spending just 16 days back home could unintentionally trigger UK tax residence, so if you are living abroad but return to the UK for extended periods, take care to understand your liabilities.

See more about UK residence rules

If you meet the residence requirements in more than one country, the ‘tie-breaker’ rules within most double tax treaties determine where you should be resident. This can be complex, however, as your interpretation of your situation may differ to the tax authorities, and your circumstances can change which may unexpectedly change your position. 

While you do not have a choice – you either are or are not resident under the rules – if you have flexibility, you can be careful with the number of days you spend in each country, and where you have assets and ties. 

Beware also that your domicile status – which affects your liability for UK inheritance tax – is different from residence. Shaking off UK domicile is complex and notoriously difficult, so take specialist advice on the best approach for you and your future heirs.

The cost of getting your tax planning wrong

If you fail to pay the taxes you owe correctly or do not report relevant income to the tax authorities in the relevant countries, you could risk inviting a potentially large bill of back taxes, interest and penalties. You could even find yourself at the centre of a tax investigation, possibly in a foreign language, and having to pay for advice as well as the tax bill. You will also need to try and recoup the taxes you paid incorrectly in the other country.

With today’s global tax scrutiny, it is more important than ever to ensure you get it right. Under the ‘automatic exchange of information’ regime, over 100 countries – including Portugal, Spain, France and the UK – are now sharing data on residents’ overseas income and assets. The UK has also introduced tougher UK penalties for undeclared offshore income and gains, including an unlimited fine and up to six months in prison. Remember, in most countries, tax evasion is a criminal offence that can result in prosecution.

Take personalised advice from an adviser with in-depth knowledge of the tax regime of both countries and the interaction between them. Once you are sure you have met your tax obligations, you can focus on securing tax-efficient ways to protect and grow your wealth to continue enjoying your time in your country of choice.

Contact your local Blevins Franks adviser for a tax planning review

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.