Dubai: For British expats based in the UAE, the end of the tax year is fast approaching. So now is the time to make sure that you have got your tax affairs up to date before April 5, 2010 and taken all necessary steps to ensure that you are maximising your allowances for the current tax year and indeed the next tax year.
Many individuals living in the region believe that as they are not resident in the United Kingdom, they do not have any tax affairs to think about back home.
However, in actual fact there are many things to consider to ensure that you are not caught out by the taxman.
Income tax
True, there is no income tax payable in the UAE. But the United Kingdom does not have a double taxation agreement in place with the UAE and, therefore, any income you have arising in the United Kingdom will be liable to UK income tax.
Income subject to tax in the United Kingdom can be in the form of rental income, investment income (dividend payments from shares) and bank interest.
Many are not aware that it is not possible to reclaim or reduce the 10 per cent tax credit on dividend payments from UK company shares.
Therefore, before the end of the tax year, it would be ideal to ensure that you have your affairs in order for the current tax year by calculating what income you have received in the United Kingdom that is subject to income tax, and indeed have taken all the steps you need to ensure that you are maximising all your relief for the 2010-11 tax year.
Income from property
Any profit you make from letting out a property in the United Kingdom is liable to UK income tax.
The letting agent or tenant must deduct the basic rate of tax from the rent, unless you have applied to be classed as a non-resident landlord, which allows for the rent to be paid to you gross.
However, beware: even if you receive the income without tax deducted, any profit you make from letting the property remains liable to income tax.
To apply for ‘non-resident landlord' status you will need to complete and submit the NRL1 form.
Bank Interest
If you have bank accounts in the United Kingdom that are paying you interest, you can apply to receive future interest without deduction of tax by providing your bank with a ‘not ordinarily resident declaration' using form R105.
However, it is important to note that not all UK banks offer this facility and therefore before making the submission it is recommended that you check with your bank first.
You may also be entitled to make a claim for tax deducted in previous tax years.
Pension contributions
Many individuals are not aware that once you are no longer resident in the United Kingdom it is still possible to make pension contributions and benefit from tax relief.
You are entitled to pay £2,880 (Dh16,565) net per annum into a pension arrangement and receive basic rate tax relief of 20 per cent on the contribution.
The government effectively contributes a further £720 and the total amount invested in the arrangement is £3,600.
Therefore, if you do this for the first five tax years that you are out of the United Kingdom, that is an additional £3,600 paid into your pension arrangement by the government through tax relief even though you are not paying tax in the United Kingdom.
It is important to note that pension contributions can not be backdated, so if you don't use this allowance each tax year it will be lost!
Capital Gains tax
The rules relating to Capital Gains tax liability for those non-resident in the United Kingdom are different from the rules surrounding income tax and are actually quite complex. For an illustrative example, see the box above.
The main point to note is that if you left the United Kingdom after March 17, 1998 and dispose of assets whilst resident outside the country for less than five complete tax years, the gains and losses accruing on those disposals are treated as accruing in the tax year of return to the country, subject to a number of detailed conditions. Currently, capital gains tax is 18 per cent.
However, in general, any investments you have made since being non-UK resident would not be subject to capital gains tax upon return to the country, although there are some important exceptions to this rule. This highlights that are a number of financial planning aspects around this point to ensure that you minimise your capital gains tax exposure.
Even though you are non-UK resident you are still eligible for the annual exemption on capital gains tax (£10,100 or Dh58,075 for the current tax year) and therefore you are making capital gains in the United Kingdom it would be best practice to make full use of your allowances each tax year. Therefore, now is the time to be considering your capital gains tax position before the end of the tax year when you will lose your entitlement to annual exemption for the current tax year.
Claim your Allowances
If you are a non-UK resident you are entitled to claim your personal allowance (income tax) for the tax year. For the current tax year, this is £6,475, (this figure is higher if you are over 65 years of age).
This can be used against any income that arises in the country.
To claim your allowances, you need to complete the R43 form. There is a form for each tax year, therefore make sure you use the form (s) for the tax year (s) that you are making a claim.
You can claim your allowances anytime up to January 31 — five years after the end of the tax year, that is, for the current tax year you have until January 31, 2016 to claim your allowances.
However, it is best practice to do it on an annual basis. This way you will ensure that you stay on top of your finances back in the United Kingdom.
If you believe that you have overpaid tax in a tax year whilst you have been based in the UAE, there is a time limit within which you may make a claim.
For any particular tax year you have up to the next January 31, and the following five years to make a claim.
For example for the tax year ended April 5, 2009 must be made by January 31, 2014. Therefore, now would be a good time to review whether you can claim any allowances or over paid tax for the previous five tax years.
So whilst there is no tax to pay in the UAE, there are a number of factors to consider in relation to the tax situation in the United Kingdom and it is important to stay on top of it.
Now is the best time to do this so that you have everything in order before the end of the tax year on April 5, 2010.
Remember that if you are to be treated as a non-UK resident for tax purposes, do not spend more than an average of 91 days in any one tax year in the United Kingdom!
Tips for keeping your tax affairs in order
- Declared non-residency by completing the P85 form.
- To receive bank interest gross - complete R105 and return to your bank in the United Kingdom.
- If eligible, make pension contributions of up to £2,880 (Dh16,560) net for the current tax year.
- If you rent out a property, apply for non-residency status — complete NRL1 form.
- Claim your allowances by completing R43 form.
- The writer is Financial Planning Director at Killik & Co, located at the DIFC, in Dubai.
Example of Capital Gains Tax calculation
- Mr X lived in the UK all his life but left the UK on 24th January 2007 to work in Dubai and is returning to the UK on a permanent basis on 30th March 2010.
- On 20th October 2008 he sold some investments in the UK (which he had before coming out to the UAE) and realised a gain of £29,600.
- Mr X will be liable to capital gains tax on this gain in the current tax year, the tax will be payable by 31st January 2011
- Gain = £29,600
- Allowance = £10,100
- Amount subject to capital gains tax = £19,500
- Tax payable= £19,500 x 18% = £3510
Note: assumes full allowance available and no losses avaiable to offset the gain
