Five Tax Myths That Could Cost Expats When Moving Abroad

Moving overseas can bring with it broad assumptions about how tax works. Many expats believe that leaving their home country automatically means their tax obligations end, that becoming a tax resident elsewhere is a matter of living there 183 days a year, or that relocating removes any need to report overseas wealth.

In reality, international tax residency is not straightforward, and rules differ significantly between countries. Relocating can create reporting obligations, ongoing tax exposure and financial planning considerations that many expats haven’t anticipated.

Based on years of experience advising international individuals and families, Chase Buchanan Private Wealth Management breaks down some of the most common misconceptions and why they can cause unnecessary issues.

Leaving My Home Country Means I No Longer Pay Tax There

Becoming an overseas resident based on a visa or work permit is not the same as becoming a tax resident. The former means an expat has the right to live or work in a new destination but doesn’t alone dictate how and where they are subject to taxation.

Tax residency is a detailed assessment that considers factors like where a person’s economic interests, family, main residence and employment are based. This will often mean that the country in which they are tax resident has taxing rights over their worldwide income and gains. Separate wealth taxes or asset-reporting obligations may also apply, depending on the jurisdiction.

While this is a nuanced area, and there may be situations where a person relocates and does not have any ongoing obligation to report or pay taxes in their home country, this often isn’t the case.

That may be because they have income sources such as investments or pension products that remain in their original place of residence or because they own a property there and receive rental income.

An individual’s home country may influence their tax obligations. For instance, the US generally taxes its citizens on their worldwide income regardless of where they live. US citizens living abroad will normally remain subject to US filing requirements where their worldwide income meets the applicable filing threshold or another filing obligation applies.

Tax Residency Is Based on the 183-Day Rule

Tax residency is often perceived as a simple test that looks at where a person lives for six months or more of the year, but this isn’t correct. Instead, those evaluations consider the detailed aspects already mentioned, and even then, may not arrive at a definitive conclusion about where an expat is a tax resident.

The UK Statutory Residence Test determines whether an individual is resident in the UK under domestic law. Where an individual is also resident in another country, separate tiebreaker provisions within the relevant double tax treaty may determine their residence for treaty purposes.

This is why relying on the 183-day rule alone can be misleading. Spending fewer than 183 days in a country doesn’t automatically mean you aren’t a tax resident there, just as exceeding that threshold doesn’t necessarily determine your position without considering your wider circumstances.

Becoming an Overseas Resident Means Filing Only Local Tax Returns

Expats are expected to comply with the reporting requirements specific to their circumstances. This may mean declaring income and assets in two or even more destinations, depending on where their wealth is held and where they are tax resident.

Cross-border information sharing has evolved considerably in recent years. Under frameworks such as the Common Reporting Standard and the US Foreign Account Tax Compliance Act, relevant financial institutions report specified account information. Tax authorities can then exchange or use that information in accordance with the applicable rules.

Depending on the applicable rules, overseas assets may need to be declared in the place they are held alongside the country of tax residence, including bank accounts, savings, investment products, and physical assets such as property.

The Spanish Modelo 720 is just one example. A Spanish tax resident may need to submit Modelo 720 where the combined value of overseas assets within any of the three reporting categories exceeds €50,000, and failure to do so can carry considerable penalties.

Tax Treaties Ensure Expats Avoid Double Taxation

Tax treaties between countries are there to help establish where an asset or income is taxed or which jurisdiction has taxing rights. They may include provisions that determine how certain types of income or assets are taxed, but they do not remove any responsibility for managing double taxation.

Rather than being applied automatically, or negating a need to comply with reporting obligations, treaties set out where each taxable event is taxed, and how expats can claim tax reliefs or credits if they are subject to duplicate taxation.

Without applying treaties correctly, knowing how the terms relate to each individual’s own circumstances, or claiming credits, expats may find themselves paying unnecessarily high tax in one or both countries.

Investments and Pensions Are Usually Taxed the Same Way After a Move

The local tax treatment of investments, savings accounts and pensions can differ significantly once someone becomes a tax resident overseas. Products with UK-specific tax advantages, such as ISAs, may not receive the same treatment in another jurisdiction, while income such as dividends and royalties may also be taxed differently.

In many cases, expats are advised to consider how appropriate each product within their portfolio will be once they become an overseas tax resident, ensuring they understand the taxes arising and any more efficient or appropriate options that could better match their priorities.

This review is also essential for retirement products that aren’t currently being accessed, or that form part of a longer-term strategy. Even if there is no immediate tax charge arising on a pension that isn’t being claimed, the tax treatment of that fund will become very relevant on retirement.

Tax Residency Should Form Part of Wider Financial Planning

Importantly, relocating overseas involves much more than understanding how your income and assets will be taxed. Moving abroad can change where you need to report your income, how investments are categorised for tax purposes, which assets you may need to declare, and how you approach retirement and succession planning.

This is why understanding your tax residency position is just one aspect of international financial planning. Reviewing tax residency early, rather than after relocating, can often provide greater flexibility and allow financial arrangements to be adapted before unexpected reporting obligations or tax liabilities arise.

Recent changes to the UK’s residence-based approach to inheritance tax illustrate why this matters. Reliance on assumptions or the historic tax system in any one country can be a costly mistake, whereas keeping up to date with tax reforms ensures expats can make informed decisions at every stage of their relocation and life abroad.

About Chase Buchanan Private Wealth Management

Chase Buchanan Private Wealth Management is a highly regulated wealth management company that specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, France, Malta, Portugal, Spain, the UK and the USA.

Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15 and offers its services in the EU on a cross-border basis as per the provisions of MiFID.

Chase Buchanan Insurance Services, Agents & Advisors is authorised and regulated by the Cyprus Insurance Companies Control Service with License No 6883 and offers services in the EU on a cross-border basis as per the provisions of the Insurance Distribution Directive (IDD).

Investing in financial instruments involves risk and may not be suitable for all investors. The value of investments may go up as well as down and past performance is not a reliable indicator of future results. You may lose part or all of your invested capital.

Contributed content: this article was written by a third-party contributor and does not necessarily reflect the views of ABC Money. Editorial and Advertising Policy