Using Split Year Rules to Save Tax When Relocating Abroad
Different types of income and capital gains are taxed in different ways.
Generally a tax resident pays tax on their worldwide taxable income.
This includes:
Earned Income
Dividend Income from Investments
Interest from Savings
Royalties
Rental Income
Capital Gains
Inheritance taxes
Some of these taxable incomes are a ‘moveable’ while others are ‘fixed’.
These means that under any double taxation treaty some taxable incomes can be relocate to a new expat location.
Meanwhile other taxable incomes are fixed to the jurisdiction in which they arise.
The clearest example of this are buildings and land.
Property rental income remains taxable in the the country where the tax arises.
Likewise UK Property sales are all subject to capital gains tax assessment with no relief for expats.
UK Investment Crypto and business sales for a capital gain can all attract Capital Gains Tax relief for expats. With the right timing expats can pay 0% capital gains tax by timing the sale and disposal correctly. Split year does not protect Capital Gains from current full UK tax year assessment - whether inbound or outbound.
Take care to plan and time capital disposals when relocating abroad.
Earned income, dividend income, interest and royalties are all movable incomes all with a personal allowance, usually in the old and new country of tax residence.
Whether relocating in or out of any country there is an opportunity to use UK split year rules to maximise the use of personal allowances. This means an expat could have two personal allowances against income in one year.
When leaving the UK this could mean using split year to reduce total UK income so that the remaining fixed UK property rental income uses the zero tax personal allowance while Living and Working Abroad.
Those using a Personal Service Company (PSC) can control timing of dividends, and so ensure they are declared as income under the lower tax residency.
Expats relocating to Cyprus for example pay 0% dividend tax for example.
There are many advantages to timing a relation using split year for tax savings. Long term as well as this year. Split year can be used once in or out every few years, there needs to be at least 3 full UK tax years between using a split year election in or out of the UK.
If taking a long term view you can assess the best way to time and utilise your tax claims.
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