The rise of remote working has made it easier than ever for workers to head overseas. Whether embracing the life of a digital nomad, or taking on a foreign posting in a multinational, working abroad can be an exciting career move.
But expats can pay a high price for these benefits when it comes to tax. Navigating the tangled web of international tax rules is a daunting prospect at the best of times, and can leave globally-mobile workers with painful and unexpected bills.
While experts say many countries offer some form of recognition to international pensions, tax-free investment and savings wrappers such as the UK’s individual savings account (Isa) pose particular challenges for Britons moving abroad and international workers arriving in the UK.
“The Isa is a UK tax wrapper. It protects UK residents from UK tax,” says Camilla Spielman, a legal director at law firm Eversheds Sutherland, specialising in tax advice.
The basic rule, according to lawyers, is that while workers might travel, their Isas don’t. Only UK tax residents can set up or contribute to an Isa. Once the move abroad triggers a change in residency, existing Isas enter suspended animation.
Investments and savings still parked in an Isa are free from UK tax while their owners are overseas, but Brits abroad miss out on the Isa allowance in the years they are resident elsewhere. They are also obliged to notify their Isa provider when they lose UK residency.
“If you move to take a job overseas, generally speaking you’ll be non-resident from the time you move to take up that job,” said Chris Groves, partner in the private client and tax team at law firm Withers.
Can my Isa investments be taxed by other countries?
After British expats settle abroad, they will be subject to tax in their new home country and those nations generally couldn’t care less about UK Isa rules. In their new home country, any investments in an Isa will normally be subject to the same rules as any other wealth.
“You’ll generally be taxed as if you hold the assets directly,” said Groves.
Tax experts note that different nations have different standards for whether they tax assets only within their territory or if they target residents’ wealth worldwide. The US, for example, generally taxes its residents on their worldwide income, whereas countries such as Italy, Denmark and Spain provide some form of tax relief for new arrivals, according to Groves. Expats should pay attention to the local laws.
Groves adds that another challenge for many workers heading to international posts is that their UK financial advisers may not be qualified or licensed to keep serving them in their new home country.
Paying tax on Isa investments abroad can also prove to be a headache since UK brokers may not provide the right documentation or currency conversions.
Can I withdraw money from my Isa while I’m living abroad?
The good news for British workers abroad is that the nest egg stashed in their UK Isa is still available for a rainy day. Withdrawals are allowed on the same terms as if they were still living in the UK.
“But once it’s out, it’s out,” cautions Spielman. Funds taken out of an Isa are shielded from any tax on gains made while held within the wrapper, but will incur it on any subsequent gains.
I’m moving to the UK for work. Should I bother to set up an Isa?
For other nationals whose career brings them to the UK, the Isa can pose a dilemma. They can take advantage of the scheme as soon as they become UK tax residents and, in theory, the benefits start from day one. However, expats in the UK will have to make a personal decision on whether the extra paperwork and complexity in their affairs is worth the savings on UK tax.
“Isas are great if you plan to be here long term,” says Paul Fairbairn, a lawyer at Cripps Pemberton Greenish. But for those who plan to stay just a few years, “you are arguably wasting your time”, he adds.
As with most tax issues, special rules apply to US citizens working abroad. “If I was a US citizen coming here, I would want to think pretty hard about what I was doing,” says Spielman.
The US taxes its citizens worldwide, and takes no account of UK Isas. So Americans who are resident in the UK can get a break on their British taxes via their Isa, but will get no relief from the US Internal Revenue Service.
Savers also need to be attentive to what investments they are choosing, since some countries — including the US — may impose particularly “penal tax rates” on certain types of investments, Fairbairn warns.
What’s the best way to save if my career takes me around the world?
Many countries have equivalents to the UK’s Isa regime, with other tax-protected vehicles designed to encourage savings. But once again, savers need to assess whether it’s worth the bother of setting one up if their stay abroad is likely to be short.
“There are a number of considerations, the first being where are they going and are they planning on staying there,” says Ines Uwiteto, private clients director at wealth manager 7IM.
Groves adds that it’s often wiser to maximise pension contributions before considering Isa or equivalent tax-exempt schemes. “Pensions tend to be slightly more internationally recognised,” he said. “They tend to be more portable.”