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How Hidden UK Tax Dangers Will Affect UAE Expats

dubai skyline, tax in uae

If there’s one thing guaranteed to burst your comfortable expat bubble, it’s the thought of having to pay tax when you return home – and potentially lots of it.

For long-term UAE residents, the introduction of Value Added Tax (VAT) at the start of the year came as a stark reminder of their old lives before they moved to the Emirates. While the 5% charged on goods and services is considerably lower than other countries, it has been a wake-up call to many people to get their financial affairs ready for the day when they finally leave the UAE and reenter the world of VAT, income, and a host of other unavoidable taxes.

According to the experts at Guardian Wealth Management (GWM), British expatriates need to be aware of new and far-reaching tax legislation that could potentially have a huge impact on their savings and plans to lead a financially stable and secure life when they return home. GWM’s senior financial planner James Ferguson stresses that being a UAE resident does not mean you are exempt from UK tax regulations.

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“So many people think that because they are living outside the UK and not subject to income tax that this means they will be free from tax when they return – but this is not necessarily the case. You may have lived and worked outside of the country for a long time, but if you are looking to return home to retire or for work, you need to have sufficient planning in place to make sure your savings are as tax efficient as possible.”

Her Majesty’s Revenue and Customs (HMRC) legislation around domicile are the rules which may trigger inheritance tax to be payable on death, and are amongst the more complex of UK tax legislation. There are a number of potential tests that can mean you acquire a UK domicile and cause yourself tax issues.

“These triggers will apply to the majority, but not all, of the UK expats in the UAE as well as foreign nationals who are planning to move to the UK or who own UK situs assets (such as UK property or shares in UK-based companies),” says Ferguson. “Should you trigger one of the domicile tests, the result is your worldwide assets could be taxable in the event of your death under inheritance tax rules.

“Inheritance tax is one of the most unpopular taxation rules in the UK but is it something that should be taken into account and planned for. It’s a highly emotive topic for many people because ultimately you have already paid tax to accrue this wealth, and then when you die you are liable to pay 40% on what is a significant amount. People find this hard to swallow.”

Although British expats benefit from a double taxation agreement between the Emirates and the UK, when they return home and begin to access their savings and investments they can be exposed to Capital Gains Tax (CGT).

tax in UAE

“People do this quite often. They think they understand how all of the various taxes work, but they often don’t,” says Ferguson. “They have money in online trading platforms and things like that and as soon as they start cashing in their savings back home they start paying CGT. However, this is avoidable.”

Ferguson, an experienced financial adviser with knowledge of both the UK and global markets, advises two possible strategies to help returning Brits avoid the full force of CGT.

“Option one is to cash all your savings in during a tax year when you’re a UAE tax resident and pay your capital gains here, which is currently zero,” he says. “But then you’ll go back to the UK with your savings, which you’re then going to have to siphon into ‘tax efficient wrappers’ such as an individual savings account (ISA) or a pension etc, but you are restricted in terms of how much you can put into these each year.

“Another option is offshore portfolio bonds that skate around this issue of CGT. They allow you to segregate your growth outside of the money you put in. Bonds are a vehicle to let you take your capital back before you touch your investment gains.”

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Ferguson gives the example of a UK expat with £1 million (AED 4.8 million) tied up in an online platform, or even in a UAE bank account. If this amount is put into a bond offshore and allowed to grow to £1.5 million (AED 7.2 million), the original AED 4.8 million can be withdrawn tax-free at a rate of 5% a year for 20 years. This means AED 241,600 a year of income that is not taxable because it’s not gains, it is your money back.

“If you compare this to an online trading platform, you could have £1 million in there that grows into £1.5 million but when you go back to the UK you will basically have to cash gains and capital whenever you pull money out – so you end up paying capital gains,” he adds.

To avoid confusion about tax legislation and to ensure their savings are as tax efficient as possible, Ferguson recommends British expats who are returning home consult a certified independent financial advisor (IFA).

“The whole issue of tax is extremely complicated and can have far-reaching and expensive consequences if not properly addressed,” he says. “These days people have access to a lot of information regarding financial advice, information about the markets, and have easy to access different investment platforms via the internet etc. The problems arise when they don’t fully understand the implications of their actions, therefore I strongly advise that they speak to a professional.

“Life in the UAE can be a fantastic opportunity for UK expats to build up a large pot of savings in a tax-free environment,” says Ferguson. “Being able to access the financial gains they have made while living in the Emirates during their retirement or their new life back home is of the utmost importance.”

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Words: James Ferguson

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