Digital nomad tax and investments + more

Many investors, and expats more generally, are confused by domicile and residency.

This might seem like such a boring topic, but it can affect capital gains and inheritance taxes.

This article will explain the differences between residency and domicile and answer some frequently asked questions (FAQs).

The article will also discuss new issues for “digital nomads” and tackle how you can invest in a tax-advantageous manner as an expat.

Is domicile important?

It is. It can determine taxes from your income tax to inheritance and capital gains taxes.

It can also affect inheritance tax planning.

What does domicile mean?

The country you are domiciled in is the place where you have your permanent home, or have a big connection with.

When you are born, you are usually assigned to your parent’s domicile. If your parents were not married, you are typically given the same domicile as your mother, although this depends on each situation.

Even when you move abroad, your domicile doesn’t usually change, unless you take specific action to change it.

What is deemed domicile?

For British expats who emigrate, there is such a thing as a deemed domicile. This can impact your inheritance taxes when you die.

Deemed domicile means that even if you are not domiciled in the UK according to HMRC law, you can be treated as domiciled in the UK at the time of transfer in two situations.

Namely, you were domiciled in the UK within 3 years immediately before the transfer or you were tax resident in the UK in at least 17 of the last 20 tax years, before making the transfer.

How about non-doms in the UK?

There are about 4-5m non-UK domiciles living in the UK, which can bring tax benefits.

However, in recent times, the UK Government has made significant changes to non-com status, after a populist backlash.

The number of wealthy UK residents who pay no UK tax on their offshore earnings has hit record lows.

There are many reasons for this, including political worries around Brexit, and the relatively new “non-dom” levy.

This is charged at 30,000-60,000GBP a year, in return for no tax on overseas income.

What is residency?

Your tax residency is the country you are supposed to pay tax to. It is a misconnection that if you spend less than 183 days a tax year, you are automatically considered tax non-resident.

Many tax authorities, like HRMC in the UK, have residency tests like the one below, available online;

It is always important to remember that rules about residency, including what defines ties, can always change.

So how would you summarize residency vs domicile?

Domicile means a legal residency where a person intends to make it their permanent home.

Residency is a more temporary thing in many cases. People can move with their expat job every 2-3 years, and change their residency in the process, without changing their domicile.

What is the difference between ordinary and multiple residencies?

To be an “ordinary resident”, the country has to be your ordinary home. You spend the majority of your time here and don’t take long trips home.

As an example, let’s say you are a British person living in the UK, but you take 2 holidays per year. You are an ordinary resident of the UK.

It is possible to be resident in two countries or more, although it can lead to tax issues.

Can people legally reduce their taxes by changing their residency?

Yes. If you get a job offer in Saudi Arabia, Kuwait or a country with 0% income tax, you are of course not taxed on your income unless you are American.

Americans are taxed on overseas income, even if they haven’t lived in the US for years.

There are also contactless countries that only tax locally sourced income. Singapore, Hong Kong, Malaysia and around 40 other countries fall into this category.

How about for digital nomads?

Many young nomads have this ideal life, where they are working on the beach from their laptop, moving from country to country.

Indeed, that is possible, and becoming easier, but that doesn’t mean you don’t have to be careful with your tax residency.

It is a misconception that you can just move from country to country, never spending more than 90 days a year in that place, and that means you automatically pay 0% tax worldwide.

Many people think that the “183-day rule” is simple. In fact, due to the rise of digital workers, many courts are asking expats to prove their residency.

There was a ruling in Australia, where an expat had to pay more tax, as he couldn’t prove where he paid his taxes, as he didn’t have a tax identification number (TIN) due the frequency of his movements.

Going forward, it will be safer for nomads to have at least one tax base, so you can answer the question “where do you pay your taxes” if it comes up.

I have personally seen a few nomads I know, have 2-3 years of “tax-free income”, only to be stung by an unexpected tax bill.

Can you buy a residency if you are a digital nomad or entrepreneur?

Countless countries do have residency programs, where you can get residency in return for making real estate and other investments, as outlined in the article at the bottom.

Some of these programs also offer citizenship, as well as residency.

Can this affect bank accounts and investments?

Yes, it can. Almost all financial institutions now, ask for TINs when opening up banks and brokerage accounts, although some will accept your old TIN if you have just moved to a new country.

What tends to be the most tax-advantageous investments for expats and nomads then?

For Americans, it can depend on several factors, as outlined in more detail here.

For British and many other expats, tax-efficient portfolio bonds have numerous tax benefits.

How can you lower your risks of unexpected tax bills?

In general, having expat banking and investments lowers your risks of tax bills.

The reason is simple. If you are from country A and live in country B, but keep your investments in country C, there are clear demarcations there.

In other words, if you are a British person living in Thailand, but your investments are held in Singapore or British Overseas Territory, you are keeping fewer ties to back home compared to if you send back substantial amounts of money every month.

In comparison, if you send money home to the UK every month, have 3 properties and 2 investment accounts held in onshore UK and so on, you are keeping a lot of ties to your home country.

Are changes likely in the future?

The last 5 years have been a period of change, with FATCA, CRS and various new laws coming into play.

There is no reason to believe the next 10 years will be any different, which is why it is important to work with somebody who is on top of changes.

What are your contact details?

My email address is adamfayed@hotmail.co.uk.

Further reading

For people interested in second residencies, the following article might be interesting;

How to invest in REITS and loan notes in UK and beyond

Countless investors are interested in real estate, without the extra hassle of finding tenants, paying taxes and maintaining the place.

Others want access to real estate, but don’t have $200,000+ to invest. What can these investors do?

This article will discuss some options and answers some frequently asked questions, and also look at options for expats who want to invest in direct property but are struggling to get a mortgage.

What are the main options besides direct property? 

This article will discuss three of the main options for gaining exposure to property without extra hassles; REITS, property funds and loan notes.

What are real estate investment trusts (REITS)?

REITS are real estate companies that invest in income producing property such as hospitals.

The average performance of some REITS has been impressive.An $100,000 investment in a Vanguard REIT index in 1996, would have grown to over $740,000 by the end of 2015, producing a 10.8% annual return, assuming dividends were reinvested.

This is slightly higher than the S&P. REITS come with some of the benefits of physical real estate, without the hassle of finding tenants and the other high costs.

REITS can be both commercial and residential focused, although residential dominates the market.

How to invest in commercial real estate through REITS?

Some REITS, like the aforementioned Vanguard REITS Index, tries to capture the whole market, like an index fund.

Other REITS are focused on specific segments, like commercial real estate, or countries like the UK, Australia or any number of other sectors.

Typically commercial and residential REITS are available on the same investment platforms as index funds and other forms of investments.

So is the easiest way to invest in REITS within an online investment account?

Yes, in general, the easiest way to invest in REITS is to open up an online brokerage account, which allows you to invest in stocks, bonds and REITS within the same portfolio.

This has the added benefit of allowing you to “rebalance” when one is doing better than the other.

What are property loan notes?

Property Loan Notes are financial instruments that are typically used to raise development capital for  developers.

These loan notes have been particularly popular with regards to UK property in recent times.

They allow individual investors to invest, sometimes alongside institutional investors, in a development.

These developments can be commercial, or residential property.  Like REITS, loan notes can sometimes be held within a wider stock and bond portfolio.

What are property funds and property index funds/tracker funds?  

There are different types of property fund.  One kind is fairly simple; some funds merely buy many construction and property companies or even merely just try to track the performance of a property index.

An example of this, would be some funds buy the shares of the top 100-200 property firms in the world.

Two examples would be the iShares Global Property Securities Equity Index Fund and the Vanguard Australian property Securities Index Fund.

Some property funds, in comparison, make more direct investments into the real estate.

Are these kinds of investments usually liquid? 

Property index funds are almost always liquid, and you can take the money when you want.  Most REITS are also liquid.

In the case of property loan notes, they often have a certain commitment period 2-3 years is a typical commitment period.

What are the risks?

All kinds of property have certain risks; political, social and otherwise.  One of the bigger risks is the liquidity issue.

If a fund has too many people redeeming their investment, and too few new investors, they can get suspended.

This has happened with some huge funds, such as The M&G UK Property Income Fund , one of the largest of its kind.

This isn’t a big risk with a property index fund.

How can you invest in real estate for small amounts like 10k?

The easiest ways to gain exposure to real estate for small amounts of money, like 10k, is to have a 10%-15% allocation to something like REITS, within a broader portfolio.

The reason why this is effective, is many direct investments into REITS or property loan notes, have investment minimums.

In comparison, if you already have 100k-200k in an existing portfolio, it is fairly easy to start small with property investments.

Why don’t you personally invest much into direct real estate?

Many of my readers have asked me why I don’t own property, or at least direct property.

I do have a 10% allocation to REITS in my portfolio, and of course, index funds indirectly gives me access to property and construction related stocks without trying to pick winners.

However, the biggest reasons why I personally don’t invest in (direct) real estate directly is:

    1. The time costs – real estate is less of an investment, and more like running your own business. You can’t rely on capital values most of the time, so need to focus on yield and leverage.  So you have revenues from rent, and sometimes from the capital values once you sell, but you also have costs for taxes, maintenance and so on.  You also have the time costs of being a landlord, especially if you go down the Airbnb route, which means checking in many tenants.
    2. It isn’t easy to beat markets long-term – beating markets short-term, can and does happen, but over 40-50 years, it isn’t easy.  What has made this situation harder, is that it is getting harder and harder to get 95%-100% mortgages, so leverage is getting harder in most markets. Given the time costs and direct costs of owning property, moreover, beating markets by 0.1% by year isn’t enough to mitigate for the costs
    3. It is an illiquid asset – unlike REITS or index funds, you can’t easily sell direct real estate. That also makes you vulnerable to tax changes – you can’t simply sell your property if a new radical government comes to power
    4. There has been a populist backlash – previously one of the biggest positives about property has been that it has been tax advantageous in most countries and you can use real estate investments to get second residencies and even passports.  So many investors could “kill two birds with one stone” by getting an overseas residency and property. That is still possible in some places, but it is much harder than before, with many countries closing schemes or raising requirements.  Likewise, many of the tax advantages of property have been closed down in numerous countries. If we take the UK as an example, the British Government has dramatically increased taxes on second homeowners.
    5. The tax rules and general rules are always changing – it seems with ever budget, brings a new tax or change.  The direction of travel seems to be towards more tax and regulation.
    6. High valuations or high risk – most markets are either very risky or have high valuations. Some of the cheap emerging market opportunities, like in Georgia, are risky. Some of the safer options, are overvlaued.

For those that do want direct property, how easy is it to get mortgages for expats?

Over the years, it has gotten harder for expats, and indeed foreign buyers, to get mortgages.

In the UK, Australia and countless European markets, most lenders perceive expats as higher risk than people living locally.

That is because many expats are earning in foreign currency, and are on 2-3 year contracts, or are self-employed.

So you can get a UK mortgage as a non-resident, but the process is often more time-consuming, and you often have to put down a bigger deposit on day 1, compared to people living locally.

Where can I go for expat mortgages?

Many online websites have expat mortgage calculators, which show that the interest rates are typically higher for expats.

Some of the most famous banks, including HSBC expat, offer buy-to-let mortgages to UK and other expats, but the exchange rates aren’t always competitive.

This can also be an issue for people living in the UK, and other countries, that have overseas income.

There are countless British people, and indeed foreign-nationals, living in the UK, who have overseas income and are paid in Euros and USD.

Beyond the UK, countless countries such as Australia and especially New Zealand, have put restrictions on overseas property buyers, after a backlash against rising property prices.

What are some of the cheapest property markets right now? 

Some up-and-coming markets include Georgia and Bulgaria, in Europe.  Beyond that, many parts of the UK are increasingly being seen as cheaper than comparative markets.

With the whole “Northern Powerhouse” project, countless people are seeing Manchester, Liverpool and other parts of the North of England, as good options for real estate.

Typically speaking, the North and Midlands have better property yields, than London and the South East.

How about property tax?

This depends on the country again.    If we tax the UK as an example again, there is a buying tax, called stamp duty.  This ranges from 0% on cheaper houses, through to 12% on houses worth over 1.5M Pounds.

People who are buying property as a second home, have to pay an additional 3%, meaning an effective rate of 3%-15%.

It isn’t hard to negate this fee, although you can sometimes transfer a property’s deeds as a gift or put it in a will.

In addition to that, any income from property, will also be included towards UK Income Tax.

Below 11,851GBP a year, you don’t have to pay UK income tax.  Above this threshold, and until 46,350GBP, a 20% rate is applied.

Above 46,350GBP, a 40% rate is applied.  So people with multiple properties in the UK, often face an income tax increase, regardless of where they live, and they also face the hassles of needing to self-assess their own taxes.

Finally, you have capital gains tax. This didn’t used to apply to non-residents, including British expats and foreign buyers, but it now does.

You are generally taxed at 18%-28%, depending on many factors.  Trusts are taxed at 28%.

The point is, property isn’t always tax advantageous. It can be high-tax, in certain situations, and the rules are complex and ever-changing.

Can you easily reduce your tax bil on direct property?

There are ways you can use deductions to reduce your tax bill. Expenses from insurance and maintenance bills are just two examples of allowable expenses.

These rules are always changing, and indeed the UK Government is currently making changes to the mortgage interest cost element of allowable expenses.

One of the advantages of loan notes and REITS, is that they can be put into more tax efficient structures – sometimes even 0% rate structures.

How about for Americans and Australians?

Americans need to pay tax on overseas income beyond a certain threshold and need to declare any overseas assets, even if the threshold has not been breached.

This is regardless of whether the investment is in direct real estate, REITs or any other kind of investment.

For Australians, expat mortgages are possible to get, but like for Brits, tend to be a bit harder than for local residents.

Do you advise on real estate?

My specialism is portfolios which compromise of stocks, bonds and something REITS and loan notes, as opposed to direct real estate.

My portfolio minimums are $75,000, or currency equivalent, for such services.

I can take clients from everywhere in the world, except those living in the US. American expats are sometimes OK, but investment options can be more limited, due to US tax rules.

However, I do have access to several property companies, if my clients ask for an introduction.

Typically, they have a specialism, such as expat mortgages and property.  The majority of them are focusing on the UK, Australian, Canadian, US and Hong Kong Markets.

A few do have access to some emerging markets, such as Bulgaria.

What are your content details?

adamfayed@hotmail.co.uk and I am also available on a range of apps