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Abroad spectrum

Our panel of experts consider the tax implications of retiring abroad, from inheritance tax, capital gains, savings and pensions

What tax planning should individuals do before retiring abroad? Could this include using offshore bonds to defer gains until they retire overseas? What other structures should or could be established before leaving the UK?

Hart: Individuals should consider how much time they may continue to spend in the UK as this could have an impact on their residence status. In order not to be tax resident in the UK, it is necessary to be non-resident from the start of the tax year. It would also be best to learn about the tax rules in your destination country.

Consider taking pension commencement lump sums in the UK if entitled to do so and there is a beneficial tax treatment in the destination country. Offshore life assurance bonds are popular as tax is usually only due when the funds are withdrawn if you are resident in the UK for tax purposes.

Assets can be reallocated without incurring a potential CGT liability. When the bond is encashed, the entire gain is taxed as income at up to 40 per cent with no annual exemption, indexation or taper relief as would be the case for CGT. Commissions on these investments also tend to be higher. Whether or not it is advisable to defer encashment until a person is resident overseas will depend on how the bond is taxed overseas compared with the UK.

Penman: If you can defer taxable income until you cease to be non-UK resident, do so. Offshore bonds or non-distributor funds are an effective way of doing this. If you are leaving the UK permanently, you may have acquired a “non-UK domicile” for tax purposes, opening the door to many tax-planning opportunities.

Kidd: Offshore investments are one option as are Isas. You can maximise your Isa allowances and they can grow tax-free but once you leave the UK, you cannot make any further investments. A full review of your position as it stands before you leave is a must and you must have an up-to-date UK will. A discussion about your tax position with your accountant and IFA is essential.

What tax planning should individuals do once they have retired abroad? Are there ways to mitigate taxes in their new countries of residence? Are there ways to mitigate tax in the UK such as IHT?

Hart: The golden rule is to seek professional advice in your local country as well as the UK and review your affairs regularly. Your domicile status determines the extent of the impact of UK IHT. Simply leaving the UK won’t necessarily mean that your domicile will change, so you may remain subject to IHT on your worldwide assets.

Remember that IHT and gift duties may also apply in the country where you have property and/or are resident and charges may arise overseas and in the UK on the same asset. Find out what entitlement there is to relief for double taxation, either under the terms of an estate taxes treaty or under general principles.

Penman: You should always be aware of the tax implications in the country you choose to reside. Most countries tax their residents on a worldwide basis although there are a number of less sophisticated jurisdictions, for example, in the Far East or in former Soviet republics, which only tax individuals on the basis of local income or income brought in to the country – similar to the UK’s “remittance basis” for non-domiciled residents.

For inheritance tax purposes you will always be liable on assets situated in the UK. If you retain a UK tax domicile you will be liable on worldwide assets. Ideally, you should keep the value of your UK estate below the IHT nil-rate band, currently £285,000.

Kidd: The first thing to do when moving abroad in terms of any planning is to make a will in the country you have moved to. The country you are in will only deal with assets dealt with in that will.

IHT is taxable on your worldwide assets and estate so the usual ways of trying to mitigate IHT should be applied.

A full review of how much your estate is worth should be undertaken before you leave and make sure that plans are in trust and that any existing planning is still relevant after the changes to trusts in the last budget.

If you are fully committed to living abroad, change your domicile and you will avoid UK IHT after three years of living there.

Does a retiree’s tax treatment vary depending on which country they move to?

Hart: Yes. There may be double tax treaties between the UK and most of the countries to eliminate double taxation but this will vary according to the type of tax. Make sure you fully understand the impact of income tax, capital gains tax, IHT and stamp duty. Also be aware that there are different taxes abroad, for example, a property tax in Spain, a wealth tax in France.

In considering how best to minimise your tax bill, you should evaluate your lifetime objectives. Consider that you may wish to return to the UK, for example, on the death of a spouse, and whether you need to build in flexibility to your financial plans.

Penman: Very much so. A non-UK resident person in receipt of a UK state pension will not be taxed on it in the UK. However, occupational and personal pensions will be subject to PAYE as usual, unless there is an exemption in a double taxation agreement between the UK and the country of residence. The country of residence will in most cases tax the pension.

Retirees should also bear in mind that many countries impose an annual wealth tax, based on a percentage of a resident’s net worth. Taking up residence in the US can cause particular tax problems for individuals with international connections.

Kidd: Absolutely. There are some countries that have very low income tax levels and high rates. Some countries, such as Italy, do not have IHT. And Spain has five bands for income tax, whereas Italy has four and are far more generous – its highest rate of 43 per cent starts at income of Euro100,000, compared with Spain’s 45 per cent on earning of Euro45,000 or greater.

What should individuals do with their assets in the UK once they have retired abroad? What is the most tax-efficient way to receive income from property rental income from the UK?

Hart: This will vary for each individual. If a person owned property personally, and they disposed of it while non-resident, then it would be exempt from UK capital gains tax if they did not return within five years. However, they may be subject to capital gains tax overseas.

One way in which individuals could reduce IHT on property would be to secure a higher level borrowing against that property. On death, any liabilities would be subtracted from the value of the estate, provided that the mortgage is not repaid on death by an endowment policy, for example.

Regarding rental income, the non-resident landlord scheme allows non-resident individuals to receive UK rental income gross. But they are required to complete self-assessment tax returns. Otherwise, tenants or agents have to collect and pay income tax to Revenue and Customs. The income may also be taxable overseas, subject to any claims for double taxation relief that might be claimed.

Penman: Rental income from UK property will always be taxable in the UK. The most tax-efficient way to receive such income is to ensure that any allowable expenditure relating to the letting is claimed in full. This includes the interest cost of borrowing to fund the rental business so it is possible to structure borrowings inexpensively but tax efficiently. For IHT purposes, assets should ideally be held outside the UK. Alternatively, borrow-ings secured against UK assets will reduce their chargeable value for IHT purposes.

Kidd: If you decide to leave the UK permanently, you will generally no longer be taxed in the UK on most types of income or CGT from the day you leave. The exception to this is if you receive rental income from a UK property which will continue to be taxed in the UK – you will need to register with HMRC as a non-resident landlord.

As always, if you have a non-taxpayer or lowerrate taxpayer, then get the rental paid in their name as opposed to yours if you pay middle band or higherrate tax. This will save you money.

Is it advisable to move UK assets into offshore bank accounts and offshore structures? What exceptions are there to this?

Hart: Offshore investment funds are mostly structured in the same way as onshore funds, with the difference that the offshore funds are tax resident in low-tax jurisdictions or tax havens. However, if you are resident and domiciled in the UK, you will be taxable on any income received from these funds and should declare such income on your tax return.

Be aware that under the EU Savings Directive, financial institutions are required to report savings income payments to the authorities or impose a withholding tax on payments.

Deferred interest accounts may be attractive as they operate in a similar way to bond wrappers by paying out all accumulated interest only when the account is closed. Savers will eventually need to declare interest, but they can time such a declaration when they are in a lower income tax bracket or non-resident, allowing them to cut their tax bill.

Before moving assets offshore, consider the potential costs if you were to move them back onshore, to the UK.

Penman: Most banks will pay interest to non-UK residents without deduction of income tax so keeping accounts in the UK is not a problem, and can be a distinct advantage if you have a long-standing relationship with the bank and an ongoing expectation of UK income or expenditure. But any cash in Sterling accounts will be subject to IHT in the UK, as will any other UK investments. As you would almost certainly require local banking in the place you move to, it would make life easier to keep most banking arrangements outside the UK.

Kidd: I would say this is a personal choice and some of the options above will pay better rates than UK banks, for example. It is good to get a UK IFA who has offshore experience before you go to look at the options in detail. I would also do this gradually as there is little point changing everything over, then in one or two years time move back to the UK because it didn’t work out. Just because you get one to two 2 per cent extra for that period, you may have to be practical and allow yourself to find your feet before you commit to changing everything.

When people retire abroad, what happens to their pension entitlements, both from the state and their former employers? How is the pension income paid to retired people living abroad and does it increase in value over time?

Hart: State Pensions: Those live abroad cannot transfer their rights to a UK state pension. They can receive the pension in their new country of residence, in most cases, full entitlement. Most countries have relevant tax treaties to eliminate double taxation.

Occupational pensions: The rules concerning private pension arrangements vary from one country to the next. The UK’s general principle is that there is tax relief on contributions and on fund growth, whereas most of the benefits are taxed in payment as if they are income.

In much of Europe, pension arrangements operate more like a savings scheme where tax relief is not available on contributions but the benefits are untaxed. This presents particular issues in relation to transferring between pension arrangements in different countries. Professional advice must be sought in both countries concerned.

Penman: Your state pension may or may not escalate depending on which country you go to and the terms of any National Insurance treaty between the UK and the country you are in.

A private pension will be subject to the rules of the country you are going to and also to the double taxation agreements between the UK and the other State. Be aware that some countries may want to tax your UK tax-free cash payment ,so planning and advice before you go are paramount.

Kidd: You are still entitled to your basic state pension when you retire abroad, as long as you have paid the requisite National Insurance contributions over the years. If you have already moved to another country in the European Economic Area (EEA) and claim a pension from that country, the UK Pension Service will pass details of your claim to the country where you have been insured.

If you receive the UK pension while living in an EU or EEA country, you will receive an index-linked pension which will increase in line with inflation. But while a state pension can be paid outside the EU/EEA area, you may not receive these increases.

More than 400,000 UK pensioners live in countries without reciprocal treaty arrangements, including those in Australia, South Africa and New Zealand.

If you are receiving a personal pension, or an occupational pension, you should contact the provider to make arrangements for receiving payment abroad. Beware that currency fluctuations can erode a pension, so ask an adviser if you should transfer your pension to an overseas provider, rather than having it paid from the UK in sterling.

There are tax issues involved. You will no longer pay UK tax on pension income if you live in a country that has a double-taxation treaty with the UK. This ensures your pension only faces tax in the country where you are resident.

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