MOVING OVERSEAS - 25.08.2017

Things to consider when retiring outside the UK

One of your wealthy clients is a few years from retirement and has indicated that he wants to move abroad. He has come to you for advice ahead of doing so - what sort of things should you bring up?

Leaving the UK

The idea of packing up and moving off to sunnier climes appeals to many people but you may find that for some of your clients this is an aspirational reality, rather than a passing fancy when the UK weather takes a turn for the worse. We will consider some of the more pertinent points here - particularly focusing on retirement.

Where?

If your client is moving to be with family, or to somewhere they already have property, then the destination is likely to be fixed. However, if there is some flexibility then comparison of the tax regimes of various countries is worthwhile. The tried and tested tax havens such as the Cayman Islands are well known, but countries within the EU can also give rise to large savings. France, Portugal, Cyprus and Malta have favourable tax regimes for UK residents looking to move. For example, Malta has a 15% flat rate on foreign sources income for qualifying beneficiaries of the Malta Retirement Programme. Compare this to the current top rate of income tax in the UK of 45%.

Pro advice. In particular, consider the timing of taking pension drawdown or a “golden goodbye” if your client is approaching retirement. If a tax saving can be achieved, ensure that the non-UK residency is established before payment.

Income tax

Income tax depends on the residence status as determined by the statutory residence test for any particular year ( yr.1, iss.8, pg.8 , see Follow up ). For a non-UK resident, tax is only paid on UK source income. However, a resident of an EEA country is entitled to a UK personal allowance, and so a small amount of taxable residual UK income (for example rent) should not be an issue (though you may need to consider the non-resident landlord scheme).

Establish the date

If the client leaves relatively early in the tax year, they may be considered non-resident for the entire year under the test. If not, split-year treatment should be available to treat them as non-resident from the date of departure.

Pro advice. If the client retires and leaves part way through a tax year, there could be unused allowances (such as the personal allowance) that might mean a refund is due. Ensure this is claimed.

Pension savings

Countries which have a double taxation treaty with the UK will generally have the primary taxing rights over worldwide income. This is key when it comes to looking at the retiree’s pension income, which is likely to be their main source of income after they leave the UK.

If your client is moving to a country that has a treaty which provides for pension income to be exempt in the UK, then once the client leaves the UK, with no immediate intention of returning, they should be able to apply to HMRC for the issue of an NT (not taxable) PAYE code to apply to any pensions paid by providers - including under flexi-access drawdown in most cases (though this may vary from country to country).

Clients who are no longer in self-assessment can do this by completing FormP85 (see Follow up ). Clients who do complete tax returns can proceed straight to FormDT-Individual (see Follow up ). This will need to be accompanied by a certificate of residency from the tax authorities in the new country of residence. Code NT will then be applied, and any overpaid tax (for example deducted during the processing period) refunded.

Pro advice 1. Part E of the DT-Individual can be used to nominate a bank account to receive any refund into. It is advisable for your clients to use this, rather than request a cheque - as many countries have a postal service which is of a significantly lower standard than the UK’s.

Pro advice 2. To avoid needing to pay UK tax and then reclaim it when taking a pension, suggest that your client uses the 25% tax free lump sum initially, and delay potentially taxable payments after the NT code has been initiated.

While the UK provides that 25% tax free can be taken, many treaties (including France and Spain) regard lump sum payments as taxable income. If that is the case, your client should take the lump sum before moving. Check the treaty carefully and consult an advisor in the other country if uncertain.

State pension

You need to check the specifics of the double tax treaty between the UK and the country your client is moving to to ascertain whether or not the state pension will be exempt from UK tax in the same way as a private pension. Some treaties, for example South Africa, Germany and Mexico, provide no exemption for the state pension.

Pro advice. If there is no exemption under the relevant treaty, the state pension may be exempted under the disregarded income rules (see Follow up ). However, remember that this will lead to the loss of the personal allowance, so there will be tax to pay on any residual UK income.

Domicile and IHT

If your client is intending to acquire a new domicile to avoid non-UK assets being subject to inheritance tax (IHT), the playing field shifts considerably. They will need to sever all ties with the UK - even keeping a UK bank account open could cause problems with claiming non-domiciled status. The problem is that the status will not be examined until death. HMRC’s current practice is to refuse to give an opinion on a lifetime transfer in most circumstances, so the old trick of making a transfer in excess of the nil rate band threshold into a trust following emigration, and forcing HMRC to take a view of the position via a disclosure, is no longer effective.

Pro advice. Remember that domicile is a matter of general law, not tax legislation and it is likely that a solicitor with experience advising on status will need to be consulted if there is even the slightest cause for uncertainty - in particular for those with a UK domicile of origin.

Even where your client moves all their assets offshore, sells all property and closes all UK accounts etc., it will take at least three years to shed a UK domicile - during which time their worldwide assets are liable to UK IHT. There are a number of ways your client could look to mitigate or eliminate any potential charge if this risk is not acceptable.

One option would be to move investments and cash into assets qualifying for business property relief - as this would reduce the window from three years to two. This may be achieved through a product like an AIM portfolio. Your client may be reluctant to do this, however, as the underlying investments are risky compared with listed shares or cash. A second option would be to acquire a short-term insurance policy to cover the exposure to IHT for the three-year period but this could prove to be expensive - increasingly so the older your client is.

FOTRA securities?

One method that might appeal is for your client to purchase UK government securities, for example treasury stock. Since 1998 all such securities have been issued free of tax to residents abroad, and can therefore be classed as excluded assets for IHT purposes. Because these are government backed, they are virtually risk free. The interest payable on them is also free from UK tax (though it would need to be declared in the country of residence). This provides a commercial reasoning for the purchase.

Pro advice. To benefit from the exclusion, your client must be the beneficial owner of the securities, not simply the legal nominee.

Previous article on statutory residence test

Form P85

Form DT-individual

HMRC guidance - disregarded income

Advise your client to obtain a certificate of residency from their new country of tax residency as early as possible. You can then request a “not taxable” code to apply to their UK pension. Ensure non-residency is established before any large drawdown is taken if a tax saving can be achieved.

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