Planning for the future

Making a will - part one

Making a will - part two

Retiring to the sun - money matters

Buying a property abroad

Nursing homes and free care

Dos and don'ts of homeworking

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Tax abroad

Tax rates vary from one country to another, a prime example being VAT, which in some parts of Europe is over 20% on certain items.

Additionally, many countries levy taxes that happily do not apply to Britain. Wealth tax exists in quite a few parts of the world. Estate duty between husbands and wives is also fairly widespread. There are all sorts of property taxes, different from our own, which – however described – are variously assessable as income or capital.

Sometimes a special tax is imposed on foreign residents. Some countries charge income tax on an individual’s worldwide income, with none of the (by British standards) normal exemptions allowed.

Even so-called tax havens may fail to live up to their privileged reputation. Many impose all sorts of conditions on foreigners, effectively excluding all but the super-rich. These conditions can include any of the following:
• Only property above a minimum (and pretty exorbitant) price may be purchased
• You might have to produce evidence of a sky-high annual income
• You may be required to invest in a local business

Or, insultingly, you could be requested to deposit a sum with the government to cover you against repatriation costs, should the necessity arise.

Much more alarming, many hundreds of Britons in Spain have been hit with with vast bills and some have even lost their home due to dodgy developers from whom they bought their property.
Unbeknown to them, the developers from whom they purchased their home had taken out a mortgage against the property and then subsequently gone out of business.

This left the British owners with the debt plus interest and legal fees. Although new laws have been introduced to protect the buyer, it appears that these are not being applied as rigorously as they might.

Your UK tax position if you retire overseas
The rules do change quite frequently so you must make sure you are absolutely up to date with any changes before you take the foreign property plunge.

Many would be emigrants cheerfully imagine that once they have settled themselves in a dream villa overseas, they are safely out of the clutches of the UK taxman. But they are mistaken.

You first have to acquire non-resident status. If you have severed all your ties, including selling your home, to take up a permanent job overseas, this is normally granted fairly quickly. But for most retirees, acquiring unconditional non-resident status can take up to three years. The purpose is to check that you are not just having a prolonged holiday.

During this period, HMRC may allow you conditional non-resident status; and if it is satisfied, full status will be granted retrospectively. The rules for non-residency are pretty stringent. You are not allowed:
• to spend more than 182 days in the UK in any one tax year
• to spend more than an average of 90 days per year in the UK over a maximum of four tax years
Even if you are not resident in the UK, some of your income may still be liable for UK taxation.
Income tax
• All overseas income is exempt from UK tax liability
• Income deriving from a UK source is, however, normally liable for UK tax

This includes any director’s or consultant’s fees you may still be receiving, as well as more obvious income such as rent from a property you still own.

An exception may be made if the country in which you have taken up residency has a double tax agreement with the United Kingdom (see below). In this case, you may be taxed on the income in your new residence – and not in the UK.
• Additionally, interest paid on certain British Government securities is not subject to tax
• Non-residents may be able to arrange for their interest on a British bank deposit or building society account to be paid gross
• Some former colonial pensions are also exempted
Double tax agreement

If you are a resident of a country with which the UK has a double taxation agreement you may be entitled to exemption or partial relief from UK income tax on certain kinds of income from UK sources.

You may also be exempt from UK tax on the disposal of assets. The conditions of exemption or relief vary. It may be a condition of the relief that the income is subject to tax in the other country.

If, as sometimes happens, the foreign tax authority later makes an adjustment and the income ceases to be taxed in that country, you have an obligation under the self-assessment rules to notify HMRC.

Britain now has a double tax agreement with most countries. For further information, check the position with your local tax office.

Capital Gains Tax (CGT)
This is only charged if you are resident or ordinarily resident in the UK; so if you can realise a large gain, it is advisable to wait until you acquire non-resident status.

However to escape CGT, you must wait to dispose of any assets until after the tax year of your departure and must remain non-resident (and not ordinarily resident) in the UK for five full tax years after your departure.

Different rules apply to gains made from the disposal of assets in a UK company. These are subject to normal CGT.

Inheritance Tax (IHT)
You only escape tax if:

A You were domiciled overseas for all of the immediate three years prior to death.

B You were resident overseas for more than three tax years in your final 20 years of life, and all your assets were overseas.

Even if you have been resident overseas for many years, if you do not have an overseas domicile, you will have to pay IHT at the same rates as if you lived in the UK.

Domicile
Broadly speaking you are domiciled in the country in which you have your permanent home.

Domicile is distinct from nationality or residence.

A person may be resident in more than one country but at any given time he/she can only be domiciled in one.

If you are resident in a country and intend to spend the rest of your days there, it could be sensible to change your domicile.

If, however, you are resident but there is a chance that you might move, the country where you are living would not qualify as your domicile.

This is a complicated area, where professional advice is recommended if you are contemplating a change.

UK pensions paid abroad
• Any queries about your pension should be addressed to the International Payments Office, Room TB 218, International Pensions Centre, Tyneview Park, Newcastle upon Tyne NE98 1BA. T: 0191 218 7777
• Technically your State pension could be subject to income tax, as it derives from the UK. In practice, if this is your only source of UK income, tax would be unlikely to be charged
• If you have an occupational pension, UK tax will normally be charged on the total of the two amounts
• Both State and occupational pensions may be paid to any country. If you are planning to retire to Australia, Canada, New Zealand or South Africa, you would be advised to check on the up-to-date position regarding any annual increases you expect to receive to your pension
• Some people have found the level of their pension “frozen” at the date they left Britain, while others have been liable for unexpected tax overseas
• If your pension is taxed in the UK, you will be able to claim your personal allowance as an offset
• A married man living with his wife may also be able to claim the married couple’s allowance, if by virtue of their age they would still be eligible to receive it

Health care overseas
People retiring to another EU country before State retirement age can apply to DWP Overseas Contributions for a form E106 which will entitle them to State health care in that country on the same basis as local people.

An E106 is only valid for a maximum of two and a half years, after which it is usually necessary to take out private insurance cover until State retirement age is reached.

Thereafter, UK pensioners can request the International Pensions Centre at Newcastle (see under “Pensions” above) for a form E121, entitling them and their dependants to State health care as provided by the country in which they are living.

Useful reading
* Residents and Non Residents – Liability to Tax in the UK (HMRC 20), available from any tax office.

* Leaflet SA 29 Your Social Security Insurance, Benefits and Health Care Rights in the European Community contains essential information about what to do if you retire to another EU country. Available from any social security or Jobcentre Plus office.

* Rosemary Brown: The Good Non Retirement Guide , published by Kogan Page, £16.99.

This article was created: 13 November 2006.
This article was last edited: 6 February 2007.

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