How to avoid trouble in paradise
Friday September 22, 2006Mark King
The dream of moving abroad is fast becoming a reality for more and more British people approaching retirement. According to life assurer Prudential, the most popular places for Brits to retire are Spain, Australia and France, followed by the US, Canada, South Africa and Cyprus. But people who plan to decamp lock, stock and barrel need to examine the tax, pensions, health and property implications.
PensionsFirst things first: the UK state pension, the foundation of your retirement income strategy. You are still entitled to your basic state pension when you retire abroad, as long as you have paid the requisite National Insurance contributions. Special provisions apply to those whose pension calculations are part-based or widely based on periods of residence in Australia, New Zealand and Canada.
You will usually be sent a claim form by the Pensions Service some months before you reach UK pensionable age. It will ask for details of any periods of residence and state insurance you have in other countries. If you are living in any European Economic Area country and claim a pension from that country, the UK Pension Service will pass details of your claim to any other EEA country where you have been insured. Contact the Pension Service from overseas if you are less than four months from state pension age and have not received a claim pack (www.thepensionservice.gov.uk).
If you are already overseas and want to obtain a pension forecast, contact HM Revenue & Customs (HMRC) (www.hmrc.gov.uk). You can also request a state pension forecast, which will tell you the amount you have earned already and the amount you can expect on retirement.
The inflation trapIf 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. Check with the International Pension Centre (see contacts). UK pensioners who have retired to popular destinations such as Australia, South Africa and New Zealand have not received index-linked payouts in recent years.
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. Where there is no such agreement, your pension will usually be subject to UK tax before it is paid and you will need to contact your local tax office to ensure it does not aggregate tax. Finally, if you have pension funds that are not yet in payment (unvested) some jurisdictions will tax the growth on the investments in these funds unless they are transferred into a pension arrangement approved by those jurisdictions.
BenefitsIf you are receiving long-term incapacity benefit, severe disablement allowance or widow?s benefit, these may continue to be claimed while resident in another EU member state, provided you satisfy the conditions. It is also possible to receive widow?s pension, industrial injuries benefits and war pensions abroad. If you have been receiving attendance allowance or disability living allowance since before 1 June 1992, you may be able to continue to receive the benefit if you move to another EU/EEA member state. Otherwise, entitlement to these benefits will cease.
TaxTax issues are at the heart of everything you need to consider before, during and after you leave the UK. There are three major arms of taxation that need a particular focus: inheritance tax, capital gains tax and income tax.
Much depends on where you are resident and where you are domiciled. Domicile relates to where your roots are and to your long-term intentions (even as far as where you intend to be buried, because if you change domicility, it will not be possible to be buried in the UK). It is difficult to lose your domicile of origin but if you retire abroad with no intention of coming back the chances are you can acquire a domicile of choice in the country you have moved to. You may only have one domicile at a time under English law and can never be without one.
Even if you become non-domiciled in the UK, you will still be subject to UK inheritance tax (IHT) for three years after you have left, should you die abroad. The UK has a double taxation treaty with Italy and France but still does not have one with Spain or Portugal.
Wynne Thomas of Dawsons solicitors says: ?It is certainly the case that it is often better to dispose of some assets in the UK, because the capital gains tax (CGT) regime is more favourable here than in many countries.?
If you leave the UK permanently you will 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 (and you will need to register with HMRC as a non-resident landlord). If the income is also taxable in the country you move to you should get credit for any UK tax paid so that you do not suffer a double tax charge.
You would also not be liable to CGT on the sale of a second home, although you might face a similar CGT bill from the authorities in your new. Belgium is one country where CGT is not payable on this kind of disposal.
Watch the residence rules
Most countries will treat you as resident and tax you if you are physically present for 183 days or more. ?The UK rules are much more complex, but you should beware of spending more than 91 days a year in the UK,? explains Andrew Penman of Smith & Williamson.
Dying intestate in another country could cause problems for your heirs. It may be necessary to have a will drawn up under local law, but as some countries operate ?forced heirship? you should check whether there are rules governing to whom you may and may not leave property.
Helen Tavroges from law firm Dickinson Dees says you could even make two wills when living abroad ? one for any assets in the UK and one covering property and savings where you live. ?Expats will often plan their will to take into account tax issues abroad, making their will to get the best deal in the local jurisdiction but often overlooking the tax issues in the UK. This could mean that they are taxed very little abroad but could end up with a horrendous tax bill in the UK. The estate at death could even end up with double tax on the assets.?
It is worth bearing in mind that many countries, particularly in Europe, impose wealth taxes based on a percentage of your net worth and also local taxes similar to council tax. Spain, for example, has an annual wealth tax.
HealthMost UK nationals who are resident in another country are not entitled to free UK health service treatment. UK pensioners resident in another EU country have the same entitlement to treatment as a national in the country they are living in. Age Concern says it is important to establish what services exist locally. In particular, certain health services, such as district nursing, may be rare or not exist at all, and privately run alternatives may be costly. If you are planning to live in an EEA country but will also be spending at least six out of every 12 months in the UK, you would still be regarded as ordinarily living in the UK for hospital treatment, as long as you are not registered as a permanent resident in the EEA country.
The Pension Service?s international pension centre has a medical benefits section, which can advise you about reciprocal arrangements and your entitlement to health. It is advisable to take out insurance for private medical and dental treatment, as well as for medical repatriation to the UK in case you become ill.
ContactsInland Revenue International Centre for Non-Residents:
Fitz Roy House, PO Box 461, Nottingham NG2 1BD
Telephone: 0 (local rate call)
or 2 (international)
Website www.dwp.gov.uk or www.thepensionservice.gov.uk.
Medical benefits section 7