Retiring abroad involves lots of planning and paperwork. When it comes to tax, there are four key areas you should pay particular attention to, says Tim Bennett.
Property
This is most people's biggest single expense. First, decide whether you plan to rent your UK property out, or sell up and buy abroad. If you take the latter route, you'll usually free up some capital, as many countries are cheaper than the UK. But if UK property prices pick up, you may find yourself unable to afford to return, should you wish to. When buying abroad, check purchase taxes. Stamp duty in Britain ranges from 0%-4%. In other countries the rate may be higher and you may even have to pay value added tax. Also, if you let, rather than sell, your UK property, rental income will be subject to UK income tax. And any capital gain from the time you leave may be taxed once the property is no longer your main home (or 'principal private residence').
Income
You might think that having left Britain you'll escape UK income tax. But if you spend 183 days (six months) or more back in Britain in any one tax year (6 April to 5 April), you'll suffer UK income tax as what HM Revenue & Customs calls a 'UK resident'. That's also true if you leave but are a regular visitor averaging 90 days or more a year here, over four consecutive tax years. HMRC also looks for evidence that you have severed ties with Britain before declaring non-UK residence. So cancel any golf club subscriptions before you go and get your post redirected to your new home. Once you achieve non-resident status, avoid sending large dollops of cash back to Britain, or it may still be taxed.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Inheritance tax
Escaping UK residence isn't easy. But it's a doddle compared to escaping 'UK domicile', whereby the UK is seen as your 'permanent legal home'. As a UK domicile, all your worldwide assets attract UK inheritance tax (IHT) at 40% on your death. The rules on shaking it off are complex and hard to meet. For example, you may have to show that you've been non-resident for 17 out of the past 20 consecutive tax years. In all, plan as if you'll have to pay UK IHT and then it'll be a bonus if you don't.
Pensions
You can claim your state pension when living abroad, and opt to have it paid into either a UK or overseas bank account. But there are catches. First off, you may not receive any annual increment unless you retire to a member of the European Economic Area (EEA) or a country with which the UK has a reciprocal agreement. On other pensions personal or company take advice. You may, for example, be charged a penalty by either a life assurer to move your income (annuity) overseas or have a company pension paid abroad.
The way around any extra UK tax is a Qualifying Recognised Overseas Pension, or QROP. These are schemes set up outside the UK in lower tax countries that have more flexible rules about the size of any lump sum on retirement (in Britain this is capped at 25% of the fund) and may even exempt you from the need to buy an annuity. See www.hmrc.gov.uk/pensionschemes/qrops.pdf for a full list of qualifying schemes and make sure you take advice from a tax adviser as HMRC's qualifying criteria are strict.
For the best options for retiring in the sunshine and getting the most from your retirement money, see: For a less taxing retirement, head abroad
Inheritance tax bills exceed £500,000 for almost 10% of estates
Can gold protect you against inflation?
