Tax is an important aspect of financial planning for expats that needs sorting out before stepping outside the UK for that move overseas.
Retiring abroad will impact on the money expats have in the bank, but some of the worst problems can be avoided with some planning before they go.
The key point to remember is that leaving the UK does not make an expat non-resident for tax even though your liability to pay income tax moves with you.
Expats still have to pay income tax in the UK on interest from savings, dividends and rental profits, for instance.
And if they are tax resident in another country, they do not pick up a boost from tax breaks like the personal savings or dividend allowances.
Double taxation agreements
Expats come under the rules imposed by double taxation agreements and the UK.
The principle is income or gains are not taxed in the UK and the country where an expat now lives.
The terms of a particular agreement dictate where the tax is paid.
Tax on UK pensions is generally taxed in the country where the expat lives, but some tax advantages, such as the 25% tax-free lump sum, are not recognised elsewhere and become taxable income.
The popular retirement destinations of France and Spain are likely to tax these lump sums, so expats should take the money before moving overseas.
Living overseas and tax on savings
Money stashed in ISAs and National Savings grows tax-free in the UK, but expats lose this shelter and have to declare any interest as earnings in their new home.
Some countries offer similar tax benefits to residents.
France has a LivretA, an instant access savings account that pays tax-free interest on up to 22,950 euros. Like ISAs, these accounts are available for each partner in a couple.
Canada has a Tax-Free Savings Account that runs like an ISA that offers tax breaks on deposits of up to CND$5,500 held as cash or shares. The allowance is renewed each year like an ISA.
Expats and capital gains tax
Capital gains tax is another issue. Non-residents who own a former home or other residential property in the UK still have to declare and pay the tax on any profits they make when selling the property.
Capital gains rules vary between countries.
- In France, homeowners pay tax on any profit they make from selling a home.
- In Spain, expats over 65 years old who have lived in their home for more than 36 months are exempt from paying capital gains tax.
- In Germany, expats do not pay CGT on their main home providing they have lived there for at least 10 years
- The US ($250,000) and Cyprus (85,430 euros) accept tax-free allowances on the sale of a main home
- New Zealand, Australia, Canada, Ireland and South Africa charge no CGT on the sale of a main home
- Italy charges no CGT on a home sale if the money is reinvested in another home within 12 months
Countries with no taxes
Some countries do not impose any taxes.
These include several Caribbean sunshine islands, like the Cayman Islands, Bahamas and Anguilla; the Gulf States of Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait; The Channel Islands and the Isle of Man.
Most countries impose a rate of between 15% and 40%.
Testing your expat status
Most countries, including Britain, have a set of tests someone must pass to become resident.
They are generally based around where they consider their main home is, how much time they spend in one place and other factors like where they were born and where their family lives.
In the UK, these rules come together in the Statutory Residence Test.
Passing or failing the test determines if an expat pays tax in the UK – and if they do not, many tax saving allowances and reliefs cannot be claimed.
Telling the tax man about income and gains
Wherever you live unless you are completely off the grid, if you have savings or investments offshore, the host country tax authority is likely to report your financial details to your home country tax authority under the Common Reporting Standard (CRS).
Most leading developed countries and financial centres have signed up to the CRS and financial data swapping has already started.
The US also operates the Foreign Account Compliance Tax Act (FATCA) which demands all overseas financial institutions pass financial information about savings and investments to the Internal Revenue Service.
Under CRS and FATCA, the tax services compare details declared on tax returns with other financial data to make sure everyone pays the right amount of tax.
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