Retiring abroad affects the tax expats pay on their savings and pensions.
Most of us dream about a new life relaxing on sun-kissed beaches, sipping cocktails as the sun goes down but forget about the practicalities, like tax.
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If you leave the UK for a new home abroad, the tax you pay largely moves with you, although you may still pay UK taxes on profits from investments and rents.
You’ll also find that paying taxes is not optional – you must tell the tax authority in your new home country about your worldwide income and gains.
Sometimes tax on the same income or gains may be due in the UK and your new home, but double taxation relief reduces the bill.
Becoming a tax exile doesn’t mean that you don’t pay taxes, just that you pay them differently.
How Expat Money Is Taxed
The rule of thumb is most income and gains are taxed in the country where you live – but determining tax residence is not always easy.
The problem is Brits abroad say they are expats without understanding residence rules.
Generally, if you live somewhere for 180 days, you are considered a resident for tax – but many other variables come into play.
For example, expats should not have plans to return to their home country and should have ended social and personal ties. Breaking these ties means closing bank accounts, handing back driving licences and passports and making your new place of residence their main home.
Expats abroad on assignment usually have plans to return home after a year or two and keep their UK ties intact, which makes them remain UK tax residents.
Seeking Professional Tax Advice
Here’s a list showing how different types of income are taxed:
- Pensions – UK pension benefits are paid gross – with no tax deducted – to expats. The money is taxed in the country where you live as income.
- Savings and investments – Interest and dividends are taxed in the country where you live. Watch out for tax-free payments in the UK, like premium bond prizes and cash ISAs as foreign governments may tax them as income.
- Capital gains tax – CGT tax rules are complicated and vary greatly between countries. Expats can pay CGT in the UK on disposals, like buy to let property or second homes.
- Inheritance tax – Wealth taxes – or IHT in the UK – are paid on the value of your estate when you die. Most countries have inheritance taxes. A problem for expats is how their estate is tax-treated by different tax systems across borders.
Expats should not move abroad and hope for the best. Tax is complicated, especially when more than one country is involved, so seeking advice from a qualified and experienced professional is vital.
The best time to take advice is before you leave the UK, so you know what lies ahead and have the time to consider a financial strategy. For example, the Gulf States do not levy income or capital gains taxes, but if you live in Dubai and have buy to let investments in the UK, you still pay both taxes to HM Revenue & Customs in Britain.
State Pension For Expats
If you qualify for the UK state pension, you can claim the payment regardless of where you live.
The minimum qualification is to accrue 10 years of national insurance contributions.
The money is paid into a UK bank in Sterling or a foreign bank account in local currency. Local currency payments are considered the best way to receive the money as no foreign exchange charges are added.
The state pension is paid 13 times a year – once every four weeks.
If your weekly payment is £5 or less, you can have the annual amount paid each December.
The big controversy over expat state pensions is uprating.
Uprating is increasing the state pension payment in line with rises in the cost of living.
The government publishes a list of countries where the state pension is increased in line with UK inflation each year. For the rest, the state pension stays frozen at the level of the first payment for life.
Countries With The Highest And Lowest Income Taxes
If you believe taxes are high in the UK and are thinking about moving abroad to flee them, then think again.
True, British taxes are not cheap, but they are even higher in these places:
- 60 per cent – Ivory Coast
- 55 – 59 per cent – Finland, Japan, Denmark and Austria
- 50 – 54 per cent – Sweden, Aruba, Belgium, Israel and Slovenia
UK income taxes are between 20 per cent and 45 per cent, depending on how much someone earns.
Besides the Gulf States, other low tax havens include Luxembourg, the Isle of Man, Jersey, Switzerland, Monaco, Mauritius and Ireland. Tax havens impose little or no income or capital gains taxes. Instead, they generate revenues by demanding expats invest in their new country of residence.
Countries Where Expats Pay For Healthcare
The cost of healthcare is a worry for expats retiring abroad.
Few countries offer the standards of care provided by the National Health Service for free. Paying for private health care is an option in the UK, not a necessity.
But most retirement destinations expect expats to take out private health cover – and to pay for incidentals such as prescriptions, eye tests and dentistry.
Many countries list private health insurance as a condition of entry for expats, for instance Australia, Spain, France, Dubai and the USA.
Healthcare costs vary between countries, but resettling expats can gain treatment for free or at a discount rate in many places with a Form S1, which they must apply for before they go.
Retiring Abroad And Paying Tax FAQ
How long must expats live abroad to stop paying UK tax?
It’s not the length of time that counts but where you intend to retire and how you cut your financial and social ties with the UK. One expat remained overseas for 20 years before returning to the UK to find he faced tax bills of tens of thousands of pounds because he unwittingly remained a UK resident during his entire time abroad.
How do I know if I am a UK tax resident?
Britain has a Statutory Residence Test. The answers are designed to indicate residence status in the UK for long standing expats and foreign nationals.
What is the Common Reporting Standard?
The cOmmon Reporting Standard is a network of more than 100 countries which swap tax data. For example, a British tax resident living in Australia can expect HMRC in the UK and the Australian tax authority to share personal data to establish if they are paying the right amount of tax in each country.
How is a QROPS offshore pension for expats taxed?
Benefits from a QROPS pension are paid gross and taxed as income in the country where the expat lives.
Do I have to tell HMRC I’m leaving the UK to live abroad?
Yes. You should file a self-assessment tax return and a Form P85 before you leave the UK to finalise your British tax affairs.
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