How to plan for it
At the end of a holiday, most of us will have travelled towards a foreign airport and wondered just why we were preparing to catch the plane home. So it is no surprise, perhaps, that the conclusions of a number of surveys shows that demand to escape Britain’s weather, taxes and political correctness continues to rise.
For example, a recent pensions’ industry study found the number of Britons leaving the country in pursuit of warmer, lower taxed climes is greater than at any time since the 1970s.
More people, especially those in their 40s and 50s who already own property abroad, are planning to remain overseas permanently. One report concludes that a third of existing overseas homeowners had opted to retire abroad on a permanent basis.
Currently, an estimated 2.2 million Britons, some 5% of the population, own a home overseas and this figure is expected to double within the next decade. Retiring abroad used to be regarded as an option for a select few; today, it is a realistic prospect for millions of people.
Not surprisingly, the majority of prospective international retirees are in their late 40s or 50s, people who plan to retire to their new home, or at very least to use it for six months every year when they stop work.
One million pensions drawn overseas
Figures issued by the Department for Work and Pensions, which show that around one million British pensioners currently draw their state pension from outside of the UK, no longer prompt the shock reaction they may have done a few decades ago.
The question is, how can you match your wholly understandable aspiration to retire to the sun? Answer: you must apply yourself and, most important of all, carefully plan the process from a financial perspective...
If you have decided upon where you wish to retire; you will have almost certainly already spent an extended period in your preferred location... in all seasons. The bright, colourful holiday snaps may be a completely different proposition in mid-January. Renting an apartment during the winter months is an ideal way to discover what a place is really like and to see whether you do actually enjoy living as opposed to holidaying there.
Having determined that retiring overseas is something you’re keen to do, what is the next step?
Inform the relevant tax authorities
To kiss goodbye to Britain and the Inland Revenue’s adhesive tentacles on a permanent basis, you will almost certainly have to make an early decision regarding your main residence. A survey by Surrey University found that around 20% of retirees in Spain, for example, had retained a property foothold in the UK, but that link with the old country comes at a potentially heavy cost.
Maintaining UK accommodation for your use means that in the eyes of the Revenue, you will remain a UK resident and, therefore, liable for UK tax. Letting your property could be the answer to this perennial dilemma, although this can be fraught with difficulty. Alternatively, selling up in order to part finance the acquisition of a property abroad, however radical that sounds, does have the benefit of convincing the Revenue that you are no longer UK resident for tax purposes.
“Do I really need to do that?” you may wonder as you ponder over how anyone, especially tax authorities, would know where you were resident.
This question has occupied the minds, however briefly, of almost everyone who has ever ventured overseas, but frankly, only the stupid or dishonest would fail to advise the Revenue of their intention to leave the UK. Furthermore, immediately registering with the tax authorities in the country to which you intend moving is good practice. Indeed, in most countries, it becomes your responsibility to advise the authorities if you become a tax resident; should it later be discovered that you have not declared your tax residence in say, Spain, you can be fined up to six times the outstanding tax, plus interest and then jailed.
Aside from dealing with practicalities such as obtaining a state pension forecast (by obtaining form BR19 from HM Revenue & Customs), the prospective international retiree will, understandably enough, want to contemplate how he may minimise his tax liability while maximising his investment returns. At this point, he would be well advised to consider the benefits of putting at least a proportion of his assets into trust.
An offshore trust may make tax planning sense
We first looked at offshore trusts back in September. For the individual who expects to spend his retirement outside of the UK, the establishment of a trust can have enormous advantages. A trust can be used for a variety of purposes; for example, to protect assets or to preserve a family’s hard-earned wealth. Alternatively, they can become a vital part of long-term tax and estate planning, as well as ensuring that the settlor avoids forced heirship.
In short, the role of trusts, an arrangement whereby one person (the settlor) transfers property and/or other assets to another (the trustee) to hold for the benefit of another (the beneficiary), has become increasingly important for those wishing to retire abroad on a permanent basis.
For UK residents who may wish to become ordinarily non-resident when they retire, or for those who are non-domiciled, an offshore trust is worthy of further consideration. It is vital, however, to seek advice before taking the first steps to establish an offshore trust ahead of one’s overseas retirement.
Having resolved matters regarding registration and trusts prior to your departure for hopefully sunnier climes, the next thing to consider is whether you’re liable for UK income tax.
Liability to UK tax is determined by your residency status. In some cases, this liability will depend upon whether you are “ordinarily resident” or “not ordinarily resident” in the UK. Residency, on the other hand, is determined by establishing how much time you spend in the UK during a tax year. Even if you have retired abroad, you may still be resident in the UK for tax purposes if you spend part of the year in the UK.
Naturally, it is crucial that the prospective international retiree establishes residency status as soon as possible as it has a direct bearing on your ongoing tax liability; remember too that it is the Inland Revenue’s job to “forfeit” as little income tax as it possibly can.
The Revenue defines income as being “any income from a source in the UK”, a jurisdiction which encompasses England, Wales, Scotland and Northern Ireland. Everywhere else is considered to be “overseas”. Different types of income such as bank interest, share dividends and pensions or annuities are taxed in a variety of ways, although the amount you pay is determined by the nature of your UK income.
In certain circumstances, an individual’s tax liability may be reduced if, for example, there is a double taxation agreement between the UK and the country to which he has retired. This is an arrangement between the UK and another country, which aims to prevent, or give relief for, double taxation. A list of countries with which the UK has double taxation agreements can be found in Inland Revenue’s booklet IR 20.
An international pension too...
The prospective international retiree will also soon discover that in addition to this myriad of definitions, a UK pension (or insurance annuity) may be liable for UK tax and be subject to tax in the country where residence is being taken up.
According to the Revenue, retirees are not, however, liable to UK tax on a UK pension if they “live in a country which has a double taxation agreement with the UK and which exempts UK pensions from UK tax”. Under the terms of most double taxation agreements, pensions are taxed only in the country where an individual is resident.
Would-be retirees to foreign parts who may still be planning their retirement in perhaps, five or 10 years, may, therefore, wish to avoid the intricacies of double taxation agreements or claiming retrospective pension allowances by considering an international personal pension.
International personal pensions have a number of benefits: there are few restrictions upon the level of contributions that can be made and minimal restrictions on the age at which the benefits may be taken. Furthermore, there is no need for pension holders to buy an annuity.
Daydreamers in airport queues rarely apply themselves to sorting out their lives, at least not until it’s too late, but for individuals giving serious consideration to the seductive prospect of retiring abroad, there is much to do.
It’s easy to moan but like everything else, if you’re set on the idea, the sooner you make provision for your departure the better off you will be.
Peter Sharkey is a director of several companies and writes on offshore financial matters for a number of organisations.
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