Daily Mail, 8 August 2007
Leaving this country to live abroad involves more than just buying that dream villa. Our sunshine expert explains!
Every year, hundreds of thousands of Britons pack their bags and go to live in sunnier climes. James Salmon explains how upping sticks permanently will affect your savings, pensions and tax.
Check Your Status
There are two crucial things to consider when you move abroad: residency and domicile. Generally, when you move to another country and become one of its residents, you'll be subject to its tax on your income, pensions and savings. Your domicile is where you are from so if you live in Spain but were born here, you are resident in Spain, but UK domiciled.
The tax situation is complicated, but the UK has what’s known as double taxation treaties with most countries which ensure you cant be taxed on the same money in both countries. As a resident of your new country, you can still be subject to UK tax — for example, if you keep a property here and rent it out. But the double-taxation agreement ensures you won't pay tax on that income in the country where you now live. If you work abroad, you could pay a lower than normal tax rate — speak to your foreign employer.
How you become a resident of another country depends on its laws. If you move to Prance intending to live there, for example, you become a resident on arrival. It's harder Spain, you're resident if you live there for more than 183 days a year. Many Britons who become resident abroad remain UK domiciled—and where you are domiciled is crucial in inheritance tax planning. UK inheritance tax (IHT) will be payable on your worldwide assets if you are UK-domiciled. But if there's a double tax treaty, you'll get relief from IHT in one country for the IHT paid in the other.
To change your domicile, you'll have to lose all links with the UK: this means closing bank accounts and selling off other assets. And you will have to tell the taxman you are leaving by submitting a DOM1 form to your local tax office. You can download one at urww.hmrc.gov.uk. The French do not differentiate between residency and domicile. And once you become a French resident, the UK taxman has no claim on any of your worldwide assets apart from your UK property. You pay tax at French rates on all other worldwide assets.
Before You Go
Do your homework. You need to tie up all your UK tax affairs before you move. If you’re working you’ll nee to send your P45 to your local office. Anyone moving abroad also has to send a P85 form which you can download at www.hmrc.gov.uk or phone HM Revenue & Customs’ residency helpline on 0845 070 0040 with any tax queries.
Phone The Pension Service (0845 606 0265) to find out if you can have your state pension paid into an overseas bank account. It can also tell you if you'll get increases in line with inflation each year (0845 300 0168). Unless you are moving within the European Union this wont happen, so your state pension will effectively be frozen at the rate you're paid when you leave. You cant put any more money into your Isas — and the interest will be taxed in the country you're moving to. If you want to keep some money in sterling to fund spending on visits to these shores, open an offshore account (usually these are based in the Channel Islands or Isle of Man) with a subsidiary of a UK bank or building society. Interest rates on sterling accounts are usually higher than Euro equivalents. Think about consolidating different personal pensions into a Sipp (self-invested personal pension) before you go. None of the usual destinations known for expat Brits offers such a flexible type of plan. Do not ignore currency risk. A big fluctuation in exchange rates can cost you dear. Use a currency specialist such as HiFX to move large amounts. High Street banks can charge up to 4 pc more to transfer your money. So on a £100,000 switch into Euros, you could be £4.000 better off.
The Three Most Popular Destinations For Britons
France
SAVINGS: Your new home has a far less developed savings market. The French love insurance bonds, which can be inflexible and expensive, but there are special tax-free bank accounts. Seek the advice of a specialist independent financial adviser such as Siddalls.
PENSIONS: Your UK state, occupational and private pensions will be subject to French tax. Only public sector pensions will remain taxed in the UK, even if they are paid into a French bank account. Contact HM Revenue & Customs for an FD5 tax form, so your non-public sector pensions are paid before tax and you don't pay this and French tax. If you're eligible to take your 25 pc tax-free cash allowance from your pension, do it before you move or you will pay tax on it when you're a French resident.
TAX: In France you are taxed as a household unit — all income is added together and divided by the number of people. So if you have children, you can earn more without paying any tax. Each adult has a tax free allowance of €5,614 (£3,820) but children have half an allowance. With two children you can earn a further €5,614 tax free. From then on you'll pay 5.5 pc tax on earnings up to €11,198 (£7,622), rising in stages to 40 pc on estates of more than €66,679 laws are fiendishly complicated. But children have more rights than inherit part of your estate. Generally spouses are entitled to at least a two children they will inherit each. But a new law, expected to remove IHT on assets passed between spouses on death.
Australia
SAVINGS: You pay tax on interest earned on your ISAs, so look to cash them in before you go. There’s no equivalent to ISAs, but there are plenty of high-interest accounts.
PENSION: If you're already taking your state, occupational or personal pension, make sure it is paid before tax into a UK bank account - then transfer it to an Australia bank account when the exchange rate is good. Once it hits your Australian account it will not be taxed.
Your state pension will not increase in line with inflation, so its value will be eroded. If an occupational pension scheme your employer may offer to transfer you pension payments into a Spanish you may get a terrible exchange rate. If you can take you before you move because you can’t once you become a Spanish resident.
TAX: If you’re under 65 you can earn €5,050 (£3,437) before paying tax (rising to €5,950 for the over-65’s (£4050) and €6,150 (4154) for the over 75’s. From then you’ll pay 24pc tax up to €17,360 (£11,814), stepping up to 43pc if you’re earning €52,360 (£35,631) or more.
IHT rules are hideously complex and vary between the country’s 17 regions. The person who inherits is taxed based on how much they received and their current wealth as well as their relationship to the deceased. And you cannot pass on all your assets tax-free to your spouse as you can in the UK. The IHT tax free allowance is just €15,957 (£10,860), which you can pass on to your spouse and children. Children under 21 have an extra €3990 (£2715) allowance a year until they reach 21 within an overall total of €47,860 (£32,654). Above this, your assets are taxed between 7.65pc and 34pc. But it can be higher if you are leaving money to others apart from your spouse and children, says Mike Warburton from accounts, Grant Thornton.