Retiring abroad affects the tax expats pay on their savings and pensions.

Most of us dream of a new, relaxing life on sunny beaches, sipping cocktails as the sun sets, but forget the practicalities, like taxes.

If you move from the UK to a new home overseas, the tax you pay largely moves with you, although you may still pay UK tax on investment profits and rents.

You will also find that paying taxes is not optional – you must inform the tax authorities of your new home country of your worldwide income and gains.

Sometimes tax on the same income or gains may be due in the UK and in your new home, but double tax relief lowers the bill.

Becoming a tax exile doesn’t mean you don’t pay taxes, just that you pay them differently.

How expat money is taxed

Generally, most income and gains are taxed in the country where you live, but determining tax residency is not always easy.

The problem is that Brits abroad say they are expats without understanding the residency rules.

Generally, if you live somewhere for 180 days, you are considered a tax resident – but many other variables come into play.

For example, expats should have no intention of returning to their home country and should have severed social and personal ties. Severing those ties means closing bank accounts, surrendering driver’s licenses and passports, and making your new place their primary residence.

Expats abroad on assignment usually intend to return home after a year or two and keep their ties to the UK intact, requiring them to remain UK tax residents.

Seek professional tax advice

Here is a list showing how the different types of income are taxed:

  • Pensions – UK pension benefits are paid gross – without tax deduction – to expatriates. 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. Beware of tax-free payments in the UK, such as premium bond prices and cash ISAs, as foreign governments may tax them as income.
  • Capital gains tax – CGT tax rules are complicated and vary widely from country to country. Expats can pay CGT in the UK on disposals, such as buy-to-let property or second homes.
  • Inheritance tax – Wealth tax – or IHT in the UK – is paid on the value of your estate when you die. Most countries have inheritance rights. An issue for expats is how their estate is taxed by different tax systems across borders.

Expats should not go abroad and hope for the best. Taxation is complicated, especially when multiple countries are involved, so it is essential to seek advice from a qualified and experienced professional.

The best time to take advice is before you leave the UK, so you know what to expect and have time to consider a financial strategy. For example, the Gulf States do not levy income or capital gains tax, but if you live in Dubai and have buy-to-let investments in the UK, you still pay both taxes at HM Revenue & Customs in Great Britain.

State pension for expatriates

If you are entitled to UK state pension, you can claim payment regardless of where you live.

The minimum qualification is to accumulate 10 years of national insurance contributions.

Money is paid into a UK bank in sterling or an overseas bank account in local currency. Local currency payments are considered the best way to receive money as no exchange fees 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 get paid the annual amount each December.

The big controversy over expatriate state pensions is growing.

Revalorization consists in increasing the payment of the state pension according to the increase 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 remains frozen at the level of the first payment for life.

Countries with the highest and lowest income taxes

If you think taxes are high in the UK and you’re considering moving abroad to escape them, think again.

Granted, UK taxes aren’t cheap, but they’re even higher in these places:

  • 60% – Ivory Coast
  • 55-59% – Finland, Japan, Denmark and Austria
  • 50-54% – Sweden, Aruba, Belgium, Israel and Slovenia

Income taxes in the UK range between 20-45%, depending on a person’s income.

Besides the Gulf States, other low-rate tax havens include Luxembourg, Isle of Man, Jersey, Switzerland, Monaco, Mauritius and Ireland. Tax havens impose little or no income or capital gains tax. Instead, they generate income by asking expats to invest in their new country of residence.

Countries where expats pay for healthcare

The cost of health care is a concern for expats retiring abroad.

Few countries offer the standards of care provided by the National Health Service free of charge. Paying for private healthcare is an option in the UK, not a necessity.

But most retirement destinations expect expats to purchase private health insurance — and pay for incidentals like prescriptions, eye tests and dental care.

Many countries list private health insurance as an entry requirement for expats, for example Australia, Spain, France, Dubai and the United States.

Healthcare costs vary from country to country, but resettled expats can qualify for free or discounted treatment in many places with an S1 form, which they must apply for before leaving.

FAQs on Retiring Abroad and Paying Taxes

How long do expats have to live abroad to stop paying UK tax?

It’s not how long that matters, but where you plan to retire and how you sever your financial and social ties with the UK. An expat stayed overseas for 20 years before returning to the UK to find he was facing tax bills of tens of thousands of pounds because he had involuntarily remained a UK resident during his entire stay in the stranger.

How do I know if I am a UK tax resident?

Britain has Statutory residence test. Responses are designed to indicate UK residency status for long term expats and foreign nationals.

What is the Common Reporting Standard?

The Common Reporting Standard is a network of over 100 countries that exchange tax data. For example, a UK tax resident living in Australia may expect HMRC in the UK and the Australian Revenue Service to share personal data to determine whether they are paying the correct amount of tax in each country.

How is a QROPS offshore pension for expatriates taxed?

Benefits from a QROPS pension are paid gross and taxed as income in the country where the expatriate lives.

Do I need to tell HMRC that I am leaving the UK to live abroad?

Yes. You must file a self-assessment tax return and a Form P85 before leaving the UK to finalize your UK tax affairs.

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