Leaving might be harder than you think

March 13th, 2012

In 2010, based on data from the Office of National Statistic (ONS), over 336,000 people permanently left UK shores for pastures new and in search of a new life. Of these over 100,000 decided that mainland Europe would be their new place of residence whilst another 94,000 decided that emigrating to Australia was their dream move.
Many of these expatriates will have taken little or no tax advice before leaving the UK.  As may or may not be expected, this can result in some very nasty surprises, especially for those who move to a high tax jurisdiction.

Many people who retire abroad are also blissfully unaware of the fact that they are likely to be subject to the same types of tax on their income and capital gains as they were in the UK. There may also be taxes that they have not seen before, such as property or wealth taxes.

To exacerbate the situation unless you have made a distinct break from the UK you may still be subject to UK tax;  people often complete the HMRC P85 form (this notifies the HMRC that you are leaving the UK) but it is not necessarily enough to define your leaving as being a clean break.  A recent high profile legal case involving Robert Gaines-Cooper and the HMRC, revolved around the question of UK residency as even though he had left the UK to live in the Seychelles in 1976 (and followed the rules for ‘allowed’ visits to the UK) he was unable to show he had made a “distinct break” from his social and family ties in the UK, this left him facing a potential UK tax liability of up to £30m, covering the period 1993 – 2004.

There can be further complications such as dual tax residency.  For instance once you are present in Spain for more than 90 days you must apply for a resident’s permit, even if you’re an EU citizen. And once you intend to remain for more than 183 days a year, you must register with the Spanish tax authorities and be issued with a tax identification number. You will be subject to tax on your worldwide income and gains.

In fact most countries in the world, and certainly those that are popular with British emigrants, consider an individual resident for tax purposes if they spend more than 183 days a year in that jurisdiction, with many also operating a secondary test that considers you resident if for example, you spend more than say 90 days there per year, or if your main home is there.

Typically most countries do not differentiate between nationals and non-nationals when it comes to taxation and will tax worldwide income and gains.  Some jurisdictions however, have special tax regimes for foreign nationals which will either exempt non-nationals from tax on their overseas income and gains, or subject them to a flat tax rate that is lower than the marginal rates that apply to locals.  Unfortunately, however, you generally need to be an entrepreneur, or employed in a specialist profession to benefit from many of these exemptions.

Broken Ties

If someone has successfully broken ties with the UK and becomes resident elsewhere this does not mean that life will then be plain sailing.  It is very rare for someone not to have some legacy connections with the UK, prime ones will be pension schemes, investments, property etc.

A question rarely considered is how these investments will be treated in the new country.  An example of this is the tax treatment of offshore investment bonds as it is a common misconception that other jurisdictions will treat these investments in the same way as the UK tax authorities.

The UK tax rules enable any tax on growth and income to be deferred until certain ‘chargeable events’ occur (e.g. – full encashment), however foreign jurisdictions may apply their own tax treatment to such assets.

For example in Spain an investment bond needs to invest in funds defined as UCITS (Undertakings for Collective Investment in Transferable Securities) from inception, have a minimum £75k invested and have had no top ups – this should mean it will be a qualifying policy and benefit from an effective low tax rate on the income element of withdrawals or on full surrender, with minimal exposure to wealth and gift taxes – although this cannot be guaranteed.

If the plan was a non-qualifying plan, then it would come under the ‘imputation’ regime.  This could create the issue of annual growth tax.

A similar issue exists in Australia.  Once you are a resident, if you choose to transfer a UK pension to a qualifying Australian pension scheme you have 6 months in which to do so – If you transfer in after this then any growth on the funds up to this point will be subject to tax.  Whilst there may be advantages in considering such a transfer if you decided to move back to the UK permanently and wanted to transfer back to a UK pension scheme this may not be permitted.

As you can see leaving the UK is a big decision and one which should not be taken lightly. This article can only scratch the surface and give some examples. As explained above, there are many potential pitfalls and seeking appropriate financial advice is essential.