The costs of living abroad
IT’S easy to get caught out by the complex rules on taxation of overseas property. Here we answer the essential questions.
I am buying a property abroad. What income tax must I pay?
If it’s a holiday home that you rent out for some of the year you will pay local taxes on any letting income in the country where you own the property.
If you are “resident” in Britain, you must still include overseas income on your UK tax return. Where the overseas taxes are lower than their British equivalent you may have to make up the difference, but if the foreign country levies higher taxes you cannot reclaim the balance.
If you go abroad permanently, you can become a UK non-resident. Then you will no longer be liable to UK tax on any overseas income but will pay that solely to your new country instead.
To be non-resident you must spend less than 183 days in Britain or visit the UK 90 days or less a year over four years. The Revenue may demand evidence that you have left the UK for good or intend to live outside Britain for three years or more.
You could still have to pay British tax on your UK income, including pension, and may be charged tax on the same income by your new country. However, where Britain has a double- taxation arrangement, you may be able to avoid UK taxes.
Revenue & Customs has a list of countries with which Britain has agreements.
If you intend to retire overseas it might make sense to transfer your fund to a pension scheme in your new country, although it can be a costly and difficult process.
Will there be UK capital-gains tax?
If you are non-resident you will pay local rates on your worldwide profits in your new country. If you are still resident in Britain, however, you will have to declare profits from the sale of your holiday home on your UK tax return and pay capital-gains tax at 40% above £8,800 if you are a higher-rate taxpayer. But you may qualify for a discount if you have already paid foreign tax on the gains.
And what about inheritance tax?
It is extremely difficult to dodge UK inheritance tax (IHT), even if you have moved abroad permanently.
British inheritance tax, which is levied at 40% on assets above £285,000, applies to your worldwide assets, including your home, for as long as you remain domiciled in the UK.
The law says a child normally takes the domicile of his or her father. This is known as the domicile of origin, and it is hard to change. It is possible to acquire a new domicile of choice, but you need to convince the tax people that you no longer regard the UK as your home.
You would probably have to sell all UK property, close your bank accounts over here and even arrange to be buried overseas.
Even then there is no guarantee the manoeuvre would work. The Revenue will not confirm or deny that your domicile has changed until a taxable event occurs — in other words, until you die.
Britain has double-taxation arrangements with some countries, such as France, South Africa, India and Pakistan, to ensure you don’t pay the tax twice. But if the overseas taxes are lower than the British equivalent you may have to make up the difference.
There is a further complication if your spouse or civil partner is non-domiciled. Normally, gifts between husbands and wives are exempt from IHT in the UK. But a non-domiciled spouse or partner has to pay the tax on the value of the estate above £55,000.
If I’m retiring abroad and will no longer be UK resident, which country has the lowest taxes?
Accountants say Dubai is the best bet. Six-and-a-half hours away from London by plane, there are no personal taxes, it is relatively easy to buy an apartment and get a resident’s visa.
But it does have its downsides. Properties are fairly expensive: up to £250,000 for a one-bedroom, shoreline apartment. And then there’s the heat. In summer, temperatures can reach nearly 50 degrees Celsius.
Panama was recently voted the world’s top retirement haven by International Living magazine. Perks to foreign retirees with a minimum monthly pension of $500 (£267) include a tax exemption to import a new car every two years, money off airline tickets, entertainment and medical consultations.
But if Panama is too far, Currencies Direct, a foreign-exchange trader, suggests Cyprus, because tax on pensions is only 5% and capital-gains tax on property is 20% with a C£50,000 (£60,000) exemption.