You’re thinking of making the momentous step to move abroad. There will be many issues to consider, particularly regarding cross border financial planning. This article will be focusing on location and currency risk mitigation. We will also look at the various tax wrappers available and whether the income is taxable in another country. We consider areas that are often overlooked by people moving overseas, such as estate planning and wills.

Where?

First of all, you obviously need to decide where you’re going to move or retire to. This may depend on whether you’ve had a lifelong dream to emigrate to Australia and live the ‘Great Outdoor Life’. Of course, you may be moving with your work. Or you may be planning to join relatives. On the other hand, you may be tempted by the States, keen to live the American dream.

Whichever country you’re moving to, there key considerations. For example, if you’re retiring and want to take your tax free lump sum from a UK pension, this can be taxable in certain countries. There are different issues to consider which are country dependent.

If you move to Australia permanently, it will mean your UK state pension will stop being ‘up-rated’. This means it will no longer rise in line with inflation or any other increases. As for the States, you need to be aware of the Foreign Account Tax Compliance ACT or FATCA as it is known. Despite FATCAs original purpose to recoup tax from US connected individuals with foreign investments, British expatriates based in the US are also finding themselves affected by it and in danger of paying additional taxes and penalties on their investments back home.

How to make the most of your currency

Once you know where you’re going, you’re going to need some money to live off when you’re there. You’re likely to have some liquid assets – maybe from the sale of a house and/or car. This is your nest egg so you don’t want it to be eroded by a poor exchange rate. Major events are likely to cause volatility and may affect the value of your investments and pension.

Mitigating currency risk is therefore crucial. If the pension is in GBP but you are spending it in a different currency when you retire, the pension solutions need to allow enough flexibility to mitigate against this. For example, if you are living in the USA and will be spending US Dollars in retirement, a UK pension scheme can offer investment strategies where you can move from GBP to US Dollars within the pension at the most advantageous time for you. Pension investment solutions in other currencies are also available.

Are my dividends tax-free?

You may have your investments in various tax wrappers. For example, pensions, bonds or ISAs but are wondering if the growth or income is taxable in another country. Any income from a British-based deposit account, investment funds, shares, pension or annuity may be subject to UK tax. However, any savings or investments held within your tax-free ISA wrapper will not be taxed in the UK, even if you live abroad. Unfortunately, you lose the other advantages of an ISA when you move overseas. For example, you cannot open a new ISA if you are no longer a UK tax resident. Although you can keep your existing ISA investments. It’s also possible that other countries may not recognise the tax-free ISA wrapper and may tax the underlying savings. It will all depend on your country of residency.

If you’re connected to the UK as an expat, you may have what is known as non-dom status. This refers to a UK resident whose permanent home, or domicile, is outside of the UK. They must provide evidence about their background, lifestyle and future intentions. This includes where they own property or intend to be buried, as proof to the tax authorities. Under the statutory residence test, there are various automatic UK tests and a sufficient ties test you can take to work out your status. This is an extract from the Government’s leaflet:

Step 1: Consider whether you spent 183 days* in the UK in that tax year. If you did, you will be resident in the UK. If not:

Step 2: Consider the 3 automatic overseas tests. If you meet 1 of these you are not UK resident. If you did not:

Step 3: Consider if you meet the second and third UK tests. If you meet 1 of these, you are UK resident. If you did not:

Step 4: Consider the sufficient ties test. If you meet this you are UK resident, if you do not meet this, you are not UK resident.

Automatic overseas tests 1.4 If you meet any of the automatic overseas tests for a tax year, you are automatically non-resident for that year.

First automatic overseas test 1.5 You were resident in the UK for 1 or more of the 3 tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year. If an individual dies in the tax year this test does not apply. The statutory residence test RDR3 10

Second automatic overseas test 1.6 You were resident in the UK for none of the 3 tax years preceding the tax year, and you spend fewer than 46 days in the UK in the tax year.

Third automatic overseas test 1.7 You work full-time overseas over the tax year, without any significant breaks during the tax year from overseas work, and: you spend fewer than 91 days in the UK in the tax year  the number of days in the tax year on which you work for more than 3 hours in the UK is less than 31

Find out more about how to check your status here.

Estate planning 

If you are resident overseas you may be wondering if you are excluded from inheritance tax (IHT) in the UK. If at the date of death, you are not deemed to be domiciled in the UK, UK IHT is only paid on your UK assets. For example, on property or bank accounts you have in the UK. It’s not paid on things like foreign currency accounts with a bank or the Post Office, overseas pensions or holdings in authorised unit trusts and open-ended investment companies.

However, it is important to be sure about your domicile. Those who intend to return to the UK in the future or have not sufficiently cut ties with the UK can still be considered a UK domicile. This means their worldwide assets could be subject to UK IHT. The rules do differ if you have assets in a trust or government gilts. All your worldwide assets will be assessed for UK IHT if you either lived in the UK for “at least” seventeen of the last twenty years or had your permanent home in the UK at any time in the last three years of your life. Although this is due to change from April 2017.

Wills

Where wills are concerned, different countries have different rules so it is important to familiarise yourself with them. For example, failure to observe inheritance laws in France can mean that people inheriting expat-owned property face significant tax bills in the future. One key aspect to consider if you have assets in both the UK and abroad is to ensure that your will in the UK is compatible with your overseas will. For example, if you own a house in the States, you will need to draw up a will in relation to it over there but it is crucial that this will ‘talks to’ your will in the UK too so that everything is accounted for. Having a will can help your relatives to avoid unnecessary tax charges whereas, without one, your assets could be at the mercy of intestacy rules.

The issues all differ according to individual circumstances and can be quite involved. Cross Border Financial Planning specialise in working with British expatriates and are happy to help if you have any queries.