"Have I told you how blessed I am to be living in paradise?" Susie Hirschfield has had these words painted in a frieze around the palm-thatched palapa of her home in Puerto Escondido, a beach resort of some 40,000 on Mexico's Pacific. The Brit moved to Mexico in 2004 when she was made redundant at the age of 54. A decade later, her retirement dream remains intact. "I've no regrets," she says.
Ms Hirschfield is unusual as a Brit to have retired to Mexico - just 440 Brits draw the state pension in the country. But her decision to flee south in search of sun, sand and superior purchasing power is increasingly common. There are between 4.5m and 5.5m British nationals living abroad, according to most estimates, which equates to 7-9 per cent of the resident population. Most live in the English-speaking former colonies of Australia, the US, Canada, Ireland and New Zealand, but there are also roughly 411,000 in Spain and 173,000 in France (see graph 1).
Motivations for leaving Britain mirror the diversity of these countries. A study published by the Institute for Public Policy Research (IPPR) in 2006 classified reasons for emigration into four groups: family (joining a partner or returning to a country of origin after many years in Britain), lifestyle (embodied by Ms Hirschfield, full story - see below), overseas adventure (young adults in search of new skills) and work (professionals in search of promotion).
Emigration has fallen away since 2006 (see chart 2) - perhaps counter-intuitively, more leave when the economy is firing on all cylinders - but these broad categories remain useful. Nearly three-quarters of all emigrants in 2011 left for some kind of work, according to the government's comprehensive International Passenger Survey (IPS). Some 44 per cent of those surveyed already had a job and a further 28 per cent were looking for one.
But a consistent minority of emigrants are retired. About 4,000 pensioners left the country for the long term in 2010, and a proportion of the larger over-45s cohort was probably also at least partly retired, reckons a Home Office research report on the subject. Spain and France are consistently the top destinations for these age groups.
The changing size of the pensioner cohort reveals its motives for emigration. Having ranged between 4,000 and 8,000 for a decade, it soared to 22,000 in 2006, before returning to the old pattern. The strength of the pound and the housing market in 2005-06 are obvious explanations (see graph 3). Because retired couples are more likely to sell their UK home and do not earn local money, they are more sensitive to currency movements and property prices than expat professionals.
This raises the point that moving abroad is partly a financial decision, which can backfire if circumstances change. Exchange rates and housing markets are the most volatile elements of the mix, but changing tax rates, pension regimes and healthcare costs can also reduce the appeal of living in a given country. This feature will discuss these shifting sands, and how expats or would-be expats can manage them.
The biggest risk of all for expats is not financial but emotional: homesickness. The 2006 IPPR report found that missing friends and family was the main motivation for older emigrants returning to the UK. The death of a partner, in particular, can make paradise a lonely place. No amount of financial planning can pre-empt loneliness - but it can help to reduce the cost of escape.
PROPERTY
Many Brits are lured abroad by a lower cost of living - and particularly a lower cost of housing. Just as high British house prices are a headache for those trying to get on the so-called 'housing ladder', they are a tonic to those looking to jump off.
The big risk associated with selling up in Britain and buying abroad is that you change your mind. Because transaction costs on property tend to be much higher abroad, owning property for just a couple of years is costly. The average 'round-trip' cost of buying and selling a property in France is 16 per cent of the purchase price, according to the Global Property Guide, a data provider. In Spain it is 12 per cent. By comparison, UK transaction costs are just 5 per cent (mainly stamp duty).
Giving up on the expat dream is even costlier if either the exchange rate or property market turns against you. The obvious example is Spain. Those who bought property in the Malaga area in 2007 are sitting on losses of 46 per cent, according to valuation company Tinsa. The average UK property is only down about 9 per cent, reports Nationwide (see graph 4). Mercifully, these relative losses have been cushioned by currency - the euro has appreciated from about 68p to 84p over the period. Even so, those who set sail in 2007 and now want to return will only be able to afford a house about two-thirds the size of the one they left.
This has left many paradise hunters stranded. "Lots of people who did move out can't move back," says Lee Lyons of the Spanish Mortgage Company. "It's a real problem for people who haven't found the dream they were looking for. It's a bleak situation."
There are three ways to handle this risk. The most obvious is to rent rather than buy. This is what most working expats chose to do, says Nigel Green, chief executive of DeVere Group, an international financial adviser. Those who move abroad in their 20s for adventure tend not to own property, while those who follow a career abroad typically rent out their UK pad. This is the case for Oliver Cann, who moved his family from London to the Geneva area last year to take a better job (see below).
The second option is to make a calculated bet on a market (and currency) you are confident will rise. Current examples might include the fast-recovering Florida market, up 13 per cent year on year, and the west coast of Ireland. Buyers are also flocking back to Spain, despite few obvious signs of a bottom in the local property market. Foreigners bought 26,871 homes in Spain last year - up 13 per cent on 2011 even as the market as a whole shrank, according to the local College of Property Registrars.
One problem with this strategy is that it involves risk - your bet could be wrong. Another is that you may not want to live in the most promising investment market. Low prices may allow you to buy a more lavish home than you could otherwise afford, but it makes no sense to buy a retirement pad just because it is cheap - more important is that you enjoy living there.
Finally, would-be emigrants can hedge their bets by buying a second home abroad. This is common among retired expats; the IPPR report estimated in 2006 that 500,000 Brits spend part of the year abroad. In many cases, this arrangement evolves naturally out of holiday-home ownership, and often serves as a way of avoiding tax (see below) as well as escaping the English winter. Charles Weston-Baker, head of the international residential business at Savills, says these second homes typically become "shared family assets" - used by the grandparents in winter and their progeny in summer. "It's a balanced, sensible approach that provides a lot of enjoyment all round," he explains.
■ Those moving abroad for work would be foolish to sell their property in their home market. If you really don't want to be a landlord, it may make sense to hedge yourself against the risk of a rising market by buying into a housing fund (Hearthstone Investments offers a vehicle that aims to match the LSL Acadametrics house price index). Even those moving abroad for good should think very carefully before selling up in the UK - as the experience of many Spanish expats has shown, this strategy risks creating hostages to fortune. As for whether to buy abroad, it depends on the expected holding period and the local market. Crisis-hit Spain offers bargains - but it probably pays to stick to traditional properties in upmarket locations rather than flats in the so-called 'urbanisations', however cheap they look.
PENSIONS
If you're moving abroad you might be facing a dilemma about whether to take your pension with you or leave it in the UK. There are two options - which are simply leave it where it is and have your retirement paid to your foreign bank account in the local currency, or you can take it with you.
Leaving it in the UK
Leaving your pension behind in the UK is probably the easiest option - especially if you think there's a chance you might come back to live here again one day. When it's time to collect your pension you can easily arrange to have it paid into a foreign bank account in pretty much any country in the world. You just need to let your pension provider know where you're going and they will be able to sort it out.
The biggest risk with having a UK pension while living abroad, though, is the possibility of your income being devalued by currency movements. For example, if you move to the US and the pound gets weaker against the dollar, you will get fewer dollars for your pounds, making you poorer in retirement. One thing you can do to minimise this risk is hiring a foreign exchange broker - which you can get for a set-up fee of around £100. A professional broker will be able to get you a better deal - typically around 1 per cent more than you'd get without their help.
Australia is one of the biggest draws for Brits moving abroad.
Taking it abroad with you
If you decide you want to take your pension abroad with you, you can't just put it in any old foreign pension scheme - it has to be a Qualifying Recognised Overseas Pension Scheme (QROPS). This rule exists to protect your retirement benefits - and deliberately prevents you from getting early access to it.
QROPS are specially selected by HM Revenue & Customs and are supposed to meet minimum standards of UK schemes. But sometimes they don't - and HMRC constantly reviews the list to check they're all up to scratch. You can find a list of all currently approved QROPS on the HMRC website at www.hmrc.gov.uk/pensionschemes/qrops.pdf.
One of the major advantages with QROPS is the exemption from UK inheritance tax. When you move you might not realise the taxman still has you down as being UK-domiciled, and of course this means you're still subject to the UK tax regime - including the dreaded 40 per cent inheritance tax (IHT) on your worldwide estate. But if your pension is in a QROPS, then it is exempt.
However, QROPS are not hiding places for all taxes. If you want to move your money out (if you move again) or the QROPS is shut down and you have to move it into another scheme, the first 25 per cent of your pot will be charged a 40 per cent tax and the rest will incur an eye-watering 55 per cent charge.
Katie Morley
TAX MATTERS
Shaking off your British identity when you move abroad could save you and your family hundreds of thousands of pounds in tax.
Moving abroad offers a unique chance to move out of reach of the UK tax system, although you will of course be moving into the grasp of another one (see Out of the frying pan...below). How far out of reach you become depends on two things: whether you are non-resident and whether you are non-UK-domiciled.
As a non-resident of the UK your income and capital gains will not normally be subject to UK tax, although it will depend on when, and where, the income was received, the gains realised and how long you live abroad. To qualify as a non-resident you will need to pass the relevant parts of the Statutory Residence Test which examines, among other things, how much time you spend in the UK. Generally, if you're working full time for an employer abroad, you should qualify as non-resident. You can use HMRC's Tax Residence Indicator test at http://bit.ly/11sWWcP to check what your status might be.
Assuming you qualify as non-resident, you can then sell shares, and other assets that would normally be liable for UK capital gains tax, completely tax-free - as long as you live abroad for at least five complete tax years. If you return to the UK within five years (you might fall ill for example and return to the UK for NHS and family support), capital gains will then be charged in the tax year your UK residency is re-established. However, as a non-resident your worldwide estate will still be liable for UK inheritance tax (IHT) upon your death at a rate of 40 per cent for the part of the estate not covered by the £325,000 nil rate band. Not only that, but your worldwide estate will probably be liable for death taxes in your new homeland as well, although these may be applied in a different way to the UK. Typically, though, there will be a double taxation agreement in place between that country and the UK which means your estate won't have to pay tax twice.
The US is one of the biggest draws for Brits moving abroad.
A common way to escape the UK IHT net is by becoming non-domiciled as opposed to simply being non-resident. Domicile starts with your country of origin. You can live abroad for 20 years and still be UK-domiciled unless you do something about it by establishing a new domicile of choice abroad. Qualifying as a non-dom means cutting your ties with the UK and demonstrating that you really have put down roots elsewhere with the intention of remaining there permanently. Proofs could be buying a burial plot overseas, selling your family home in the UK, getting involved in the community in the new country and so on. "There must be a complete relinquishment of your UK domicile and it's up to you to supply the evidence. There used to be a form called the Dom 1 that could be completed, but that's been abolished," says Nigel Neville, technical associate director at Baker Tilly. It's well worth amassing the evidence so that it can be presented after your death. "Have the argument ready," advises Mr Neville.
You can find out more about the type of evidence that will be required by HMRC.
In fact, says Mr Neville, some ultra high-net-worth non-residents invite HMRC to make a decision about their domicile long before their death by creating a trust and dropping in a sum of money sufficiently above the nil-rate band to warrant the tax office's interest. "They tell HMRC about the trust and HMRC will then make enquiries to establish the individual's domicile status and hence whether there has been a chargeable UK lifetime transfer. The evidence will be examined and a decision reached. In the event that HMRC doesn't agree that the individual is non-domiciled, a charge of 20 per cent will be payable on the amount in the trust in excess of any available nil-rate band," says Mr Neville.
However being non-domiciled isn't a watertight defence against IHT: if you die within three years of becoming a non-dom, your worldwide assets will be treated as if you were still UK-domiciled and hence could be subject to IHT. Even after the three-year period, any assets that you own in the UK will be subject to UK IHT, even if you're a recognised non-dom.
If you are reluctant to smash all links with the UK, here are two crumbs of comfort. You don't have to give up your British passport (although doing so could support your case); and you can always choose to become UK-domiciled again. It's not an irreversible decision.
Out of the frying pan...
You will of course be moving into the tax system of the country you settle in and that might be better or worse for you, depending on your circumstances.
Examples of better might be Dubai, where no tax is taken from your income or capital gains. But most countries apply income and capital gains taxes. Australia has no IHT, although inherited assets can be subject to capital gains tax (CGT). The US applies death taxes, but allowances are generous and few estates are hit.
Examples of worse might include countries - France and Spain among them - that tax the inheritors rather than the estate. Under systems where the beneficiaries pay rather than the estate, each inheritor's tax bill is calculated according to their relationship to you, with children generally having the largest tax allowances and the lowest tax rate. An estate that would not have been liable for any IHT in the UK (because it's worth less than £325,000 or £650,000 for a married couple/civil partners) could therefore have to pay a big chunk of tax in the new country. Let's say you have two children and an estate worth £300,000, which is split between the children on your death. In the UK there would be no tax to pay, but in France the children would have tax to pay on the amount left once their tax-free allowance was deducted. The rate charged on the taxable amount depends on its size. However, for high-value estates, the UK tax position could be much worse.
And while married couples and civil partners can inherit assets from each other tax-free in the UK, that's not the case everywhere.
If you and your partner are not married or in a civil partnership, there's another trap to watch out for. In the UK an estate worth less than £325,000 can be passed on to the partner tax-free, but in another country your partner could face a high tax bill - in France, for example, the tax-free allowance for unrelated beneficiaries is low and the tax charge in this case would be 60 per cent.
Finally, watch out for local laws on inheritance which dictate how you can distribute your wealth - you may be forced to leave the bulk of your estate to your children even if they don't need it and you'd prefer to leave it to a new spouse. Usually you can make provision for a surviving spouse to have a life interest in your home so that they can continue living there until their death. And remember that tax laws, allowances and rates change.
Rosie Carr
READ MORE...
Read this week's reader portfolio: how one reader has built a portfolio to help them retire overseas.
Read more articles by Stephen Wilmot in Property Matters.
Read more on property including buy-to-let, commercial property and overseas property.
