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Your money abroad

Thinking about making a summer break more permanent? Here's how to plan your savings and investments if you're heading overseas
June 10, 2016

The onset of another British 'summer' might be making you consider a more permanent sojourn in the South of France. But penalising taxes and confusing investments could spoil your dreams of a pied-a-terre. A spell overseas, either temporary or permanent, will have a major impact on your personal finances, from the tax you pay on savings and earnings, to the way you save for your pension.

Pensions

You don't have to take your pension if you move abroad. "If you have a pension with a UK provider, you do not have to close it," says Gary Smith, chartered financial planner at Tilney Bestinvest. "It can be retained and you can stay invested as before. But your ability to continue funding the pension will change."

While you are still building up a pot, it might make more sense to leave it invested, but be aware that the tax relief you receive will be limited. You can continue paying into your current self-invested personal pension (Sipp) and or workplace scheme for five years after leaving the UK, but the tax relief you receive will be capped on gross contributions of up to £3,600 for five years.

The main problem with leaving your pension in the UK comes when you take income from it. Foreign exchange rates, the taxes you will pay on lump sum and drawdown payments, and payments into foreign bank accounts could all prove sticky.

The tax benefits of taking out lump sums might also not apply in your new jurisdiction. In the UK you are entitled to take 25 per cent of your pension as a tax-free lump sum when you reach 55 but other countries, for example Spain, may not allow this. Patricky Murphy, partner at Zen Wealth says: "Spain is very rigorous in terms of tax collection on things that people might think would normally be tax free, including the 25 per cent lump sum, which you would have to report and pay taxes on in Spain."

Receiving pension income into a foreign bank account could result in your income being eroded, if the currency you convert to is stronger than the pound. A foreign broker could help you minimise this issue for a reasonable fee and will get you a better deal than you could otherwise.

However, you might struggle to find a pension provider willing to pay into a foreign bank account. You could keep open a UK bank account for this purpose, but would then need consider the transfer fees charged for transferring between UK and foreign accounts.

 

Overseas pensions

If you think you are moving away permanently, you will need to consider transferring your pension to a Qualifying Recognised Overseas Pension Scheme (QROPS). These are regulated overseas, and can accept transfers from private UK pension schemes and pay you in currencies other than sterling, avoiding money loss through foreign exchange.

The assets within QROPS grow tax free though the amount you will be charged when you take benefits will depend on the jurisdiction. However QROPs are expensive to set up and the ongoing charges are high. You usually have to pay commission and high initial fees for the funds held within them, and the cost is likely to be far higher than those of a UK self invested personal pension (Sipp).

"The costs of a QROPS tend to be a lot higher than your standard Sipp or personal pension, so you need to be mindful of the costs when you transfer," says Danny Cox, chartered financial planner at Hargreaves Lansdown. "And moving money into an offshore scheme is a clunky process too. I would want to be pretty sure I wasn't coming back before doing it."

You will also incur a charge from your UK pension provider for moving into a QROPS. For example, AJ Bell charges £250 to transfer to a QROPS and Hargreaves Lansdown charges £295.

"Most people remain in the UK because it is a good, regulated market," says Petronella West, chartered wealth manager at Investment Quorum. "It is easy to get involved in unregulated offshore scams and it is a complicated market, so tread carefully."

QROPS are specially selected by HM Revenue & Customs (HMRC) and are supposed to meet the minimum standards of UK schemes, though sometimes don't despite the fact 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.

 

Isas

There is no reason to ditch your individual savings account (Isas) just because you move abroad, but like a pension, your ability to pay in and the tax relief you receive on investments may differ significantly. There is nothing to stop you keeping an Isa and even moving around the investments within it while you are overseas, but you will not be able to keep putting new money into it.

There is also the risk that, depending on the country you move to, your new jurisdiction might take a very different - and potentially far less favourable - view on the taxation of any money you build up within the wrapper.

Ms West says: "The US is toxic for Isas whether you go for a year or longer."

The US Internal Revenue Service (IRS) does not recognise Isas as tax-efficient vehicles, and you must report and pay tax on your gains in Isas. The same is true in Spain. "In simple terms, you lose the tax efficiency of Isas and premium bonds when you move to Spain you so should probably think about moving those into something that is compliant with the Spanish tax authorities," says Mr Murphy.

Whether held inside or outside tax efficient wrappers, you can keep hold of your UK authorised unit trusts and open-ended investment companies (Oeics) when you move abroad. But be aware of the way in which their dividends and income will be taxed. "Nothing has to change with your general investments but if you do invest in these assets they will generate interest and dividends, and are subject to capital gains tax," says Mr Smith. "You need to check whether or not the country you are moving to has a dual tax treaty with the UK to prevent you being taxed more than once on the income. The UK has agreements with a large number of other countries in order to prevent this, and you can claim tax relief when you declare this on your tax return, though the amount you can claim will depend on where you are moving to."

 

Alternative investment wrappers - offshore bonds

A way to keep investing in a tax-efficient manner from abroad is to invest in an offshore bond. This is a tax-efficient investment wrapper set up by a life assurance company, usually in a jurisdiction with a favourable tax regime such as Dublin or Luxembourg. You are able to hold a wide range of investments in these, and you are not subject to tax until you withdraw money from the bond or repatriate it to the UK, though holding taxes may apply.

If you are overseas when you realise the investment you will be taxed according to the country you are based in, but if in the UK you will be taxed at your marginal rate. However, you can apply for time apportionment relief for the years when you were a non-UK resident.

You can draw down up to 5 per cent of the orginal sum of the offshore bond each year and defer the tax bill on that until the end of the contract. You pay income tax on anything above the 5 per cent limit. If you do not take your 5 per cent in some years, you can use that allowance in future years.

"If you are going to return to the UK at some point or are not sure whether you are moving permanently, an offshore bond could be a good way of continuing to save rather than funding a pension while you remain offshore," says Mr Smith. "If you have funded an overseas pension scheme, the issue when you return is finding a provider prepared to accept the transfer back."

However offshore bonds are often expensive and you may not be able to buy them direct from a platform . If you have to buy through an adviser, you are likely to pay high commissions and might also have to pay hefty initial charges, making this a more expensive route than an onshore wrapper.

Ms West says: "Just because offshore funds are more tax efficient, they are not necessarily better because they could be more expensive. In our clean charging world you can pick up a fund for 80 basis points on a platform, while the equivalent in Luxembourg might have charges more like 1.8 per cent, and you may have a bid/ offer spread to pay."

You could also look at investments specific to the country you have moved to. "There are investments which are particularly tax-efficient for particular regions," says Mr Smith. "For example, France has Assurance Vie, a life assurance product, which is not subject to French tax unless you take withdrawals whereas the authorities are able to look through an offshore bond and tax accordingly."

Mr Murphy adds: "In Spain there are some investments which are considered compliant by the authorities. These are effectively offshore bonds with a small number of life assurance companies that are usually resident outside Spain. There are certain restrictions placed upon the investment funds you can have but you don't have to pay any tax at all until you make a withdrawal, or surrender in part or in whole. If you decided to invest in a non-Spanish compliant offshore investment bond it could have a very punitive tax treatment."

CASE STUDY: punitive taxes on non-compliant investments in Spain

Mr Smith invests €100,000 (£78,044.89) in a non-compliant offshore investment bond on 1 Jan 2014 and a year later the bond has grown 10 per cent to €110,000. Mr Smith has not taken any withdrawals and the gain is €10,000.

The first €6,000 is taxed at 19.5 per cent and the remaining €4,000 is taxed at 21.5 per cent. The calculation needs to be made by Mr Smith, unless he pays a Gestor or accountant to do it, and the appropriate tax would be withheld for payment on his tax return. The total investment tax bill would be €2,030 which would reduce the value of the bond to €107,970.

Had Mr Smith invested in a Spanish Tax Compliant Bond instead, no investment tax would be payable and he would not even need to declare the plan to the Spanish tax authorities. With a Spanish tax compliant bond he would only have had a tax bill of €177.26 when taking the full €10,000 as withdrawal.

Source: Zen Wealth