With careful planning, enough research and some professional advice, your move overseas could see you paying considerably less tax than you've bargained for.
Moving overseas can be an ideal opportunity for tax planning so that you minimise the amount of tax you pay in both Britain and your new overseas country.
Tax avoidance should not be confused with tax evasion. Tax avoidance is legitimate and involves arranging your affairs in the optimum way so that you minimise your tax bill. Everyone has the right to do this. Tax evasion, on the other hand, is illegal. It involves the deliberate omission of income, gains or assets on your tax returns, or where you fail to submit tax returns where these are due.
The scope available to each individual to carry out tax planning will differ depending on your circumstances and the type of income and assets you have. Some of the most important issues to consider are described below.
Your residence status is extremely important as this largely determines to which country you will pay your taxes. You do not have to be resident in any one country and you may be among the few individuals who are not tax resident anywhere. These "fiscal nomads" typically spend a great deal of time travelling, perhaps living mainly on a yacht, and do not settle in any single country. In these circumstances, there are many tax planning opportunities available.
However, if you are intending to settle in a new country, it may be possible for you to create a short period of time when you are not resident anywhere by moving to a third country for a limited period before you settle in your intended country of residence. During this period of time, there is scope to avoid tax completely on certain types of British source income (for example large dividend payouts) and capital gains on British assets. The timing of your departure from Britain and the timing of the sale of assets or receipt of income is crucial and specialist advice should be sought.
TESSAs, PEPs and ISAs are all tax-efficient investments for British residents, but are not usually tax efficient overseas. Any income and gains arising within the funds will usually be taxed in your new country of residence. Therefore, careful thought should be given to restructuring your British investments and placing them into structures that are effective in your new country. In France, Spain, Portugal and Cyprus, for example, there are specific types of qualifying life assurance bonds which enjoy special tax advantages for individuals resident in those countries.
Trusts can be useful in minimising the taxes you pay both in Britain and overseas. They are, however, a complex subject and will not be suitable for everyone. But in the right circumstances, trusts can minimise the amount of income tax, wealth tax (if applicable) and succession tax you pay in your new country. They can also be useful in protecting your assets and the intended beneficiaries. For example, they are often used for second marriages where you wish to provide an income for your new spouse but ultimately you wish for the assets to pass to your children of your previous marriage. Trusts also serve to control the amount of income or capital that is passed to children if you are afraid they may squander large amounts of capital at once. Specialist advice should be sought as the taxation treatment of trusts varies greatly from one country to another.
Tax treaties can provide useful tax planning solutions, although the specific benefits will of course depend on the particular country you move to and the nature of the income you are receiving or the types of assets you own. For example, due to the operation of the current British/France tax treaty, the sale of British investment property can be entirely free of both British and French capital gains tax if sold while resident in France. This loophole will be closed when the new treaty comes into force (expected 2009), although the new treaty gives British nationals a break from wealth tax on non-French assets for the first five years of their stay in France.
These are just a couple of examples of how treaties can help to avoid tax in the right circumstances. It is therefore extremely important that you consider the relevant tax treaty, if any, of the particular country you are moving to.
If wealth tax is an issue in your new country, such as in France or Spain, you should seek advice on ways to minimise your liability. This can often be done by simply restructuring your assets and investments and placing them into tax efficient structures that work in these countries, or by perhaps placing these assets into a trust.
Inheritance (or succession) tax planning is usually of concern to most individuals who wish for their assets to pass to their intended heirs with the minimum amount of tax payable. There is a gathering trend in Europe towards the abolition of inheritance tax between spouses. Britain has this provision, so does Portugal. France introduced it last year, and most regions in Spain are moving in this direction. Cyprus has no inheritance tax and it was abolished in Sweden in 2005.
Whereas British inheritance tax is calculated on the estate of the deceased, in many European countries it is paid by the recipient depending on the amount inherited and their relationship with the deceased, with children enjoying more generous allowances and reliefs. British inheritance tax planning will still be of particular relevance if you remain British domiciled. Many individuals who live overseas will remain British domiciled even if they live overseas for many years. Your domicile status depends on many factors, but most importantly the connections you retain with Britain and whether it is your intention to ultimately return, for example in the event that you outlive your spouse. British inheritance tax should therefore not be overlooked. A few countries have inheritance tax treaties with Britain, such as France, which can greatly assist your British inheritance tax position even if you remain British domiciled. Qualified tax advice should be sought.
In addition to succession taxes, you should also research the succession laws of your new country as some countries have forced heirship laws which prevent you from leaving your assets to whomever you choose. Usually such laws protect children who have an automatic entitlement to inherit a certain portion of your assets on your death.
There are a whole host of tax planning opportunities available to you when you move overseas and this is a valuable time to organise your affairs in the most tax efficient way possible. Each person has different circumstances and the scope for planning will differ accordingly. Most importantly, you should seek advice from a tax adviser who specialises not only in the laws of your new country but also in British tax laws as any tax planning will need to be effective in both countries.
Some information contained within this article may have changed since it was first published. HomesOverseas strongly advises you to seek current legal and financial advise from a qualified professional.