Plans up in the air
Many Brits will have made foreign retirement plans for 2020, only to see them torpedoed by the global pandemic, travel restrictions and economic uncertainty. Some may have steered towards a different course because of the health crisis.
Those who previously planned an urban retirement may, conditions permitting, now favour a more rural life abroad – perhaps in the French countryside, by the sea in Portugal, or in the fresh air of Switzerland. Others will be fearful of the prospect of steep tax rises following Covid 19, and be drawn to lower tax environments – Singapore or Monaco, for example.
Finally, those who were pushed close to the edge by Brexit, may be tipped over it if the UK leaves without a deal.
Meanwhile, the map of welcoming territories continues to change, with some ports closing and others opening. At the time of writing, the European Commission is seeking to end the 'golden passport' schemes offered by Cyprus and Malta, whilst the UAE is enticing wealthy retirees with its new retirement visa programme.
In short, many will be keeping a close eye on the forecast as they revisit their retirement plans in choppy waters.
… plans change, but the need for advice does not
One aspect of retirement that has remained constant, at least for those in the UK, is the importance of tax considerations. As the bounty of UK pensions has become less plentiful due to troubled global markets and ever-tightening pension rules, so the appeal to some of retiring in a more benign tax environment has increased.
At a flat rate of 40 percent, inheritance tax (IHT) is commonly the most unpopular tax amongst the wealthy in the UK, particularly those close to retirement, and is frequently the first for discussion with their advisers. Unfortunately, it is often the hardest one to escape. That is partly because it is linked to an individual's domicile – so, for as long as a retiree is domiciled in the UK, he remains subject to IHT on his worldwide assets.
Inheritance tax and domicile
An individual with a UK domicile of origin can only lose it by acquiring a domicile of choice in another country. That is achieved by becoming resident in that country, and making it his home where he intends to live permanently or indefinitely. It is the second of these requirements that usually presents the greater difficulty.
If a person retires abroad but intends to return to the UK on the happening of a future event (for example, the death of a spouse), or after a given period of time, he will fail to establish a domicile of choice in his new country of residence.
One of the challenges faced by the retiree is that, although the forming an intention is a subjective test, in practice objective evidence is needed to support it. So, he may find it difficult to claim successfully to have lost his UK domicile if he retains close links to the country (family, friends, club memberships etc), or if he returns regularly.
Conversely, his case to have acquired a new domicile will only be convincing if he becomes properly entrenched in his new country. For as long no clear domicile of choice has been established, his UK domicile prevails by default.
For those who do manage to acquire a new domicile of choice, there is a sting in the tax tail: the law treats an individual as deemed domiciled in the UK for IHT purposes for a further three calendar years after he has ceased to be UK domiciled. The journey to the land of the non-domiciliary is, therefore, longer than a mere change of intention would otherwise allow.
For those who make it and lose their UK domicile, their worldwide estates (except, UK assets and indirectly held UK real estate) become exempt from IHT. In this new world, opportunities open up. These include the ability to settle valuable non-UK assets into trust without incurring the immediate IHT entry charge of 20 percent that applies to UK domiciliaries.
This may be appealing for succession planning reasons. The assets of the trust, meanwhile, will remain outside the IHT net provided that the settlor's UK domicile is not revived. In all cases, the potential merits of a trust must be considered in tandem with advice on the tax and regulatory implications in the new home jurisdiction.
To mitigate any residual exposure to IHT on UK assets (real estate, for example), while also potentially helping to support the loss of a UK domicile, retirees may consider making gifts of UK assets to their children.
Provided that the parents do not continue to benefit from the assets given away, the assets will fall out of their estates after seven years – with insurance available to cover the risk in the meantime. The potential IHT benefits should, however, be weighed against possible capital gains tax (CGT) on the disposal. Where real estate is given away subject to an existing charge, stamp duty land tax will also need to be considered.
Other tax considerations
Once the émigré is no longer UK resident, his exposure to UK income tax and CGT will be limited. Income tax will be payable inter alia on UK rental income and profits from a UK trade, while capital gains tax will be payable only on disposals of UK real estate and entities the value of which derives at least 75 percent from UK real estate.
The expat must be wary, though, of tax traps that await if his period of non-UK residence proves to be only temporary.
Pension planning is, of course, the final piece in the tax jigsaw. Émigrés may consider transferring their UK pension schemes to a QNUPS (Qualifying Non-UK Pension Scheme) to remove the scheme from the scope of UK inheritance tax.
At the time of writing, UK pension schemes can be decanted into a QNUPS registered within the EU/EEA (usually Malta) without incurring the 25 percent transfer tax charge that arises on a transfer to non-EU/EEA schemes. Many commentators believe this will change after Brexit, which gives émigrés precious little time – up to 1 January 2021 - to expatriate their pensions.
For so long as their retirement plans remain under the Covid cloud, many UK retirees will find little scope for celebration as they begin their golden years amidst the current gloom. However, for those who are prepared to commit to leaving the UK's shores for good and have an experienced tax adviser as their compass, a silver lining (not to mention sunnier climes) may await.