If you can’t explain it to a six-year-old, you don’t understand it yourself.
ALBERT EINSTEIN, QUOTED IN THE CHICAGO TRIBUNE
No one likes paying tax. For the year 2014–15, the personal tax allowance is rising to £10,000. This is the first slice of income that all but the highest paid can earn before income tax kicks in. The good news is that there are many perfectly legitimate ways to ensure that you don’t pay more tax than you have to. Here are a few tips on how to minimize your tax bill – most are dealt with in more detail later in the chapter.
(Source: The Week: PROSPER www.theweek.co.uk)
Prudent tax planning is essential but take heed: the government is aiming to raise nearly £11 billion by clamping down on tax avoidance by savers, homeowners and business partners. These changes introduced in the April 2013 Budget (and due to come into force in April 2014) focus on avoidance, combined with a new general anti-abuse rule, could lead to traditional tax-planning measures being outlawed, experts have warned. Areas likely to come under the spotlight include partnerships: groups of highly paid employees who have been removed from the payroll by their employers and set up in a partnership. Another area of concern is the introduction of a third-party company or corporation into an otherwise legitimate partnership. Another area to watch is offshore accounts. A new agreement with the Isle of Man, Guernsey and Jersey will allow for ‘automatic information exchange’ and cover a wider range of accounts. Double trust arrangements were used to mitigate inheritance tax (IHT) until the practice was abolished in 2006. Existing schemes were allowed to continue but a clampdown has been announced. Anyone with these arrangements should now seek advice.
If HMRC is unhappy with any aspect of your tax planning arrangements, it can refer the matter to a panel to decide whether the measures are ‘reasonable’. Advisers are concerned that there is no precedent for how the panel will work, or the decisions it may take. Make sure your arrangements are sound.
Understanding the broad principles of taxation helps you save money. While you were employed you may have been contributing many thousands of pounds to HM Revenue & Customs (HMRC), but in practice you may have had very little direct contact with the tax system. The accounts department would have automatically deducted – and accounted for – the PAYE on your earnings as a salaried employee. If you were self-employed, or had other money unconnected with your job, you may have had more dealings with your tax office.
The most common types of tax are income tax, National Insurance Contributions, capital gains tax and inheritance tax. On reaching retirement you should be able to calculate how much money (after deduction of tax) you will have available to spend: the equivalent, if you like, of your take-home pay. Your tax adviser should be fully conversant with your financial affairs so that he or she can advise in the light of your own circumstances. The following information is based on our understanding of current taxation, legislation and HMRC practice following the 2013 Budget statement. The impact of taxation (and any tax relief) depends on individual circumstances.
This is calculated on all (or nearly all) of your income, after deduction of your personal allowance and, in the case of older married people, of the Married Couple’s Allowance. The reason for saying ‘nearly all’ is that some income you may receive is tax free; types of income on which you do not have to pay tax are listed a little further on.
Most income counts, however. You will be assessed for income tax on your pension, interest you receive from most types of savings, dividends from investments, any earnings (even if these are only from casual work), plus rent from any lodgers, should the amount you receive exceed £4,250 a year. Many social security benefits are also taxable. The tax year runs from 6 April to the following 5 April, so the amount of tax you pay in any one year is calculated on the income you receive (or are deemed to have received) between these two dates. The four different rates of income tax for 2013/14 are:
NB: 300,000 more people have been drawn into the higher rate (40 per cent) tax band from 2013/14 as the threshold has been reduced from £42,475 to £41,450. (The rates available for dividends for 2013/14 tax year are the 10 per cent dividend ordinary rate, 32.5 per cent dividend upper rate and the 37.5 per cent dividend additional rate.)
Personal allowance
Your personal allowance is the amount of money you are allowed to retain before income tax becomes applicable. When calculating how much tax you will have to pay in any one year, first deduct from your total income the amount represented by your personal allowance. You should add any other tax allowance to which you may be entitled – see further on. You will not have to pay any income tax if your income does not exceed your personal allowance (or total of your allowances), and you may be able to claim a refund for any tax you have paid, or that has been deducted from payments made to you, during the year.
Calculating your personal allowance since the introduction of independent taxation has become easier. Everyone receives the same basic personal allowance regardless of whether they are male, female, married or single. It does not matter where the income comes from, whether from earnings, an investment, a pension or another source.
The figures for the tax year 2013/14 are as follows:
Married Couple’s Allowance
Married Couple’s Allowance (for those aged under 75) is no longer applicable. Age-related Married Couple’s Allowance (aged 75 and over) for 2013/14 is £7,915. The minimum amount of Married Couple’s Allowance is £3,040.
Some important points you should know:
Useful reading
For more detailed information about tax allowances, see HMRC website: www.hmrc.gov.uk. The Inland Revenue booklet, IR 121, Approaching Retirement (A Guide to Tax and National Insurance Contributions) is also useful.
Same-sex partners
Same-sex couples are treated the same as married couples for tax purposes. The most important thing to note is that only one property can qualify as their principal home for exemption from capital gains tax (CGT). Against this, there is no CGT to pay on transfer of assets between the couple, and similarly any assets left in a will to each other are free of inheritance tax.
Separate from any personal allowances, you can obtain tax relief on the following:
Mortgage interest relief
Mortgage interest relief was abolished on 6 April 2000. The only purpose for which relief is still available is in respect of loans secured on an older person’s home to purchase a life annuity. However, to qualify, the loan must have been taken out (or at least processed and confirmed in writing) by 9 March 1999. Borrowers in this situation can continue to benefit from the relief for the duration of their loan. As before, the relief remains at 10 per cent on the first £30,000 of the loan.
Tax relief for maintenance payments was also withdrawn on 6 April 2000. Individuals in receipt of maintenance payments are not affected and will continue to receive their money free of income tax. Those who had to pay tax under the pre-March 1988 rules now also receive their payments free of tax. Most individuals paying maintenance, however, face higher tax bills. This applies especially to those who set up arrangements before the March 1988 Budget. While previously they got tax relief at their highest rate, from 6 April 2000 when maintenance relief was withdrawn they no longer get any relief at all. An exception has been made in cases where one (or both) of the divorced or separated spouses was aged 65 or over at 5 April 2000. Those paying maintenance are still able to claim tax relief – but only at the 1999/2000 standard rate of 10 per cent.
Pension contributions
HMRC sets limits on the contributions that individuals can invest in their pension plan and on the pension benefits they can receive. All company and personal pensions are now set under a single tax regime and new rules have been implemented (see Chapter 3, Pensions, for more information).
For further information on Pension Credit, see Chapter 3, Pensions, or look under ‘Pension Credit’ on the website: www.gov.uk.
Some income you may receive is entirely free of tax. It is important to know what income is non-taxable and what can be ignored for tax purposes. If you receive any of the following, you can forget about the tax aspect altogether (for a full list see Citizens Advice Bureau website: www.adviceguide.org.uk – taxable and non-taxable income):
The following are not income, in the sense that they are more likely to be one-off rather than regular payments. However, as with the above list they are tax free:
Income tax on savings and investments
Savings
For the tax year 2013/14 the 10 per cent starting rate applies to savings income up to £2,790.
Investments
For most investments on which you are likely to receive dividends, basic-rate tax will have been deducted before the money is paid to you. If you are a basic-rate taxpayer, the money you receive will be yours in its entirety. If you pay tax at the higher rate, you will have to pay some additional tax and should allow for this in your budgeting.
Exceptionally, there are one or two types of investment where the money is paid to you gross – without the basic-rate tax deducted. These include NS&I income bonds, capital bonds, the NS&I Investment Account and all gilt interest. (People who prefer to receive gilt interest net can opt to do so.) As with higher-rate taxpayers, you will need to save sufficient money to pay the tax on the due date.
Avoiding paying excess tax on savings income
Banks and building societies automatically deduct the normal 20 per cent rate of tax from interest before it is paid to savers. As a result, most working people, except higher-rate taxpayers, can keep all their savings without having to worry about paying additional tax. While convenient for the majority, a problem is that some 4 million people on low incomes – including in particular many women and pensioners – are unwittingly paying more tax than they need. Those most affected are non-taxpayers (anyone whose taxable income is less than their allowances) who, although not liable for tax, are having it taken from their income before they receive the money.
Non-taxpayers can stop this happening quite simply by requesting their bank and/or building society to pay any interest owing to them gross, without deduction of tax at source. If applicable, all you need do is request form R85 from the institution in question or HMRC Enquiry Centre, which you will then need to complete. If you have more than one bank or building society account, you will need a separate form for each account. People who have filled in an R85 should automatically receive their interest gross. If your form was not completed in time for this to happen, you can reclaim the tax from your tax office after the end of the tax year in April.
Reclaiming tax overpaid
If you are a non-taxpayer and have not yet completed an R85 form (or forms), you are very likely to be eligible to claim a tax rebate. To obtain a claim form and, if relevant, copies of form R85 for you to complete and give to your bank or building society, see website: www.hmrc.gov.uk.
HMRC does sometimes make mistakes. Normally, if it has charged you insufficient tax and later discovers the error, it will send you a supplementary demand requesting the balance owing. However, under a provision known as the ‘Official Error Concession’, if the mistake was due to HMRC’s failure ‘to make proper and timely use’ of information it received, it is possible that you may be excused the arrears.
Undercharging is not the only type of error. It is equally possible that you may have been overcharged and either do not owe as much as has been stated or, not having spotted the mistake, have paid more than you needed to previously. So if you have reason to think your tax bill looks wrong, check it carefully. If you think there has been a mistake, write to your tax office explaining why you think the amount is too high. If a large sum is involved it could well be worth asking an accountant to help you.
As part of the Citizen’s Charter, HMRC has appointed an independent Adjudicator to examine taxpayers’ complaints about their dealings with HMRC and, if considered valid, to determine what action would be fair. Complaints appropriate to the Adjudicator are mainly limited to the way HMRC has handled someone’s tax affairs. Before approaching the Adjudicator, taxpayers are expected to have tried to resolve the matter either with their local tax office or, should that fail, with the regional office.
Genuine mistakes are excused by HMRC but individuals may need to convince officials that they had not been careless in completing their returns, otherwise they could be at risk of incurring a penalty of 30 to 100 per cent of the tax involved, plus the tax owed itself and interest, and potentially HMRC widening its focus on you and your tax affairs.
Important dates to remember: The deadline for filing paper self-assessment forms for the 2013/14 tax year is 31 October 2014. For those filing online will have until 31 January 2015.
Further information
For further information, see HMRC booklet Code of Practice 1, Putting Things Right: How to complain, available from tax offices. Contact the Adjudicator’s Office for information about referring a complaint. The Adjudicator acts as a fair and unbiased referee looking into complaints about HMRC, including the Tax Credit Office, the Valuation Office and the Office of the Public Guardian and the Insolvency Service. See website: www.adjudicatorsoffice.gov.uk.
The TaxPayers’ Alliance campaigns towards achieving a low-tax society: www.taxpayersalliance.com.
TaxHelp for Older People (TOP) is an independent, free tax advice service for over-60s whose household income is less than £17,000 a year: www.taxvol.org.uk.
Useful tax forms that can help you pay less tax
Most forms can be obtained via the HMRC website: www.hmrc.gov.uk.
NB: HMRC is closing all of its 281 Enquiry Centres which gave face-to-face help to 2.5 million people with tax queries. This move starts in 2014 with the centres being replaced by a telephone service and home visits. The aim is to save HMRC £13 million a year. One of the reasons given by HMRC for introducing this change is that the number of people using the Enquiry Centres across the UK had halved from 5 million in 2005/06 to 2.5 million in 2011/12. The five-month pilot scheme started in June 2013. In future if you have a query you will have to use the HMRC telephone helpline or go online to get your tax query answered. (www.bbc.co.uk/news/business-21789759)
The amount of tax credits you get depends on how many children you have living with you, whether you work and how many hours you work, if you pay for childcare, if you or any child living with you has a disability, or if you are coming off benefits.
Working Tax Credit
This is an earnings top-up given to low-income workers, including the self-employed. Eligibility is normally restricted to couples and single parents with a low income. HMRC advises that the easiest way to check whether you are eligible is to complete the form listed under ‘Tax credits’ on its website: www.hmrc.gov.uk.
Child Tax Credit
This is a cash payment given to all families with a low household income that have at least one child under 16, or under 20 if in full-time education, and is paid in addition to a basic tax credit payment.
Need to claim
Payment is not automatic. In both cases – Working Tax Credit and Child Tax Credit – you need to complete an application form, obtainable from any Tax Enquiry Centre or via the website: www.gov.uk – Tax Credits.
Post-war credits are extra tax that people had to pay in addition to their income tax between April 1941 and April 1946. The extra tax was treated as a credit to be repaid after the war. People who paid credits were given certificates showing the amount actually paid. In 1972 people who could produce at least one of their post-war credit certificates were invited to claim. In cases where the original credit holder has died without claiming repayment and the post-war credit certificate is still available, repayment can be made to the next of kin or personal representative of the estate. Interest is payable on all claims at a composite rate of 38 per cent. The interest is exempt from income tax. All claims should be sent to the Special Post-War Credit Claim Centre at HM Revenue & Customs, HM Inspector of Taxes, PWC Centre V, Ty Glas, Llanishen, Cardiff CF4 5TX.
When you retire, you may be due for a tax rebate. If you are, this would normally be paid automatically, especially if you are getting a pension from your last employer. You should ask for a P45 form. Then either send it – care of your earlier employer – to the pension fund trustees or, in the event of your receiving only a state pension, to the tax office together with details of your age and the date you retired. Ask your employer for the address of the tax office to which you should write. If the repayment is made to you more than a year after the end of the year for which the repayment is due – and is more than £25 – HMRC will automatically pay you (tax-free) interest. HMRC calls this a ‘repayment supplement’.
NB: HMRC says it never sends notifications of a tax rebate by e-mail, or asks you to disclose personal or payment information by e-mail. For more advice and suggestions to protect yourself from phishing scams, see Chapter 7 – How to complain and cautionary advice.
Mis-sold PPI
Millions of borrowers have been receiving refunds after being mis-sold payment protection insurance (PPI) with credit cards and personal loans. This is good news as many are receiving cheques for thousands of pounds. Even better, they are being paid 8 per cent interest on the refunds, to compensate for being without their money all that time. But while there is no tax to pay on the refund element, which simply returns their own money to them, they have to pay tax on the interest, just as they do on earned interest in a savings account. Some lenders are deducting basic tax at 20 per cent, which non-taxpayers can reclaim, and higher-rate payers must report to the Revenue. The longer someone has been without their money, the higher the interest proportion of it will be.
You may have to pay capital gains tax if you make a profit (or, to use the proper term, ‘gain’) on the sale of a capital asset. CGT applies only to the actual gain you make, so if you buy shares to the value of £100,000 and sell them later for £125,000, the tax office will be interested only in the £25,000 profit you have made. There is an exemption limit of currently £10,600 a year. For married couples, from 6 April 2014 each partner enjoys his or her own annual exemption of £11,000 and from 6 April 2015 this rises by 1 per cent to £11,100. This means a couple can make gains of £22,000 free of CGT in 2014. However, it is not possible to use the losses of one spouse to cover the gains of the other. Transfers between husband and wife remain tax free, although any income arising from such a gift will of course be taxed.
Any gains you make are taxed at 18 per cent for basic-rate taxpayers and 28 per cent for higher-rate and additional-rate taxpayers. Company owners benefit from a doubling of the lifetime limit on ‘entrepreneurs’ relief’ to £10 million since 6 April 2011. The relief limits CGT to 10 per cent on the sale of business assets under certain conditions.
Free of capital gains tax
The following assets are not subject to CGT and do not count towards the gains you are allowed to make:
Enterprise Investment Scheme (EIS)
Changes to investment limits and qualifying criteria allow more companies to attract up to £10 million a year of equity investment through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) – both tax-efficient investment schemes – since April 2012.
The effect of the rules enacted in the Finance Act 2012 was that ‘if an investor re-invests a capital gain arising in 2012/13 in SEIS shares either in 2012/13, or in 2013/14 subject to an election [under ITA 2007 s 257AB], then that gain is exempt from capital gains tax’. However, the legislation ‘does not permit the amount of a 2013/14 gain to be invested in 2013/14 and become exempt from capital gains tax’.
Mitigating CGT by means of EIS or SEIS reinvestment is a complex area and expert advice is recommended. See HMRC website: www.hmrc.gov.uk.
Your main home is usually exempt from CGT. However, if you convert part of your home into an office or into self-contained accommodation on which you charge rent, the part of your home that is deemed to be a ‘business’ may be separately assessed and CGT may be payable when you come to sell it. (CGT would not apply if you simply take in a lodger who is treated as family, in the sense of sharing your kitchen or bathroom.)
If you leave your home to someone else who later decides to sell it, then he or she may be liable for CGT when the property is sold (although only on the gain since the date of death). There may also be inheritance tax implications, so you are strongly advised to consult a solicitor or accountant. If you own two homes, only one of them is exempt from CGT, namely the one you designate as your ‘main residence’.
Selling a family business
CGT is payable if you are selling a family business and is 28 per cent for higher-rate and additional-rate taxpayers, but the reduced level of 18 per cent for basic-rate taxpayers. One possible option is the CGT deferral relief allowable to investors in an EIS. The key changes that potential investors should note are:
This is a complex area, so before either retiring or selling shares you should seek professional advice.
Useful reading
For further information about capital gains tax, see booklet CGT1, Capital Gains Tax: An Introduction, available from any tax office. There are also a number of useful help sheets downloadable from the HMRC website: www.hmrc.gov.uk.
Inheritance tax (IHT) is the tax that is paid on your ‘estate’. The tax threshold (the level at which you’ll need to pay tax) has been set at £325,000 and frozen at this rate until 2019 at the earliest. The threshold amount for married couples and civil partners is £650,000. The value of estates over and above this sum is taxed at 40 per cent.
There is no immediate tax on lifetime gifts between individuals. The gifts become wholly exempt if the donor survives for seven years. When the donor dies, any gifts made within the previous seven years become chargeable and their value is added to that of the estate. The total is then taxed on the excess over £325,000. Chargeable gifts benefit first towards the £325,000 exemption, starting with the earliest gifts and continuing in the order in which they were given. Any unused balance of the £325,000 threshold goes towards the remaining estate.
The £325,000 threshold allows married couples or civil partners to transfer the unused element of their IHT-free allowance to their spouse or civil partner when they die. IHT will, however, still be levied at 40 per cent above £325,000 on the estate of anyone who is single or divorced when they die.
The government changed the tax law in April 2012 to encourage donating to charities, and reduced the inheritance tax payable on estates that give at least 10 per cent to charity. The remainder is taxed at 36 per cent against the usual 40 per cent inheritance tax rate. Existing wills can be amended by codicil to include this 10 per cent provision. There is no such benefit to those whose estate falls below the current IHT threshold.
Gifts or money up to the value of £3,000 can be given annually free of tax, regardless of the particular date they were given. Additionally, it is possible to make small gifts to any number of individuals free of tax, provided the amount to each does not exceed £250.
An important consideration relating to IHT is the need to make a will. For further information, see ‘Wills’, in Chapter 16. If you have already written a will, have it checked by a professional adviser to ensure that you do not give money unnecessarily to HMRC. In view of the recent changes to IHT, check with your professional adviser or HMRC. For assistance see website: www.gov.uk – Probate and Inheritance Tax Helpline.
There may be inheritance tax to pay when assets – such as money, land or buildings – are transferred into or out of trusts when they reach a 10-year anniversary. There are complex rules that determine whether a trust needs to pay IHT in such situations. New rules came into effect on 22 March 2006 for new trusts, additions of new assets to existing trusts, and other IHT-relevant events in relation to existing trusts. Transitional rules provided for a period of adjustment for certain existing trusts to 6 April 2008.
This is a particularly complex area, and professional advice is recommended. Further information is available on the website: www.hmrc.gov.uk – Inheritance tax and trusts.
Both husband and wife are taxed independently on their own income. Each has his or her own personal allowance and rate band, and both independently pay their own tax and receive their own tax rebates. Couples should note that independent taxation applies equally to both capital gains tax and inheritance tax. Property left to a surviving spouse is, as before, free of inheritance tax.
Tax return forms are sent out in April, and the details you need to enter on the form you receive in April 2014 are those relating to the 2013/14 tax year. All taxpayers now have a legal obligation to keep records of all their different sources of income and capital gains. These include:
HMRC advises that taxpayers are obliged to keep these records for 22 months after the end of the tax year to which they relate. If you are self-employed or a partner in a business, as well as the above list, you also need to keep records of all your business earnings and expenses, together with sales invoices and receipts. All records (both personal and business) need to be kept for five years after the fixed filing date.
Those most likely to be affected by the self-assessment system include anyone who normally receives a tax return, higher-rate taxpayers, company directors, the self-employed and partners in a business. If your only income is your salary from which tax is deducted at source, you will not have to worry about self-assessment. If, however, you have other income that is not fully taxed under PAYE (eg possibly benefits in kind or expenses payments) or that is not fully taxed at source, you need to notify HMRC within six months of the end of the tax year, and you may need to fill in a tax return.
If your financial affairs change, as they sometimes do on retirement (eg if you become self-employed or receive income that has not already been fully taxed), it is your responsibility to inform HMRC and, depending on the amount of money involved, you may need to complete a tax return. The government has recently revised the guidelines, and higher-rate taxpayers will no longer automatically receive a self-assessment form if their affairs can be handled through the PAYE system.
Please note that self-calculation is optional. HMRC will continue as before to do the sums for you if you think you are at risk of making a mistake. If you submit a paper return this must be filed by 31 October each year; the deadline for online filing is 31 January the following year.
Further information
See booklets SA/BK4, Self-Assessment – A General Guide to Keeping Records; SA/BK6, Self-Assessment – Penalties for Late Tax Returns; SA/BK7, Self-Assessment – Surcharges for Late Payment of Tax and SA/BK8, Self-Assessment – Your Guide, all obtainable free from any tax office. See website: www.gov.uk or HMRC website: www.hmrc.gov.uk.
There are many examples of people who retired abroad in the expectation of being able to afford a higher standard of living and who returned home a few years later, thoroughly disillusioned. A vital question that is often overlooked is the taxation effects of living overseas. If you are thinking of retiring abroad, do thoroughly investigate the potential effects this will have on your finances to avoid unpleasant surprises.
Taxation abroad
Tax rates vary from one country to another: a prime example is VAT, which varies considerably in Europe. Additionally, many countries levy taxes that don’t apply in the UK. Wealth tax exists in quite a few parts of the world. Estate duty on property left by one spouse to another is also fairly widespread. There are all sorts of property taxes, different from those in the UK, which – however described – are variously assessable as income or capital. Sometimes a special tax is imposed on foreign residents. Some countries charge income tax on an individual’s worldwide income, without the exemptions that apply in the UK.
Apart from the essential of getting first-class legal advice when buying property overseas, if you are thinking of retiring abroad the golden rule must be to investigate the situation thoroughly before you take an irrevocable step, such as selling your home in the UK.
Your UK tax position if you retire overseas
Many intending emigrants cheerfully imagine that, once they have settled themselves in a dream villa overseas, they are safely out of the clutches of the UK tax office. This is not so. You first have to acquire non-resident status. If you have severed all your ties, including selling your home, to take up a permanent job overseas, this is normally granted fairly quickly. But for most retirees, acquiring unconditional non-resident status can take up to three years. The purpose is to check that you are not just having a prolonged holiday but are actually living as a resident abroad. During the check period, HMRC may allow you conditional non-resident status and, if it is satisfied, full status will be granted retrospectively.
The rules for non-residency are pretty stringent. You are not allowed to spend more than 182 days in the UK in any one tax year, or to spend more than an average of 90 days per year in the UK over a maximum of four tax years. Even if you are not resident in the UK, some of your income may still be liable for UK taxation.
UK income tax
All overseas income (provided it is not remitted to the UK) is exempt from UK tax liability. Income deriving from a UK source is, however, normally liable for UK tax. This includes any director’s or consultant’s fees you may still be receiving, as well as more obvious income such as rent from a property you still own.
An exception may be made if the country in which you have taken up residency has a double tax agreement with the UK (see below). If this is the case, you may be taxed on the income in your new residence – and not in the UK.
Additionally, interest paid on certain British government securities is not subject to tax. Non-residents may be able to arrange for their interest on a British bank deposit or building society account to be paid gross. Some former colonial pensions are also exempt.
Double tax agreement
A person who is a resident of a country with which the UK has a double taxation agreement may be entitled to exemption or partial relief from UK income tax on certain kinds of income from UK sources and may also be exempt from UK tax on the disposal of assets. The conditions of exemption or relief vary from agreement to agreement. It may be a condition of the relief that the income is subject to tax in the other country.
NB: if, as sometimes happens, the foreign tax authority later makes an adjustment and the income ceases to be taxed in that country, you have an obligation under the self-assessment rules to notify HMRC.
Capital gains tax
This is only charged if you are resident or ordinarily resident in the UK; so if you are in the position of being able to realize a gain, it is advisable to wait until you acquire non-resident status. However, to escape CGT you must wait to dispose of any assets until after the tax year of your departure and must remain non-resident (and not ordinarily resident) in the UK for five full tax years after your departure. Different rules apply to gains made from the disposal of assets in a UK company; these are subject to normal CGT.
Inheritance tax
You escape IHT only if:
Even if you have been resident overseas for many years, if you do not have an overseas domicile you will have to pay IHT at the same rates as if you lived in the UK.
Domicile
You are domiciled in the country in which you have your permanent home. Domicile is distinct from nationality or residence. A person may be resident in more than one country, but at any given time he or she can be domiciled in only one. If you are resident in a country and intend to spend the rest of your days there, it could be sensible to decide to change your domicile. If, however, you are resident but there is a chance that you might move, the country where you are living would not qualify as your domicile. This is a complicated area, where professional advice is recommended if you are contemplating a change.
UK pensions paid abroad
If your state pension is your only source of UK income, tax is unlikely to be charged. If you have an occupational pension, UK tax will normally be charged on the total of the two amounts. Both state and occupational pensions may be paid to you in any country. If you are planning to retire to Australia, Canada, New Zealand or South Africa, it would be advisable to check on the up-to-date position regarding any annual increases you would expect to receive to your pension. Some people have found the level of their pension frozen at the date they left the UK, while others have been liable for unexpected tax overseas.
If the country where you are living has a double tax agreement with the UK, as previously explained, your income may be taxed there and not in the UK. The UK now has a double tax agreement with most countries. For further information, check the position with your local tax office. If your pension is taxed in the UK, you will be able to claim your personal allowance as an offset.
Any queries about your pension should be addressed to the International Payments Office, International Pensions Centre. For contact details see website: www.gov.uk – International Pensions Centre. See Chapter 3 (Pensions) for more information.
Health care overseas
People retiring to another EU country before state retirement age can apply for a form E106, which will entitle them to state health care in that country on the same basis as for local people. This is valid only for a maximum of two and a half years, after which it is usually necessary to take out private insurance cover until state retirement age is reached. More information and advice can be obtained from the website: www.gov.uk – Britons living abroad. Thereafter, UK pensioners can request the International Pensions Centre at Newcastle (see under ‘UK pensions paid abroad’ above) for a form E121, entitling them and their dependants to state health care as provided by the country in which they are living.
Useful reading
The Daily Telegraph Tax Guide by David Genders, published annually by Kogan Page; see website: www.koganpage.com. Residents and Non Residents – Liability to Tax in the UK (IR20) is available from any tax office. Leaflet SA29, Your Social Security Insurance, Benefits and Health Care Rights in the European Community, contains essential information about what to do if you retire to another EU country, available from any social security or Jobcentre Plus office or website: www.jobcentreplus.gov.uk.