25th August 2023Retiring abroad? Don’t trip up on your taxes

Leaving the UK to retire abroad? Perhaps sunny Marbella is on your bucket list or somewhere a little further afield? Whatever you decide, it is important to remember that leaving the UK doesn’t automatically mean you are exempt from UK taxes. Expat tax matters can be complicated, and it is advisable to familiarise yourself with the rules to ensure you manage your tax obligations correctly.

Even spending a few weeks in the UK can impact your UK tax residency status. This article outlines some simple measures to prevent unwelcome tax bills.

  1. Inform HMRC of your move

When retiring abroad, you must let HMRC know. How you tell HMRC depends on whether you normally fill in a tax return or not and your employment status. If you do not normally complete a self-assessment tax return, you will need to download and fill in your P85 form offline before you leave.

If you do complete a self-assessment tax return you can use the residency section (form SA109), and then send the form by post to let HMRC know you are moving abroad. You’ll be charged a penalty if you do not meet the deadline.

There are a few other relevant government offices that you need to inform when moving abroad – you can find them on the government website here.

  1. Understand how much time you can spend in the UK

Retirees living abroad often have family ties in the UK and wish to visit frequently. Given the UK’s stringent residence test, it is important that you are fully aware of how much time you can spend in the UK.

To avoid being subject to taxation in both the UK and your new country of residence, you should look at the UK statutory residency test to determine how many days you can spend in the UK each year and remain non-UK tax resident.

  1. Secure the full state pension if retiring early

If you are planning to retire before you reach the state pension age, you may want to consider requesting a state pension forecast. To receive the full state pension, you must have 35 qualifying years where you have or were deemed to have paid National Insurance. If it turns out that you do not fully qualify then it may be possible to make voluntary/top-up contributions to increase your entitlements.

If you are below state pension age and want to learn more about making voluntary contributions to your National Insurance, contact the Future Pension Centre. You are also able to check your State Pension Forecast on the government website to find out how much you could get and if there are ways you can increase it.

  1. Claim your tax-free lump sum

When retiring abroad, many retirees intend to draw down from state pensions. You can usually take up to 25% of the pension as a tax-free lump sum, limited to a maximum of 25% of your lifetime allowance. As your new country of residence may not provide a similar tax-free lump sum, it may make sense to draw this amount before moving to another country where it could otherwise be taxable in full.

  1. Know what taxes need to be paid

Any additional withdrawals after the 25% tax-free lump sum will usually be subject to UK tax, in the first instance. It is important to check the double tax treaty (if applicable) with the UK to determine where pension withdrawals are taxable. If you are taxable in the other jurisdiction, you should apply for an NT code from HMRC so that your pension providers do not deduct tax. You will then need to report and pay tax in your new country of residence.

  1. Protect your investments

Make sure your investments are optimised under your new country’s tax laws before leaving the UK. For example, ISAs are popular tax-free wrappers in the UK. It is unlikely that the other jurisdiction will recognise this tax-free status and will instead tax income and gains realised within these wrappers.

  1. Don’t return for 5 years

Returning to home soil after an extended period abroad to continue your retirement can have tax implications. It is essential to be aware of your potential tax obligations and any changes in residency status that could affect your tax situation. Taxes may be due on income and gains arising while you were not resident in the UK if you return within five years. Therefore, you should aim to remain a non-UK resident for at least 5 years and 1 day to avoid this temporary non-residency tax charge.

If you would like to discuss how to manage your tax residency and obligations further, please get in touch with Tim Walford-Fitzgerald or Daniel Tomassen.

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Daniel Tomassen
Director - Private Client

+44 (0)20 7874 7883
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Tim Walford-Fitzgerald

020 7380 4927
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