Before you move abroad you need to work out the financial implications, and this means taking appropriate advice, particularly if there is a good deal of money at stake. The choice of adviser or advisers is crucial.

It is unwise to assume that your local bank manager, insurance broker or solicitor is in a position to advise you on expatriate financial matters. Expatriate finance is a complex subject, and the chances of finding an expert in this field in your local high street are slim. However, most high street banks and other finance houses have departments, often based in the Channel Islands, that cater for expatriate customers.

You really need to ask around, look in the advertisement columns of expatriate newspapers and magazines (eg Resident Abroad) or ask professional institutes such as the Institute of Chartered Accountants and the British Insurance and Investment Brokers Association to recommend someone. The directory at the end of this book suggests a few contacts.

Good advice does not necessarily come cheap; but on the other hand, not to take good advice could cost you dear. You need to find out how to:

• minimise tax liability
• maximise the return from your investments
• provide for emergencies.

A move abroad represents a radical change in your circumstances and your current financial arrangements will probably need a complete rethink.

There are three areas that you need to consider in turn:

• taxation
• investment
• insurance.

The ideal adviser is a person who can deal with all three, particularly where large amounts of money are involved. However, this is not always possible; an accountant may be able to advise you on taxation, but may have to refer you to someone else for advice on investment and insurance.

TAXATION

‘In this world nothing can be said to be certain, except death and taxation,’ wrote Benjamin Franklin. Anyone planning to retire abroad ought to bear this in mind, particularly the bit about taxation.

There is no reason to pay more tax than you need, and if you do not have to pay any at all, so much the better. People who have resided in Britain for most of their lives generally know the rules of the game – about allowances you can make against tax, tax-free investments and so on.

But if you move aboard your tax circumstances may change. You may find that you no longer need to pay UK tax, but you may be taxed by the authorities in your adopted country. Whatever your situation, you will not want to pay more tax than you really need, hence the need to clarify your position at the outset with Inland Revenue booklet IR20: Residents and Non-residents. Liability to tax in the UK.

In the next few pages I attempt to explain some of the ground rules as they exist at present. However, you should bear in mind that at any time the rules may be changed, and that each person’s circumstances are different. Moreover, you will have to accept the fact that you are unlikely to escape paying taxes completely.

The importance of being non-resident

Some expatriates believe that once you leave the UK your obligations to the British tax authorities cease automatically. Wrong.

Even if you have decamped to a remote tropical island, you should not assume that you have escaped the clutches of the Inland Revenue. If the taxman decides that you are resident in the United Kingdom, you remain a UK taxpayer.

As you sit beneath the palm tree sipping pineapple juice ask yourself the following questions:

• Am I going to be in the UK for more than 183 days in one tax year?
• Am I going to spend on average more than 90 days a year in the UK over a period of four years?
• Do I plan to spend any time in the UK and have accommodation available for my use (a place of abode) there?

If the answer to any of these questions is ‘yes’, add a dollop of gin to your juice and prepare yourself for a shock. In the eyes of the Inland Revenue you are still a UK resident, and therefore a taxpayer. True, the taxman is unlikely to turn up on the doorstep of your beachside villa in person, but he will probably catch up with you in the end.

The third question may need some explaining. If you have a house, flat or just a room available for your use in the UK and you visit the country, you will be regarded as a resident. This remains true even if you do not use the accommodation or only stay in Britain for five minutes.

You may hear of people with property in the UK who have managed not to pay tax to the Inland Revenue. However, their circumstances may be different from yours. For instance, they may have a full-time job abroad, or they may have let their property on a long-term basis.

How to establish non-resident status

You need to demonstrate to the Inland Revenue that you intend to live abroad for a tax year or more. If successful, you will be offered provisional non-resident status, which means that from the day following departure you will have no liability to UK tax on any income arising outside the UK.

However, if the Inland Revenue have reason to doubt your intention to move abroad on a permanent basis, you may not acquire this status immediately. If, for instance, you still retain a property or continue to engage in business in the UK, it may be difficult to establish the permanency of your expatriation.

In order to avoid liability to capital gains tax you should ensure that chargeable assets are disposed of after your departure from the UK and that you remain a non-resident for a minimum of 36 months. Self-employed people should take advice on when to cease business and when to dispose of their assets. (Incidentally, the sale of your main residence in the UK is not subject to CGT.)

An income tax free existence?

So, you have established your non-resident status. Does this mean that all your income is your own? How marvellous it would be if this were true! In fact, you will still be liable to the Inland Revenue for tax on income arising in the UK with few exceptions.

Pensions, dividends, interest, royalties

Any of these sources of income arising in the UK is normally taxed, although certain British government funds as well as PEPs and ISAs are exempt. In some cases it is possible to have interest paid without tax deducted, but you are still liable for UK tax on it. However, if you are a resident of a country with which the UK has a double taxation agreement you may be able to claim partial relief or exemption.

Since the conditions for exemption or relief vary from agreement to agreement, the best plan is to contact the Inspector of Foreign Dividends who will send you details of the agreement and the relevant claims form. (More on page 95.)

The European Union Saving Tax Directive means EU countries are now in a position to exchange information on interest payments received in one member country on accounts held in another. So if you are living within the EU it is not possible to evade paying tax by putting your savings into a third country.

Income from property

Any income from property rentals in the UK is taxable, once it reaches a certain level. Tax must be deducted from the rental income quarterly and paid to the Inland Revenue either by:

• the letting agent, or
• the tenant, where there is no letting agent.

It is, of course, possible to offset some of the tax against expenses you have incurred on the property, and by applying to the Financial Intermediaries and Claims Office (FICO) it may be possible for you to receive your rental income with no deduction of tax. Inland Revenue Leaflet IR140 Non-resident landlords, their agents and tenants provides information on this matter.

Many expatriates endeavour to reduce their income tax liability by moving their investments offshore. The Channel Islands and the Isle of Man have a large number of financial institutions serving the expatriate, many of them subsidiaries of banks and finance houses on the mainland; and there are others in Luxembourg, the Caribbean, Gibraltar and elsewhere.

It would be sensible to contact a few of these to find out what services they can offer, but, as always, I urge you to seek appropriate advice before you commit yourself.

Inheritance tax and capital gains tax

Do not overlook the matter of UK inheritance tax if your assets exceed the current allowance (£263K in 2004/5). You could avoid payment if you declare your new country of residence to be your domicile of choice, but this will take effect only after three years. It may be possible to put any assets in the UK into an offshore company or trust, but you will require advice on this matter.

Capital gains liability should not be overlooked. If you sell a business or a second property you could find yourself faced with a hefty capital gains tax bill from the Inland Revenue, and you should therefore take advice from an accountant as to how to reduce your liability, especially if a large amount is involved.

One idea is to delay the realisation of your capital gains until you are no longer a UK resident. However, unless you are planning to set up house in a tax haven, you may well find the tax authorities in your new country of residence taking an unhealthy interest in your gains.

Taxation abroad

As a general rule the income tax threshold (ie the point at which you start to pay tax on your income) is higher in most other countries than in the UK. As a result, a good many retired British expatriates escape paying income tax in their country of residence.

On the other hand, what other governments lose on the swings they may recoup on the roundabouts and you could find yourself liable for other forms of taxation – even in so-called tax havens. Many European countries, for instance, rely more heavily on indirect taxation, and you would find yourself paying a higher rate of VAT on a wider range of goods than in the UK.

You might also have to pay a wealth tax based on the value of your house or a foreign resident’s tax. If you eventually sell it at a profit, you could find yourself paying capital gains tax or even VAT. And don’t forget that there are bound to be local taxes as well.

It is impossible in a book of this size to discuss the relative merits of the tax regimes in different countries of the world. For one thing, tax legislation never stands still. To find out the current tax rates before you leave you need to contact either the embassy or consulate of your country of destination or consult an adviser on expatriate finance. The latest edition of Ernst & Young’s Worldwide Personal Tax Guide is another source of information.

Double taxation agreements

Is there a risk of being taxed twice on the same income or capital? There is, but fortunately Britain has signed double taxation agreements with a number of countries in order to overcome this problem allowing you exemption or partial relief from UK tax on certain types of income and capital gains.

However, you should bear in mind that double taxation agreements may differ from country to country and the precise conditions for exemption or relief vary. You and your advisers therefore need to study the relevant agreement with care. These are available for study on the Inland Revenue website or from the Centre for Non-Residents in Bootle.

If you are spending time in two or more different countries the situation becomes more complicated, and the following questions need to be asked to determine which country you will pay taxes to:

• In which country do you have a permanent home?
• Which country is the main centre of your life?
• In which country are you habitually resident?
• Of which country are you a national?

If you are living abroad, you may nonetheless be able to claim certain UK tax allowances. The Inland Revenue Centre for Non-Residents will be able to advise you on which – or the Public Departments (Foreign Section) in Cardiff if you receive a pension from Crown service.

What if I remain a UK resident?

Some people will be chary about selling up in the UK, and expect to make the occasional visit to their home. If you decide to share your time between your UK and foreign residence – this might happen if you buy a property in the USA, for example – you will continue to be liable for UK income tax and of course local taxes.

Provided there is a double taxation agreement between the UK and the other country in which you are residing you should be spared two income tax bills, but you will still be liable for local taxes and charges in both countries.

INVESTMENTS

When doing research for this book I heard of some unfortunate cases of elderly British people whose financial situation was extremely precarious. The crux of the problem was that their pensions were hardly sufficient to cover their day-to-day living expenses and they had no savings to fall back on.

In the UK there are supplementary benefits which provide a safety net for people whose capital and income fall below a certain level. However, this type of scheme is by no means universal, and so you may need to provide your own safety net. This means ensuring that you have a reasonable amount of capital in addition to your pension(s) and that it is carefully invested. This will help avoid two potentially disastrous scenarios:

• The buying power of your state and occupational pensions fails to keep up with the cost of living. This

HOW MUCH ARE YOU WORTH?
To help you and your adviser decide how much you will have available to spend on accommodation and to live on you need to evaluate your financial circumstances.
CAPITAL	You	Your spouse
Value of current house	_____	_____
Value of contents	_____	_____
National Savings	_____	_____
Value of any other property	_____	_____
Bank accounts	_____	_____
Building society accounts	_____	_____
Unit trusts, PEPs, ISAs	_____	_____
Government stocks	_____	_____
Other fixed-interest securities	_____	_____
Equities	_____	_____
Other securities	_____	_____
Life assurance policies	_____	_____
Other assets	_____	_____
ANTICIPATED INCOME
State pension	_____	_____
Occupational pension	_____	_____
Personal pension	_____	_____
Interest from bank or building society	_____	_____
Interest from unit trusts, PEPs, ISAs	_____	_____
Interest from government stocks	_____	_____
Other fixed interest	_____	_____
Interest from equities	_____	_____
Interest from other securities	_____	_____
Interest from life insurance policies	_____	_____
Trust income	_____	_____
Rental income	_____	_____
ANTICIPATED OUTGOINGS:
One-off
House purchase	_____	_____
House purchase taxes and fees	_____	_____
Removal charges	_____	_____
Car purchase	_____	_____
Regular
Local taxes	_____	_____
Income tax	_____	_____
Wealth tax	_____	_____
Home maintenance costs	_____	_____
Management charges (in a condominium)	_____	_____
Insurance (car, house, life, medical)	_____	_____
Electricity	_____	_____
Telephone	_____	_____
Water	_____	_____
Gas	_____	_____
Car maintenance and fuel	_____	_____
Car tax	_____	_____
Other transport costs (eg flights to the UK)	_____	_____
Domestic help	_____	_____
Clothing	_____	_____
Food and drink	_____	_____
Entertainment	_____	_____

• could happen as a result of changes in the exchange rate, inflation, because your pension is frozen, or through a combination of these factors.

• The amount of pension paid is reduced. This happens, for instance, to widows when their husband’s occupational pension may be reduced by 50%.

Golden rules for investors

Before going abroad it is essential to review your investments thoroughly to make sure they are appropriate to your new circumstances – retirement and overseas residence. You will need to ensure that your capital is accessible and that you are not paying UK income tax on your investment income unless this is unavoidable.

There are two golden rules for investors:

• Don’t put all your eggs in one basket.
• Make sure that your investments are arranged by reputable companies.

There are two broad types of investment:

• 1.Investments that pay out interest on a regular basis but do not appreciate in value (eg bank deposit accounts, building society accounts).
• 2.Those that will appreciate in value in the long term and usually pay a dividend (eg stocks and shares, unit trusts, investment trusts). Land and property may also appreciate in value and yield an income in rent.

Ideally you should consider having both types of investment. Money on deposit is readily accessible and if you do not need the income for the time being you can always leave it to accumulate. However, inflation can quickly erode the value of any cash you place on deposit and interest rates can go down.

Some people are reluctant to invest in equities or bonds arguing that their value can go down as well as up – which is, of course, true. On the other hand – if the past is any guide – investments in equities will perform better than deposit accounts in the long run.

In order to reduce risk you should invest in a number of companies, perhaps through a unit trust or an investment trust making use of any tax breaks which are available. In time your capital should increase in value and so should your dividends.

You may wonder whether there is any sense in investing in the country where you have decided to settle. Provided there are suitable opportunities this is certainly an idea worth consideration, particularly since you will need to guard against any financial loss if the pound drops in value against the currency of your country of residence. However, a better idea might be to aim for an investment portfolio with a wide geographical spread to include Europe, North America and the Pacific rim, in order to spend the risk. This can all be arranged from the UK.

Even if you are quite happy with your investment portfolio, it is essential to review it if you are going to be a non-resident for tax purposes. Investments which you made on the strength of tax efficiency may not be quite so suitable when your tax position changes, and any investment adviser you engage needs to bear this in mind. On the other hand, you should not switch round your investments merely for the sake of change.

If you decide to handle your investments yourself, you should be beware of investment schemes that sound too good to be true (eg funds promising cast-iron security and extremely high returns). My advice is to check the credentials of any financial adviser or firm with whom you plan to do business with the Financial Services Authority (FSA).

There is no reason why you should not continue to use an investment adviser based in the UK, the Channel Isles or the Isle of Man, where financial services are strictly regulated. Make sure, however, that the firm is approved by the Financial Services Authority.