As a financial planning company with offices in both the UK and Hong Kong, you won’t be surprised to read that we receive a lot of enquiries from internationally-mobile clients in terms of how best to structure a tax-efficient income in retirement.
Many people effectively attain the status of “tax nomad”, especially during the active years of their retirement.
Clearly, this can create complications from a tax planning perspective. So, we thought it would be helpful to get an expert in this field to write a guest article for you.
Emma McDermott is the founder of Global Tax Consulting, exclusively focusing on UK expat tax. Emma has a wealth of specialised knowledge and experience for taxpayers with international affairs.
So, if your financial future involves retiring overseas, or it’s just something you’re thinking about and you wish to understand how you can optimise tax exposure in relation to pension withdrawals, you’ll find much to interest you in Emma’s article.
Don’t assume living overseas will mean you’ll pay no UK tax
As a starting point, you may believe that your pension withdrawals will automatically escape UK taxation, given that you are no longer residing in the UK. However, this assumption is incorrect.
As a non-UK resident, which is broadly the status you achieve by being a UK expat living overseas, you will continue to be liable to UK taxation on any UK-sourced income. This includes payments from your UK State Pension and any private pension pots you may have accrued.
The importance of double-taxation agreements
Providing that you are resident overseas, which will be achieved by spending six or more months having a home, or having ties in another country, you may be able to remove the right of HMRC to tax your pension income, by relying on a double-taxation agreement.
Such agreements emanate from international tax rules. They supersede domestic tax law and, while every agreement has unique rules, the position usually achieved is that the country you are resident in has the taxing rights over your income, with the rights of the UK being removed.
However, you should note that the Hong Kong double-taxation agreement gives the taxing rights to the source country.
As a result, your first step to achieving maximum tax optimisation is by relocating to an overseas country that has a double-taxation agreement with the UK which removes the UK’s taxing right in relation to pension income.
Creating an income free of UK tax
Once your income is no longer subject to UK tax, there are two options you can explore with respect to receiving your pension income free of UK taxation.
Firstly, you can complete a treaty relief form available on the HMRC website to request approval that your pension income can be paid gross of tax.
Alternatively, you can pay tax at source and complete a UK self-assessment tax return to reclaim the tax you have paid using the applicable addendum, which in this case is form HS304.
You may also want to consider relocating to a country that enables you to achieve a better tax position compared to the UK.
For example, you could settle in the United Arab Emirates, where you won’t be subject to any personal taxation at all.
Closer to home, from a UK perspective, there are countries that offer a special tax regime for retiree expats. For example, in Italy, you will be liable for a 7% flat rate of tax on your pension income, or in Portugal, the applicable flat rate of tax is 10%.
To conclude, the perfect optimisation strategy is to settle in a country that can both remove the UK’s right to tax your pension income and levies no tax at all, or a relatively low rate.
We would strongly recommend that you work with a tax adviser in both the UK and any overseas jurisdiction to craft and implement a strategy that is achievable in line with your travel pattern, personal circumstances and goals.
Get in touch
Take a look at the Global Tax Consulting website to find out more about the services they offer, and how Emma can help you manage your tax affairs and ensure that your obligations to HMRC are met.
If you’d like to find out more about the issues raised in this article, please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
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