What happens to your ISAs and pensions should you move abroad?
Further to my earlier article, determining UK residence status can be a tricky business. However, assuming you have navigated the minefield, and are, or are about to become non-UK resident, what implications does this have for tax purposes on certain specific events?
As you will probably remember, when opening an ISA account of any description, you need to quote your national insurance number. This is because you can only open an ISA if you are resident and ordinarily resident in the UK for tax purposes and you can only open one ISA per tax year.
If you already hold an ISA and then go abroad, you cannot continue investing into the ISA but you can keep the investment and you will still get tax relief on investments held in the ISA. If and when you return, you can start putting money in again.
There are two different issues to consider with pensions, those looking to contribute to pension schemes and those looking to receive pensions.
It is important to realise that there are no HM Revenue and Customs (HMRC) limits to the amount of contributions you can make into a pension scheme. However there are limits to the amount of tax relief you can receive on those contributions. This is crucial, given the current state of the market, as tax relief is probably the only reason some pension funds are worth more than the sum of the contributions invested.
In effect if you are a 'relevant UK individual' you can contribute up to 100% of your relevant UK earnings, or £3,600 if this is higher, in any one tax year and receive tax relief.
Someone no longer resident in the UK is a relevant UK individual for a tax year if they were resident in the UK both:
- at some time during the five tax years before that year; and
- when the individual became a member of the pension scheme.
However, unless such a person also has relevant UK earnings, they will only qualify for tax relief on contributions up to the basic amount of £3,600.
If you are lucky enough to be in receipt of a UK pension and have retired somewhere sunny, you probably have many more fun things to do than worry about tax. However, if you are in receipt of UK income, such as a pension, you will be charged to income tax, unless the income falls within the remit of a double taxation agreement with the country you are resident in.
You may also continue to receive a UK state pension even though you live abroad, as, in simple terms, you have paid for it through a lifetime of national insurance contributions, so why should you not benefit. The UK state pension is not, as is commonly believed, tax free, but is merely paid gross. For pensioners whose only income is a State pension, it is effectively tax free as it will be covered by their personal allowance.
But do you get a personal allowance if you are no longer UK resident? Well, leaving aside the complicated complications of losing entitlement to allowances when claiming the new remittance basis of taxation, the answer (as ever in tax) is, it depends.
If you're a Commonwealth citizen (including British), European Economic Area citizen, or a current or former Crown employee, you'll still get your tax-free allowances to reduce the amount of UK Income Tax due. Members of certain other special groups also qualify.
However, there are two things to note. The entitlement to allowance rests on citizenship, not residency. Thus, if you retain your UK citizenship (by holding a UK passport, for example), you will be both a Commonwealth and EEA citizen, although you will not actually get double allowances, unfortunately. Countries like Australia require naturalisation in order to gain permanent residency, which would mean UK citizenship would be surrendered for Australian. Australia actually has a double taxation treaty with the UK, but citizens of certain other Commonwealth countries, such as the Bahamas or the Maldives will lose their entitlement to allowances from 6 April 2010 due to Finance Act 2009 changes.
If you move abroad permanently, the level of your State pension will be frozen unless you are in a European Economic Area (EEA) country or one of the countries that has a special agreement with the UK. If you leave the UK before having made sufficient number of years contributions in order to qualify for a State pension, you may need to consider making voluntary National Insurance contributions whilst outside the UK.
Liability to capital gains tax (CGT) depends on both residence and ordinary residence. If you are neither UK resident nor ordinarily resident you will not be liable to UK CGT on the sale of assets, including shares, although you may be liable in the country you actually reside in.
However, there is specific anti-avoidance legislation to prevent any unscrupulous Fools from leaving the UK temporarily in order to realise large gains free of UK CGT and then returning considerably wealthier. As a result, although gains realised whilst non resident and not ordinarily resident will not be charged at the time, if you return to the UK sooner than five complete tax years (so likely 6 years in practice), all gains realised in the interim will become chargeable in the tax year you resume UK residence.
More on tax from Sam Thewlis: