Your IndustryFeb 25 2016

Navigating taxation differences cross-border

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Navigating taxation differences cross-border

Some of the biggest challenges facing advisers whose clients live abroad are changes to local taxation rules, not to mention the effects that some tax agreements have on overseas clients.

Jason Porter, director for Blevins Franks, says: “It is very difficult for individual advisers to keep up to speed with various changes to taxation across jurisdictions.”

While various websites will publish changes to financial and tax law across jurisdiction - often in English - he said this may not go into sufficient depth to enable the individual to advise clients living overseas.

Therefore, Mr Porter suggests: “It may well be that a UK practising IFA who has expatriate clients should put in place information exchange agreements with practices in local jurisdictions.”

According to Nigel Green, chief executive of the deVere Group, “The only way advisers can remain up to speed on the various changes to taxation across jurisdictions is to have an established technical services department, whose sole job it is to track and undertand the changes, and then help advisers implement them when working with clients.”

Without this, Mr Porter says there could be problems.

He says: “Without having the necessary in-house expertise or support of local accountants, lawyers and other professional contacts, a UK adviser may not be able to ‘qualify’ the advice he provides in respect of an overseas jurisdiction as being correct.”

Sam Instone, chief executive of AES International, agrees, saying tax, legal and regulatory frameworks can change so quickly advisers tend to refer business to specialists. However, advisers must still commit to continuous learning, he says, adding: “Advisers in international firms tend to specialise in certain markets or sectors, while undertaking focused CPD to ensure continuing competency in these areas.”

Paul Stanfield, chief executive of the Federation of European IFAs, adds: “Some international life assurance companies, particularly those based in Dublin and Luxembourg, specialise in cross-border business in the EU and these can be a good source of information and guidance.”

Double taxation agreements

Expats who are members of UK DC schemes are eligible for the same pension freedoms as those in the UK, and HM Revenue & Customs regards the pension and related benefits as being subject to UK tax regulations.

Therefore, expats can get their 25 per cent tax-free lump sum and subject to any income tax on withdrawals above their annual allowance, but there are complications, as Marilyn McKeever, associate director, private client, for Berwin Leighton Paisner, explains.

Withdrawals may be taxed differently depending on the local tax rules of the country in which the expats reside. For example, they may end up being liable for local tax on payments on their lump-sum in some countries.

Clearly this is something of a minefield of advisers who will not want to be responsible for their clients suffering an additional tax charge Marilyn McKeever

Double tax agreements (DTA) between the UK and various countries aim to reduce the tax burden on individuals. For example, in Spain, an expat who withdraws money from their UK pension scheme will only be taxed in Spain.

However, not all DTAs are the same as each country has a slightly different way of taxing pension income, which means either the home or the host country will become the sole tax authority, and there can be different time limitations on how long any one jurisdiction will have sole taxation rights over an individual.

Ms McKeever adds: “In some cases, the country of residence only has sole taxing rights if tax is actually paid there. For example, if a Briton retires to Israel as a new Israeli resident, they have a 10-year tax holiday in Israel. As they would pay no tax on their pension receipts there, the UK would still be able to tax them under the terms of the DTA.”

Form filling

The administration can be onerous.

For example, people retiring to France must complete a lot of forms. Under the French DTA, pension income should only be taxable in France but this is subject to French scale income tax rates, with a 10 per cent deduction. Pension lump sums are subject to 7.5 per cent.

Pension income is also subject to a social charge of 7.4 per cent, which expatriates can avoid - if they can prove they have paid UK national insurance for the previous two years. To do this, they will need to get Form S1 from HMRC and prove they have not paid French social security in the past, and arrange with the UK pension or annuity provider to pay income gross. And another form is needed - Form FD5 - which should be sent to the local French tax authority.

According to Mr Porter, “It is widely accepted in France that pension lump sums are subject to only 7.5 per cent income tax and 7.4 per cent social charges (which won’t be charged if a Form S1 is present). But the safest way to ensure this tax treatment is obtained is to receive the whole pension as a single lump sum.”

Non-habitually resident taxation

Sun-traps such as Portugal tempting people who wish to retire from the UK but Mr Porter highlights that the country does not have specific favourable pension legislation. However, there are ways to mitigate the tax bill for UK pensioners.

From 2009, the country created a Non-Habitually Resident (NHR) regime, which applies for the first 10 years of tax residence.

As long as your client has registered as a NHR with the tax authorities, and the client’s pension income may not be regarded as Portuguese-sourced income (ie as long as it is a UK company pension scheme or Sipp or registered overseas pension scheme), then no tax is due to Portugal on the pension income for the first 10 years.

UK residents, non-doms

Another ‘hidden’ tax stems from fee-based charging under the Retail Distribution Review for clients who are not classed as expatriates but who are registered as non-domiciled.

Ms McKeever explains: “If a non-dom (ie a UK resident but non-domiciled individual who is claiming the remittance basis) pays for advice provided in the UK with offshore income and gains, that counts as a remittance of the money used to pay the fees, and is taxable.

“If the service relates to offshore property and the payment is made offshore, and the non-dom pays his UK investment manager for services relating to his offshore portfolio with offshore income, there will be no tax charge as long as he pays the fees offshore.

“However, if he pays directly into the UK, that will constitute a taxable remittance. If he pays fees relating to his UK portfolio with offshore income, even if paid abroad, that will also be a taxable remittance. Clearly this is something of a minefield of advisers who will not want to be responsible for their clients suffering an additional tax charge.”