Comprehensive Financial Guide for UK Retirees Making Aliyah
Making Aliyah is a life-changing and exciting step, but it can also feel overwhelming, particularly when entering a new tax system like Israel’s. Understanding how your UK tax obligations change and what steps to take to optimize your tax situation is crucial as you settle into your new life. This guide is designed to walk you through some of the key tax considerations from a UK perspective, while also touching on important aspects of Israeli tax law. As always, it's important to seek professional, bespoke advice tailored to your specific situation, as tax laws and personal circumstances vary widely.
Leaving the UK: Informing HMRC
One of the first steps when making Aliyah is informing HMRC (Her Majesty’s Revenue & Customs) that you have left the UK. This process depends on your current filing status:
If You’re Not Filing Tax Returns: For individuals who don’t file regular UK tax returns, such as pensioners or employees, the easiest way to inform HMRC of your departure is by submitting form P85. This form is designed to notify HMRC that you are leaving the UK and to claim tax relief or a tax refund if applicable. If you were employed at the time of your departure, be sure to attach your P45 (a form given to you by your employer upon leaving) to the P85. This allows HMRC to assess whether you have overpaid tax and issue a refund for the part of the tax year in which you were still a UK resident. This refund can often be processed even before the end of the tax year.
If You’re Filing UK Tax Returns: If you are already required to file UK tax returns (e.g., if you’re self-employed or own rental property), you’ll need to complete a tax return for the tax year in which you left. On this return, you'll need to claim split-year treatment, which ensures that only part of the tax year (until the day you left the UK) is considered for UK tax purposes. You'll also need to provide the exact date of your departure from the UK. In the years following your departure, assuming you qualify as a non-resident, you will generally be able to claim non-resident status for the entire tax year.
Will I Still Pay UK Tax?
Once you are classified as a non-resident for UK tax purposes, your tax liability in the UK is limited to UK-earned income. This is a key shift from the UK’s worldwide tax system, under which all your global income is subject to UK tax if you are a resident. As a non-resident, only certain types of UK income remain taxable, including:
Rental Income: Any income generated from property you own in the UK will remain taxable in the UK, even if you are no longer a resident.
Onshore Bank Interest: Interest earned on UK bank accounts remains taxable, though many people find this to be a small portion of their income due to low interest rates.
Dividends from UK Companies: If you hold shares in UK companies, dividends paid to you will still be subject to UK tax.
Pensions: Pensions paid by UK payers remain taxable in the UK, though there are nuances depending on the type of pension and the application of the UK-Israel Double Tax Treaty (discussed later).
If you continue to earn taxable UK income, you’ll still need to meet the UK’s tax return filing deadlines. This includes filing by January 31st each year for online returns, and making payments (if any) by January 31st and July 31st.
Determining If You Are Non-Resident
Establishing your non-resident status is critical for minimizing your UK tax liability. HMRC has specific criteria to determine whether someone qualifies as non-resident. These rules were revised in recent years to make them more straightforward and formula-based, known as the Statutory Residence Test.
The simplest way to be classified as non-resident is to spend fewer than 16 days in the UK during any given tax year. However, for many people, this is unrealistic due to family ties or business commitments. In such cases, HMRC applies a “sufficient ties” test, which takes into account several factors to determine how much time you can spend in the UK while retaining your non-resident status.
For individuals making Aliyah, the key ties to the UK are as follows:
Family Ties: If your spouse or minor children remain in the UK as residents, this is counted as a tie.
Accommodation Ties: If you own or have access to a property in the UK where you stay for at least one night during the year, or if you stay at a relative’s house (parents or children) for at least 16 days, this counts as a tie.
Work Ties: If you work in the UK for at least 40 days in the tax year, this is considered a tie. A workday is defined as a day in which you work for three or more hours.
90-Day Ties: If you have spent at least 90 days in the UK in either of the two previous tax years, this is another tie. This rule often comes into play during the first two years post-Aliyah.
Country Ties: If the UK is the country where you spend the most midnights during the tax year, this is considered a tie.
Depending on how many of these ties you have, you are limited to a certain number of days you can spend in the UK while still being considered non-resident:
4-5 ties: You can spend a maximum of 45 days in the UK.
3 ties: You can spend a maximum of 90 days in the UK.
2 ties: You can spend a maximum of 120 days in the UK.
1 tie: You can spend a maximum of 182 days in the UK.
Aliyah Tax Planning
Income Tax
Making Aliyah opens up new tax planning opportunities, particularly for managing income tax obligations. One of the simplest strategies is to open bank accounts in offshore jurisdictions. For example, banks in the Isle of Man or Channel Islands are part of the UK banking system, meaning you’ll have familiar account numbers and sort codes, but these banks are outside the UK tax system, allowing you to potentially shelter your interest income from UK taxation.
Additionally, it’s important to review whether your ISA (Individual Savings Account) remains relevant. While ISAs offer tax-free interest or growth while you are a UK resident, they may lose their tax advantages once you become non-resident. In some cases, it may be beneficial to liquidate your ISAs and invest in other vehicles that offer better returns or tax advantages for non-residents, especially for low-interest cash ISAs.
For those with significant pension savings, consider the potential advantages of transferring your pension to an offshore scheme such as a QROPS (Qualifying Recognized Overseas Pension Scheme). This allows you to move your pension out of the UK and into a jurisdiction with more favorable tax treatment, potentially reducing your tax liability upon withdrawal or death. However, QROPS are not suitable for everyone, and it’s essential to get advice from a regulated pension specialist.
Under the terms of the UK-Israel Double Tax Treaty, pensions are only taxable in one country – either the UK or Israel, but not both. During the 10-year tax exemption period in Israel for new olim, you can elect to waive your right to exemption from Israeli tax on some or all of your pensions, making them subject to Israeli tax but exempt from UK tax. This can result in substantial tax savings, particularly if a QROPS transfer is not feasible.
Capital Gains Tax
One of the benefits of becoming a non-resident is that UK non-residents are exempt from paying UK capital gains tax (CGT) on the sale of UK-based assets, with the exception of residential properties that are not your primary residence. This change, introduced on April 5, 2015, means that if you sell UK residential property, CGT may still apply.
To qualify for the full CGT exemption on other UK assets (such as commercial property or shares), you need to remain non-resident for at least five full tax years following your departure from the UK. For this reason, it is often advisable to wait until after the UK tax year following your Aliyah (i.e., after April 6th) to sell any assets, as this will maximize your CGT exemption.
Inheritance Tax (IHT)
Inheritance Tax (IHT) is another important consideration for individuals making Aliyah. UK assets are always subject to IHT, regardless of your residency status, but for UK domiciles, IHT is applied to worldwide assets. Domicile is a complex and somewhat subjective concept, reflecting where you consider your permanent home.
There are several steps you can take to prove that you’ve changed your domicile from the UK to Israel, such as:
Making Israeli wills to demonstrate your intention to settle in Israel.
Giving up UK burial rights and acquiring burial rights in Israel.
Renouncing UK memberships (such as synagogues, golf clubs, or charitable organizations) and taking up equivalents in Israel.
It’s important to note that for IHT purposes, you are considered UK domiciled if you were resident in the UK for 17 of the last 20 years. This means you need to establish non-residence for at least three years (soon to be five for new olim under upcoming rule changes) before you can be classified as non-domiciled for IHT purposes.
Once You’re in Israel
Now that you’ve settled in Israel, it’s vital to understand your obligations to the Israeli Tax Authority. New olim benefit from a 10-year tax exemption on their non-Israeli income, but it’s essential to seek specific advice tailored to your circumstances. There are numerous rules, exceptions, and caveats that could affect your overall tax situation, so having an expert guide you through these complexities is highly recommended.
By taking these steps, you can make your Aliyah transition smoother and ensure that your tax obligations are optimized both in the UK and Israel.
Understanding UK Inheritance Tax (IHT) for Retirees Making Aliyah
Inheritance Tax (IHT) in the UK is a tax on the estate of someone who has passed away, including their property, money, and possessions. It may also be payable on certain lifetime gifts or trusts. The Inheritance Tax threshold, also known as the ‘nil rate band’, is the portion of the estate that can be passed on without incurring IHT. Since April 6, 2009, the nil rate band has been set at £325,000. This means that estates valued below this threshold are not subject to IHT.
Married couples and registered civil partners can combine their unused nil rate band allowances, effectively increasing the IHT threshold to £650,000 on the death of the second partner, provided the first did not use up their allowance.
If the total value of an estate, including any assets in trusts or gifts made within seven years of death, exceeds this threshold, a 40% IHT will be levied on the amount above the nil rate band.
For many retirees who make Aliyah from the UK, their estates may still be liable for IHT even after they settle in Israel. This is primarily because:
They may remain domiciled in the UK (which is the case for most olim).
They continue to hold UK-based property or other UK assets.
Domicile is a legal concept that defines your permanent home or country of long-term residence. Even if you are living in Israel, the UK may still consider you domiciled there for tax purposes, especially if you have long-standing ties to the UK. Changing your domicile is complex and can involve severing ties with the UK in a meaningful way, such as selling property, transferring your will to the new country, or relocating permanently.
QNUPS and UK Inheritance Tax: A Solution for Expatriates
To mitigate the IHT burden, retirees can consider using a QNUPS (Qualifying Non-UK Pension Scheme). QNUPS were introduced through the Inheritance Tax Regulations of 2010, which came into force on February 15, 2010, as a way to offer inheritance tax protection for non-UK pension schemes. Prior to 2006, certain non-UK pensions were automatically exempt from UK IHT. However, the policy changes made on A-Day (April 6, 2006) unintentionally left some pensions without this protection. The 2010 regulations restored this exemption, allowing pensions held in a QNUPS to avoid UK IHT.
To qualify as a QNUPS, a pension scheme must meet specific conditions similar to those required of a Recognised Overseas Pension Scheme (ROPS), but without the need to report to HMRC. QNUPS are particularly beneficial for high-net-worth individuals and expatriates as they provide flexible retirement benefits while also offering protection from UK IHT.
Contributing to a QNUPS
Contribution Limits
There is no fixed limit on the amount you can contribute to a QNUPS. Contributions are generally determined based on an actuarial assessment of your lifestyle and overall wealth, factoring in your global assets and other retirement schemes. An actuary will estimate the level of retirement income required to maintain your standard of living and calculate any shortfall, which can then be addressed by contributing to the QNUPS.
Timing of Contributions
Contributions to a QNUPS can be made at any time, provided they are for the purpose of funding retirement benefits. If HMRC deems that contributions were made solely for tax avoidance, particularly if the individual is in poor health or terminally ill, the QNUPS may lose its IHT exemption. It’s critical that contributions are made in good faith, with the genuine intention of providing for retirement.
Advantages of QNUPS for UK Expatriates
QNUPS offer significant tax advantages and flexibility, making them attractive for retirees moving to Israel or other countries. Key benefits include:
Funding Benefits
Unlimited Contributions: Unlike UK pensions, there is no cap on contributions to a QNUPS, making it an ideal option for high-net-worth individuals who want to secure additional retirement income.
No Employment Income Requirement: You can contribute to a QNUPS without needing relevant employment income, unlike traditional pensions.
Flexibility in Funding: Contributions can be made via personal savings, or through transfers from an International Pension Plan (IPP) or QROPS.
Growth Benefits
No Capital Gains Tax: Investments held within a QNUPS are not subject to capital gains tax, allowing your retirement fund to grow more efficiently.
No UK Income Tax on Non-UK Investments: Non-UK sourced income generated within the QNUPS is not subject to UK income tax.
No Fund Size Limits: Unlike UK pensions, there is no lifetime limit on the size of a QNUPS fund.
Multiple Investment Options: QNUPS can hold a broad range of investments, including foreign currencies, and there are no specific investment restrictions.
Retirement and Death Benefits
UK IHT Exemption: QNUPS are exempt from UK inheritance tax, meaning that assets held within the scheme will not form part of your taxable estate.
Avoidance of Local Succession Laws: QNUPS can bypass local inheritance laws, giving you control over who inherits your pension benefits.
Deferred Income: You can defer income withdrawals from your QNUPS until age 75, giving you flexibility in managing your retirement income.
Flexible Lump Sum Withdrawals: Many QNUPS allow you to withdraw up to 25% of the fund as a tax-free lump sum (sometimes as much as 30%).
No Annuity Requirement: You are not required to purchase an annuity with a QNUPS, providing greater control over your retirement funds.
Reporting and Compliance
No HMRC Reporting Requirements: Unlike other overseas pension schemes, there are no reporting obligations to HMRC for QNUPS, providing greater privacy and less administrative burden.
Who Should Consider a QNUPS?
QNUPS are particularly suitable for:
Expatriates who are saving for retirement and may return to the UK in the future.
High-net-worth individuals who have already used up their UK tax-relievable pension contributions or who want to save beyond the UK pension contribution limits.
Those restricted to basic-rate tax relief on UK pension contributions after April 6, 2010.
Individuals looking to transfer from a QROPS or International Pension Plan to a more flexible pension structure.
Taxation of QNUPS Benefits
Tax Treatment for Non-Residents
If the individual receiving benefits from a QNUPS is a non-UK resident, there is no UK tax charged on pension payments, including lump sum withdrawals. However, taxes may apply in the country where the individual is resident, depending on local tax laws.
Tax Treatment for UK Residents
If the QNUPS member returns to the UK and becomes a UK resident again, they will pay tax on 90% of the pension income received from the QNUPS. This is still more favorable than the full taxation typically applied to UK pension income.
Loans to Members from a QNUPS
In certain cases, QNUPS allow loans to be made to members before they retire. These loans must be structured as commercial investments, with proper due diligence conducted by the trustees. The loan must be made at a commercial interest rate and under terms that would be acceptable for any other form of investment. Not all jurisdictions permit loans from QNUPS, so it’s essential to verify whether loans are allowed and under what terms before considering this option.
Is QNUPS Right for You?
For UK expatriates and retirees, QNUPS can provide an effective, flexible, and tax-efficient way to plan for retirement while protecting your assets from UK Inheritance Tax. They are particularly valuable for high-net-worth individuals who need to secure additional pension benefits beyond the limits of traditional UK schemes.
However, contributions to a QNUPS must be carefully considered and proportional to your overall wealth and retirement needs. It is essential to seek professional financial advice to ensure compliance with both UK and international regulations and to avoid the possibility of HMRC deeming contributions as tax avoidance.
QNUPS also provide a safe haven for long-term savings, allowing expatriates to shelter their wealth while enjoying flexible income options in retirement. Whether or not you plan to return to the UK, QNUPS can be a valuable component of a well-structured retirement strategy.