Global relocation: the CGT tax traps

Relocating abroad for a more affordable retirement? Depending on where you’re relocating from and where you’re heading, you might have a couple of nasty tax shocks coming your way. Alistair McKechnie grasps the nettle.

If you’re planning to retire abroad and live mainly or completely off your pension, forecasting your finances should be fairly straightforward – and depending on where you move to, your tax obligation could drop to exactly zero (scroll down to see where).

And if you’ve also built up an investment portfolio of stocks and bonds (possibly maximizing a tax-efficient wrapper like the UK’s ISA or the US’s Roth IRA), you might think that you could simply take dividends or sell off your investments as and when you need to, and pay the local (hopefully lower or non-existent) taxes on capital gains or dividends as you do so. You may also expect to mitigate your investment gains with your losses along the way.

Here are two potential pitfalls with this approach.

⚠️ Will your tax-protection wrapper stay in place?

Perhaps you’ve been assiduously using your tax-free investment allowances to build up a tidy nest egg that’s safe from the taxman. But once you change your tax residency, there’s a chance that your tax-free wrapper might fall away like a poorly fastened beach towel – leaving you exposed to punitive capital gains charges.

Got a US Roth IRA?

The way your Roth IRA is treated could depend on the financial institution involved (they may insist that you move your account overseas) and on your new tax residency, which may not recognize the Roth’s tax benefits and tax your capital gains under local rules.

The good news is that Canada, the European countries of UK, Belgium, Estonia, France, Latvia, and Lithuania all respect the Roth wrapper. And then there are countries like Panama, Switzerland and others that simply don’t tax foreign-sourced capital gains at all. But in most other countries, including Portugal, Italy and Spain, your Roth wrapper simply won’t be recognized.

Got a UK ISA?

Unless you’re moving to one of the low-tax countries that don’t charge tax on any foreign-sourced income, you’re out of luck. The UK is the only country that recognizes your ISA’s special tax-free status. Countries like the USA, Canada, Australia, New Zealand, France, Spain, Portugal, Germany, Italy, Netherlands, and South Africa will tax it like any other investment. Worse, if you’re a US citizen returning to the US from the UK with an ISA, the IRS has a special welcome for you. They classify ISAs as “Passive Foreign Investment Companies” or PFICs, meaning that your ISA will attract extremely high tax rates and complicated reporting requirements, with potential harsh penalties and unexpected tax bills.

Also bear in mind that:

• You’ll need to tell your ISA provider you’re no longer a UK taxpayer.
• You can carry on trading within your ISA but you won’t be able to invest more money into it unless you return to the UK, although you can transfer your account to another provider.

But for some relocating retirees, there’s another nasty waiting to puncture your painstakingly accrued investments:

⚠️ Exit taxes

Heard of exit taxes and deemed disposal rules? Depending on where you’re coming from, prepare for a rude shock.

• Australia: Ceasing tax residency triggers CGT Event I1, which treats your global portfolio (excluding Australian real property) as if it were sold at market value on the day you leave.
• Canada: Loss of your tax residency will trigger deemed disposition at fair market value of most of your worldwide capital property.
• South Africa: Section 9H of the Income Tax Act triggers an immediate deemed disposal on the day before you cease residency, taxing all unrealized global assets (excluding SA immovable property).

That’s far from all. Japan, and a number of European countries, will also demand an exit tax on your investment portfolio. So if you switch your tax residence to another country, and then decide to move again after a few years, that could trigger another exit tax event.

🔍 What are the most investment-friendly jurisdictions?

If one of these is your relocation target, you’re in luck. Here are five international jurisdictions that offer the cleanest shelter for an investment-heavy lifestyle:

Planning a mostly pension-based retirement overseas is comparatively straightforward. If you have time, converting a private investment portfolio to something that will be treated more favorably by tax authorities in both your current and destination countries may be a very good idea.

This article is for general information only and does not constitute financial, tax or immigration advice. Visa requirements, tax rules and income thresholds change frequently, are applied case by case, and depend on your own circumstances and the treaties between the countries involved. Please speak to a qualified, licensed adviser in both countries before making any decisions about relocating or restructuring your retirement income.