Often the default position of people that I meet is to keep their property in the UK and rent it out. This is understandable but is it the right thing to do? Property has generally been an extremely good investment, particularly over the last twenty years or so. The property question gets to the heart of investment planning for Olim. What makes perfect sense for someone living in the UK is not necessarily right for Olim.
Unless you are a professional landlord managing numerous properties, I strongly recommend you do not keep your UK property and rent it out. This is especially true if you are relying on the rent for part/all of your income need.
Here are some of the issues you need to consider:
Reasons to keep UK property
- Property has been an excellent investment in the past
- Rent produced from the property can be used as source of income
- There would be a UK property to live in if things do not work out in Israel
- Property should be a good long term ‘hedge’ against inflation
Reasons to sell UK property
- Property has done extremely well in recent times. Could this be coming to an end especially as interest rates can only go up from current levels
- Managing property can be time consuming and stressful when based in the UK and this is even more so when you are based abroad
- Paying management fees will be costly
- Overheads, repairs and vacant periods reduce returns
- UK property is subject to UK inheritance tax at up to 40% (UK situs asset)
- Non liquid asset – money can’t be released quickly or easily nor can you sell part of the property should you need a small amount
- Rental income subject to on-going UK income tax (even if you live in Israel)
- HMRC could argue that you are still UK domiciled if you keep your former private residence [see section on inheritance tax]. Investment properties e.g. “buy to lets” should be less significant in determining your domicile
- Sterling only income
- UK Capital Gains Tax now chargeable even for non-residents
- Yields in London at around 2-3%
When you consider the typical yield on a London property, less all the costs such as agents, management, insurance, vacant periods, repairs, UK tax etc it typically brings the yield to below 3%. If the rent is a vital part of your income requirement, then you are dependent on a stranger paying rent and that income will be in Sterling. Thus you are relying on an individual person and a single currency for your income needs. I think that combination is too risky for my clients especially when their pensions will also be Sterling based. Add to that all the uncertainties of managing a property from Israel and most people decide to sell.
However, for those of you who still need convincing, consider that you need to pay UK Income tax on the rental income and UK Capital Gains tax on future gains. As an Oleh you do not need to pay Israeli income tax on your investments (10 years). However UK property will remain taxable in the UK. Why hold an asset that attracts UK income/capital gains tax when you can hold other assets that are tax free?
In my opinion, the final nail in the coffin for UK property is that inheritance tax at 40% (subject to the nil rate band) is payable on any asset (including property) left behind in the UK.
When you consider the low income yield, the difficulties and costs of managing property from abroad, the fact that UK rental property will potentially be subject to income tax, capital gains tax and inheritance tax it is clear to me that there are more appropriate investments for Olim. There are other forms of investing that are not subject to any of these taxes and typically produce a higher income.
There are lots of issues to consider with pensions, not least because the UK pension system is very complicated and is forever changing. Often people have a variety of different pension schemes that each have their own rules. In April 2015 probably the biggest change in generations came into force with UK pensions. In broad terms pensions have become far more flexible than they have ever been. I will discuss pensions in general terms, but you really should talk to a competent adviser and particularly one that has a good understanding of QROPS (discussed later) and how they interact with Israel.
There is a lot of confusion around the taxation of UK pensions. A few years ago HMRC won a case against an Israeli resident who felt that HMRC were wrong to be taxing his UK pension because he lived in Israel.
What you need to remember is that hypothetically, your UK (I stress UK) pension income will be taxable. The only question is where? Will you pay the tax in the UK or in Israel? Pension income is treated differently to other types of income such as bank interest.
There is a double taxation agreement (DTA) in place between the UK and Israel which to be honest is quite old and out of date. There has been talk of a new one for the last few years but this seems to be caught up in general Middle Eastern politics and a definition of Israeli borders. Typically the point of DTA is to prevent a person paying double tax. For example, if one country would tax at 20% and the other 30% the person does not pay 50%. The DTA comes in and broadly speaking one country would get 20% and the other 10%.
Israel does not tax UK pension income in the first ten years (as it is foreign income). HMRC’s view is that since a DTA is designed to prevent a person paying tax twice, it is not applicable to new Olim. Thus HMRC’s position is that if Israel does not tax UK pensions, HMRC will. The recent judgment referred to above confirmed HMRC’s interpretation was correct and UK pension income remains taxable in the UK even though the person has moved to Israel.
As a result, it is often worth volunteering to pay tax in Israel (even though you are exempt for ten years). The reason you may consider this is because you would typically pay a lower rate of tax in Israel than in the UK. Under the DTA you can then rightly say you are paying tax in Israel and thus HMRC typically will no longer tax you in the UK. As a result you would normally end up with a lower overall tax bill. This is because Israel ignores the first 35% of pension income payments for tax purposes. One of the Israeli accountants we work with would calculate what is your best course of action and help you with the relevant forms in Israel and the UK.
In line with a number of Western countries Israel has changed the statutory retirement age; a pensioner is now defined as a male aged 67 or a female aged 64. Taking pension income before these ages could be considered “early retirement” and may be subject to different tax rules.
If you are below the Israeli statutory retirement age you may be taxed on all of your pension income. In addition, there are certain circumstances where you may also have to pay Israeli National Insurance contributions. You should talk to an Israeli accountant if you are wishing to take an income from your pension and you are below the Israeli retirement age.
There is an additional rule that stipulates that you will not pay more tax on your pension income in Israel than you would have paid in the country from which you came. This applies to new immigrants and to veteran returning residents. Thus you have the certainty that your financial position will be the same or better on the Israeli tax system.
QROPS – Qualifying Recognised Overseas Pension Schemes
As a result of EU freedom of movement legislation, UK pension rules allow one to move their existing UK pension funds into an overseas pensions scheme (QROPS). There are a number of potential benefits especially for people moving to Israel. The way that the QROPS rules interact with the Israeli rules is extremely beneficial for anyone making Aliyah. I would strongly advise anyone who has an appropriate pension fund to take advice on whether they can and should move their pension to a QROPS.
The current popular QROPS destinations are: (in alphabetical order)
- Isle of Man
It is beyond the scope of this booklet to go into the pros and cons of each jurisdiction. There are huge differences between them in their tax treatment, reporting/filing, investment choices and quality of provider/administration.
Broadly speaking the advantages of QROPS fall into two categories- “lifetime advantages” and “death advantages”.
As discussed above, HMRC’s interpretation of the DTA means that your UK pension income will always be taxed; the only choice is where? Either in the UK or Israel.
If you move your pension offshore into a QROPS you can have your income tax free (or minimal tax) for at least 10 years.
The reason is that the offshore jurisdictions will pay your pension income gross, (or charge a very small amount of tax) and Israel will not be taxing you for 10 years. The issue with the DTA and the UK will no longer apply, as your pension income will be coming from the offshore jurisdiction and not from the UK.
Under the April 2015 rules, if a person dies prior to their 75th birthday their pension fund can pass to their beneficiaries free of tax regardless of whether the person has started taking an income from their pension (crystallised) or not. There would be no tax to pay regardless of how the beneficiaries take the fund, either as a lump sum or as regular income.
If you live beyond age 75 then your beneficiaries can still receive the pension as a lump sum or as regular income but income tax will be payable by the beneficiaries up to 45% (current highest income tax rate). Moving your pension to a QROPS will avoid this income tax post 75. It is worth noting that Israel does not have inheritance tax so it is feasible that the entire pension pot can go to the next generation free of tax.
Most pensions can be transferred into a QROPS although not all. State pensions, the majority of occupational pensions (that are in payment) and personal pensions where you have taken an annuity, cannot be transferred.
As I said, pensions are complex and you must not move your pension without taking proper advice. There are many issues that need consideration, not least that there could be extra benefits in your current pension that you would not want to give up.
QROPS problems (Post March 2017)
It is fair to say that HMRC do not particularly like QROPS, but had to accept it as part of EU rules (what happens post Brexit is up for debate). As a result there have been many changes to QROPS rules over the years, typically as and when HMRC feel there has been an abuse of the rules.
The March 2017 Budget brought about the biggest change in rules to date. For many the changes have in effect killed off the QROPS market.
The Government introduced a 25% up-front tax charge on any transfers to a QROPS, unless the person is moving to an EU country and the pension also moves to an EU country. For example, a person retiring to France who moves their pension to Malta (EU) would not have a tax charge. A person making Aliyah (outside EU) and moving their pension to Malta would have a 25% upfront tax charge.
For those of you momentarily considering moving to say France for a short period of time and then making another move to Israel, the Government has already thought of that! The Government brought in anti avoidance legislation saying that if there was an onward move to a non EU country within 5 years there would be the 25% tax. One would need to live in France (or another EU country) for at least 5 years to avoid the 25% tax. However there could be further changes post Brexit so I’m not sure that is a viable option.
Before the March ’17 budget it was very likely that a person making Aliyah with a regular personal pension would have been advised to move to a QROPS as it has so many benefits. Now you can still have those benefits but only at a price. You now need to pay a one off 25% tax charge on the value of the fund you are transferring. The question is, is a QROPS still worthwhile?
Without wishing to overstate the point, take professional advice from a UK qualified pension transfer specialist.
People often ask how does their pension actually get paid into their bank in Israel and does that make any difference to the tax treatment.
Firstly, your tax liability (if any) on your pension or savings income is not dependant on where the money is sent (remitted) to. Whether your pension money is sent to your UK bank, your Israeli bank or an offshore bank account is irrelevant for taxation purposes. Therefore, the decision on where to send the payments is based on what is the most practical and convenient for you.
The State pension can be paid directly to you in Israel in Shekels. This is probably the most convenient way of receiving your pension. The money will be changed using the banking exchange rate rather than a tourist rate. Additionally, if you move to non-contested geographical locations (eg Tel Aviv) you will be entitled to the yearly inflation increases. There is talk from time to time about the Government stopping inflation increases for expats, as this would save a lot of money over time. It hasn’t happened yet but it could and this should be factored into your plans.
With regards to non-State pensions, you will need to contact the scheme administrator to confirm if they are willing to pay direct to Israel.
Now that I have discussed some of the guiding principles, there are other things you need to consider in light of the above:
- What do you want your investments to achieve?
- Do you want the highest possible income now or do you want your investments to grow so that you have a greater income in the future?
- How much income will you need?
- What is my life expectancy and is there enough money to see me/us through?
- Do you have other sources of income? Are they guaranteed?
- Can you afford to put your money in the bank which has no growth?
- How important is it for you to leave money to your children?
- Would you be prepared to invest differently to avoid 40% UK inheritance tax?
Everyone will have different answers to these questions. This is why each individual should have their own tailor-made portfolio designed to take into account their unique set of circumstances. Typically as you get older you will want to reduce the risk and increase the income that comes from your savings. When selecting investments, it is very important that you consider this at the outset so you have the flexibility built in to allow for changes in your circumstances.
The answers to the above questions will form the foundation of your portfolio and its asset mix. A successful portfolio should typically hold cash, property, bonds/gilts and equities.
Research shows that 90% of a portfolio’s performance is due to selecting the right asset mix. The remaining 10% of the performance is due to picking the right stock or bond. It is because of this that getting the right asset allocation is so fundamental. The wrong asset mix can affect 90% of a portfolio’s performance and the amount of money you have in the future.
There is no perfect investment. Each of the four asset ‘classes’ and investment types have advantages and disadvantages and their own unique characteristics. It is blending the most suitable attributes to your circumstances that creates your own ‘optimal’ portfolio. An ‘optimal’ portfolio, in multi currencies, inside a tax efficient structure will give you the greatest possible chance of financial success in your retirement. This is exactly what we try and achieve for our clients.