Retire overseas by buying property? Some investment taxes may come as a surprise
Many overseas countries have special tax programmes that minimise taxation for retirees
Dubai: When choosing to retire to a popular overseas destination, you will likely base your decision on which country offers relatively lower taxes. However, retiring abroad can also come with certain not-so-obvious tax tariffs and charges.
“Interest by retirees in moving overseas has been growing for a while, and the pandemic has only increased that interest, but it’s not a move that could or should be made hastily,” said Melanie Aguste, an international tax and estate planner based in Abu Dhabi.
“Aside from social factors to consider, retirees interested in moving abroad may need to navigate residency and other financial and regulations, particularly if you are looking to gain citizenship in another country by investing or buying property, among a myriad of other costs that can crop up.”
Cost of getting tax residency when retiring abroad
People who are ready to move need to apply for a residency visa, which must be obtained at the destination country’s consulate. “It’s especially critical to start tax process correctly,” said tax researcher Brijesh Meti, as “there’s a lot of paperwork and it can take several months”.
“Aside from expecting to see basic documentation such as passport information, travel insurance, and your planned local residence, once in the country, the norms surrounding applying for residency related tax permits vary starkly.
Aguste agreed that a commonly seen mistake among new retirees is they assume the residency and related tax processes are the same for every country. “Each country has specific requirements, and not knowing exactly what’s necessary will make the process longer and costlier,” she added.
It’s especially critical to start tax process correctly as there’s a lot of paperwork and it can take several months
Getting retirement residency through investment route
“There is another way to gain residency that could streamline the process of applying, but it comes with a risk. A number of countries such as Portugal and Greece, plus some Caribbean and South American countries, offer residency by investment permits, or golden visas, to overseas investors.”
One of the popular retirement citizenship investment option is to buy property, according to Aguste and Dubai-based investment advisor Brody Dunn. For example, investors can spend 250,000 Euros (Dh1 million), in Greece on property and get residency permits. Portugal also has property options between 280,000 Euros and 500,000 Euros (Dh1-2 million), depending where the property is located.
“Generally, residency can be renewed for as long as the investment remains, although the European Commission is beginning to consider tougher rules that could diminish the appeal of golden visas,” said Dunn. “Retirees shouldn’t regard these programs as an easy way to buy a retirement home and a residency permit in a particular country. These should still be considered as investments.”
What are the tax considerations when retiring overseas?
“Some expats are surprised to learn they still need to pay income tax when retiring overseas. While most retirement destinations have tax treaties with a number of countries, and those treaties will determine which country gets paid what, taxable income overseas mostly include pensions, rents, dividends and interest from investment brokerage and savings accounts, among others.”
Aguste explained that if you plan to retire to the US, for example, expats must also report foreign bank account holdings in excess of $10,000 (Dh36,700), including funds in savings accounts. “Similar tax norms exist in several other countries as well, particularly across Asian countries,” she added.
“The biggest thing with international reporting is there’s all these kinds of traps for people who don’t really understand what they’re doing, and these traps often come with penalties,” she said, noting penalties can often be as high as $10,000 (AED36,800) for not filing out needed forms to disclose assets.
“Some countries have special tax programs that minimise taxation for retirees. Each country’s tax rules are unique and each one will interact with your taxes in slightly different ways. Also keep in mind that no tax treaty covers health savings accounts or other savings schemes,” she added.
“These will be fully taxable in countries that tax worldwide income. And some countries tax mutual funds and exchange-traded funds (ETFs), which is why investors should work with an advisor who understands foreign tax rules.”
(How are mutual funds different from exchange-traded funds? Both investment avenues pool funds from investors and puts savings to work in different forms of investments. While exchange-traded funds (ETFs) are actively traded throughout the day, mutual fund trades close at the end of the trading day, allowing ETFs to have more time in the market. Mutual funds are actively managed, and ETFs are passively managed investment options.)
Key takeaways
When you are planning to retire abroad, financial planners would widely recommend that the most cost-effective means to settle overseas is to buy property there. But doing so is likely to create some unexpected bills and charges.
“Across Europe, Australia, and the US, for example, house buying comes with a whole range of tax tariffs which vary from country to country, and quickly mount up,” explained Aguste. “Make sure you're very clear on the costs involved before you make a realty transaction.
“Whichever country you're headed, if you draw income in one currency, and are planning on spending in another, then you need to also understand and make allowances for exchange rate fluctuations. If not, you might find yourself with a hefty bill to pay.”
The way out of such a costly predicament, according to forex experts, is to seek help from a foreign exchange service that will enable you to avoid market volatility by fixing a rate before a financial transaction and also make use of rate alerts to keep a watch on steep drops in the currency’s value.
Before retirees move, Aguste and Dunn both recommended that it’s always considered safer to consult with a tax advisor who understands the tax laws of their new home country.