The top 10 financial planning tips if you’re moving to Australia

1. Transferring your UK pension to Australia

One of the areas of significant opportunity involves UK pensions and Australian superannuation (‘super’) because the tax works very differently for each.

In Australia, superannuation contributions are taxed on the way into the scheme. Investment growth is also taxed but, when taking the super out as income, it is tax-free.

In contrast, in the UK, contributions are not taxed on the way into the scheme and investment growth is not taxed. However, all but 25% of the fund is taxed on the way out. So, you can see that, if UK pensions can be transferred to superannuation, then it is possible to pay little to no tax at each stage.

A UK pension can currently be transferred to super at 55 years of age – increasing to 57 in 2028. It is then accessible at 60 or 65 depending on whether you are still working.

Both schemes have annual allowances – the maximum that you can contribute each year. In the UK it’s the lesser of £40,000 or your annual salary, and in Australia, it’s roughly £14,000. Based on this, it makes sense to pay excess contributions in the UK as far as possible.

Case Study

Scenario – An Australian couple live and work in the UK for five years before returning to Australia. Each earns £70,000 a year, which means that £20,000 each – £40,000 in total, is in the 40% marginal tax bracket.

Let’s focus on the £40,000 in the marginal tax zone. The tax on this will be £16,000 per annum, leaving £24,000 after tax. Saving the £24,000 for five years would result in £120,000 in savings, not including any investment gains. However, if this were paid into a pension, the saving would be £200,000. This means an equivalent guaranteed return on investment of 67% – an extra £80,000 as the 40% tax is avoided. (See Table 1)

If this pension was accessed in the UK, 25% would be tax-free and, depending on other income, the rest would be taxed at the basic rate – currently 20%. This means about £30,000 would be paid in tax. But, if this was transferred to an Australian superannuation scheme, it would most likely be largely free of tax.

Table 1

Conversely, if it were one individual earning £140,000, the tax savings from putting £40,000 in the pension would be £28,500. So, rather than saving only £57,500 over five years, £200,000 would be saved – a huge uplift (See Table 2).

This is the case even if you’re not leaving the UK but will be taxable once taken in the UK except for the tax-free 25%. If you move to Australia, then the proportion that is tax free is likely to be much higher – around 75-100%. It becomes a significant wealth creation opportunity due to the lower taxation on withdrawal.

Table 2

This approach can also work for a UK basic rate taxpayer earning £50,000 – particularly if salary sacrifice is available (Table 3).

When salary sacrifice is used to put money in a pension, the 12% National Insurance (NI) is not payable. Additionally, the 13.8% employer NI is also not payable. Often a company will pass on some or all the NI savings to the employee as an extra pension contribution.

In this example, we’re assuming £10,000 is salary sacrificed and the company NI savings are also put into the pension. So, an extra 20% + 12% +13.8% = 45.8% can be added, equivalent to £14,580 in total. A return on investment of 45.8% is guaranteed.

Even for a 35-year-old, the power of compounding growth means at 65 years of age, this would be worth £47,239 in today’s money (assuming 4% annual growth net of fees and inflation). So, a £10,000 investment can create £47,239 in wealth. This approach is less effective for higher rate taxpayers as personal NI is only 2% (the company rate is still 13.8%).

These scenarios are the case for those retiring in the UK. Just the exit tax is different from Australia.

Table 3

For a British expat, the same process can work if this is planned before emigrating. In any case, a pension pot can be transferred to Australia and potentially benefit from little or no tax on taking the money from Australian super.

The taxation benefits also makes transferring Defined Benefit (Final Salary) pensions a potentially more attractive option, although given the issues and concerns around transferring out of a Defined Benefit scheme, this needs careful evaluation and it’s essential to take financial advice.

Checklist:

• Build a strong pension portfolio
• Maximise pension contributions in the years leading up to moving to Australia to reduce tax
• Use carry forward of pension allowances where applicable
• Ensure your pension is invested to work hard for you while waiting for the time it can be transferred back to Australia
• For basic rate tax payers, consider using salary sacrifice to save 20% tax and 12% NI on pension contributions
• If you have a Defined Benefit scheme, consider a transfer evaluation to Australia

2. Mitigating currency risk

While your pension or other investments are held in the UK, it is possible to place them in investment portfolios denominated in Australian Dollars (AUD).

The switch can take place at an exchange rate that is likely to be favourable – for example $2 to £1. This helps remove currency risk.

When transferring your money, it’s advisable to use a currency trading company as the rates offered are far cheaper than a bank- to-bank transfer. You can also use forward contracts to lock in a transfer rate up to a year in advance to help planning and create certainty.

Checklist:

• Consider using AUD portfolios for investments held in the UK
• Use currency traders to transfer
• Consider forward contracts to create certainty on a future move

3. Dealing with your property

There are three commonly asked questions regarding property when it comes to emigrating to Australia –

Question 1 – ‘Do I sell any properties before or after leaving the UK?’

This is a complex calculation as it depends on each tax regime, your income, Capital Gains Tax rules in both countries, and whether it’s your primary residence. There is no easy way to answer this, and you need professional advice from a tax specialist.

Question 2 – ‘Do I buy in Australia before moving there?’

If you aren’t an expat Australian, this won’t be an attractive option as you would be classed as a foreign investor which is more restrictive and expensive for property ownership.

For Australian expats, it may be worthwhile. If the property is rented, then any losses can be accumulated and applied to your income tax when you are an Australian tax resident again – so they’ll be subsidised by tax relief.

There are also some significant deductions that can be applied to reduce taxable profits that aren’t available in the UK. Unlike the UK, where only a 20% tax credit on mortgage interest is allowed, 100% is deductible in Australia. For these reasons, a rental asset in Australia may be a better option than one in the UK.

There are other costs like land tax in Australia that don’t apply in the UK. However, each state is different, so you need a bespoke assessment.

Question 3 – ‘Should I keep a UK property and rent it when in Australia?’

Again, it depends on income tax and after-tax profits. UK tax will be due, and it will require the use of the double taxation treaty to claim tax credits. Remember also that only 20% of mortgage costs can be claimed in the UK compared with 100% in Australia.

If it was your UK primary residence then you will also dilute the primary residence exemption, resulting in a potential capital gain. Capital Gains Tax on sales in both countries depends on many factors, so it needs careful calculation.

Of course, there are benefits of owning property in terms of rental yield and capital growth in each country. Organising a mortgage while an expat, interest rate differences, and currency risks are all general issues to be assessed in the context of investment goals. Sometimes it is simpler to choose more liquid investment options.

Property is a popular investment because it is tangible. However, in retirement, it isn’t always an optimal investment unless it’s your primary residence. The main reason is that capital growth can’t be turned into income, only the net rent profit. In contrast, other assets like ISAs or managed funds can provide income regardless of whether growth was from income or capital gains. This all depends on your financial goals and needs.

Checklist:

• Get professional advice at least two years before a move as many of these choices need careful calculation and to use at least two years of UK tax UK allowances (e.g. Pension Annual allowance)
• Research the property market as not all areas will provide an increase in property value
• Ensure you get professional tax advice for the property to ensure full benefits are taken and tax minimised
• Consider the simplicity and transparency of liquid assets investments like bonds, active and passive funds, or even pension contributions depending on your age

4. Changes in taxation when becoming an Australian tax resident

The general rule is that non-UK residents are not subject to Capital Gains Tax (CGT), which means that you can sell most UK or overseas assets after ceasing UK tax residency and not pay UK CGT.

Once you become resident in Australia, worldwide capital gains will be assessable to Australian tax. This includes unrealised currency gains on disposal of overseas assets. So, the timing of disposals is a key area of planning. UK ISAs will be subject to Australian CGT and so it may be best to cash them in before leaving the UK, then reinvest in Australian assets once you’re an Australian tax resident.

If you are comfortable putting your money aside for ten years, then offshore bonds will be tax-free in Australia after that period. The money is accessible but there are exit costs and tax consequences before the end of the ten-year period. This may be an alternative to ISAs for expats planning to return.

General UK investments (OEICs, investment trusts, shares) that are subject to CGT, or onshore bonds that are subject to income tax, all need to be assessed before leaving. You need to determine their tax impact in Australia if held, or where and when it is best to dispose of these assets. Assets will still be liable for UK tax, although tax credits are available.

Spousal transfer with no capital gains implications is not available in Australia, so asset transfers between spouses prior to leaving may be beneficial.
These are all complex calculations requiring professional determination.

Checklist:

• Get professional tax advice more than a year before any move
• Consider encashing before leaving the UK to keep it simple
• Consider Spousal transfer of assets prior to leaving the UK
• Consider the timing of your move to minimise tax in that financial year. (See Section 9)

5. Minimising Inheritance Tax (IHT)

Inheritance Tax doesn’t exist in Australia. However, if any assets remain in the UK, they will be subject to IHT – payable on the estate value over the IHT allowance, which is £325,000 (2020/21 tax year). This may include gifts of UK assets made within the last seven years.

For a Brit in Australia who remains UK domiciled, IHT will be liable on their worldwide assets, even as a permanent resident in Australia. It is possible, but challenging, to change domicile if you’re planning to stay in another country permanently, but intentions and ties to the UK need to be evaluated. This is best managed with professional advice.

Pension assets are exempt from IHT so any left here in preparation for transfer to Australia should be protected.

The UK system often requires payment of IHT before the completion of probate, which can make it difficult for beneficiaries. Consideration should be given to prior disposal of these assets if possible.

Checklist:

• Make a ‘domicile of choice’
• Consider disposing of UK assets
• Consider using life insurance to cover any IHT liability
• Trusts are an option, although not always tax-efficient
• Ensure pension beneficiary nominations are up to date

6. Setting up Wills and Powers of Attorney

Wills and Powers of Attorney are different in each country and may not apply to assets in other countries. All need to be kept up to date.

For those in Australia, if assets are willed to children or relatives who are resident in the UK, then CGT will apply on the transfer. This can leave a large tax bill but possibly no funds to pay the tax owing. This may result in a forced disposal of the assets to pay the tax.

Spouses or relatives are not automatically given Power of Attorney over your assets in the UK so this must be specified, or a third party will be assigned.

Checklist:

• Check your Will and Powers of Attorney in both countries if assets remain in each
• Ensure an Australian Will is in place for Australian assets if the beneficiaries live in the UK

7. Arranging life cover and income protection

You may have taken out Life Insurance, Income Protection or Critical Illness insurance policies in the UK.

It may be worth understanding whether they will pay out if you move to Australia. If you are moving to Australia, then you may wish to cash them in or cancel them, but obviously not before you have alternative cover in place.

Even if they do pay out, some Australian super schemes have insurance arrangements attached. It is worth understanding if they are better alternatives.

Checklist:

• Review all your UK insurance policies to see if they still provide the benefits intended when you live in Australia
• Check what your super schemes may provide and the conditions
• Ensure continuity of cover by cancelling only once alternatives are in place

8. Receiving your UK State Pension in Australia

The UK State Pension is payable in Australia, but it is not subject to the ‘triple lock’ benefit so will not increase over time. It may therefore be worth ensuring you have as full an NI payment record as possible. State Pension provision in Australia is income and asset-tested and therefore relatively hard to get.

The full UK State Pension is around £9,700 per annum (or around $17,500) but it takes 35 years NI contributions to achieve, and a minimum of ten years to be eligible.

Checklist:

• Check and consider topping up your NI record before leaving the UK.

9. Capitalising on the transition timing

When to formally move from the UK to Australia can be an important decision.

It can be tax-effective to split a tax year between the countries, as both have full tax-free allowances even if you’re only there for a partial tax year. However, tax credits or deductions may provide greater benefit with close to a full year of income, so returning for a full Australian tax year may be best.

Timing may also impact UK capital gains decisions in terms of both tax systems and the location of the asset.

Poor choices at this time can be very costly if you end up trapped in the worst tax situation in each country.

As mentioned earlier, there is no Spousal transfer of assets to avoid CGT in Australia, so it may be best to do that before leaving the UK.

Checklist:

• Always get tax advice before leaving and, ideally, more than a year in advance to make the best use of annual tax allowances
• Consider the optimal timing for income tax purposes
• Assess the pros and cons of asset disposal and when and where it is best to sell them
• Utilise CGT asset transfer between spouses before leaving the UK
• If you’re not working a full UK tax year you may be eligible for a tax refund as tax liabilities are calculated on the presumption that you are here for a full tax year

10. Dealing with a change of mind

As we said in the introduction, becoming an expat is a significant step to take, and it’s perfectly understandable if you were to have second thoughts after a certain period.

As long as you stay in Australia for at least five years, pensions transferred to Australia are unlikely to be classed as tax avoidance in the UK but requires great caution. However, pension access is now at 60 or 65 years of age and it cannot be transferred back to the UK as a pension.

Your super will be taxed on remittance in the UK if you take it after returning to the UK, except any component earned from Australian employment prior to April 2017. The balance will be subject to tax. This can be taken in lump sum chunks to remain in a lower tax bracket. If your super is taken as an income stream each year, it will be taxed in the UK as income.

Ideally, you should look to stay until you can take your super as a tax-free lump sum while in Australia and then return to the UK. Australian assets will be subject to IHT if returning to the UK and you are UK domiciled. Superannuation, unlike UK pensions, will be considered part of your estate.

If you want to come and go between the two countries, you may be able to engineer the optimal tax residency status. Be warned though, if you get it wrong, you could be classed as tax resident in both countries which will impact the tax treatment significantly.

Checklist:

• Be aware of the implications of transferring pensions and changing your mind. It may be best to settle in Australia and, when comfortable, transfer pensions assets
• If you’re unsure about whether you would stay, other investments like offshore bonds may provide some flexibility
• Seek tax advice about other assets before leaving Australia, ideally a year or two in advance
• If moving between the two countries, be very careful about tax residency as it is possible to be caught out in both