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Sam
Sam, Accountant
Category: Tax
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I am in the process of buying a house in portugal and will

Resolved Question:

Hi
I am in the process of buying a house in portugal and will become a Portugese non habitual resident (NHR) - I am 53 Years old and will be able to access my pension in 18 months. Am i correct that because there is a double taxation treaty between Portugal and the UK I could withdraw my pension in its entirety tax free? Portugal are offering a 10 year dispensation under the NHR scheme. Are there any pitfalls here - would there be a 45% tax deduction by HMRC which I would have to claim back or could this be avoided?
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.

Hi

Thanks for your question

No your understanding is incorrect I am afraid. The double taxation treaty menas that any tax suffered from a UK source would NOT be charged tax twice on the receiving country.

So tax will arise in the UK but then your declaration of the pension and any tax suffered would be taken into account for Portuguese tax position.

(So 25% might be possible to be drawn tax free and the remaining 75% liable to UK tax and the appropriate tax rates but usually the cut off age starts at 55 before a quarter of the pension pot can be drawn tax free - so do check with your pension provider. )

Thanks

Sam

Customer: replied 1 year ago.
The information I have received from several sources is as follows:
"Foreign pension income is treated particularly favourably.For example a private pension paid from the United Kingdom to a non habitual resident in Portugal (with the exception of some Civil Service and Public Schemes) will not be subject to taxation in the United Kingdom as the competent country to apply taxation is Portugal and willbe exempt from taxation under the NHR scheme."
This theme is mirrored on several sites referring to the Portugal NHR scheme - I also know people that are moving there expressly to avoid UK tax. Please can you recheck and reconfirm as your advice, swiftly given, is counter to everything that is out there on line.
Expert:  Sam replied 1 year ago.

Hi

Your first tax position of any UK source falls in the UK so HMRC WILL tax you on the pension as they have to follow UK legislation.

There is the ability to apply for No Tax status in the UK - but this IS on the strict proviso that the country in which you will reside takes up the tax baton and as there is no tax baton from what you advise then HMRC will not release the No Tax status on the pension) and this relates to a regular monthly pension position not a full down draw which is what you asked after.

If you wish to take this forward - you would need to wait until you were 55 - take 25% tax free and then allow the monthly pension to be established (so let the first payment get made) , and then apply for NT (NO tax on form P85 for HMRC to review if you qualified as not resident ) If HMRC agreed you could be treated as not resident this would then allow them to issue Tax code NT to your pension provider would then apply against the next pension payment allowing tax free payment. Then under this preferential tax treatment - you could have your pension come into Portugal with no taxation on it all the while this scheme lasts.

Thanks

Sam

Customer: replied 1 year ago.
My pension is in a SIPP and therefore there won't be a monthly pension established. Obviously I have no intention of drawing anything until I am 55. I have been non UK resident now for over 2 years (living in Gibraltar) and am in the process of buying a house in Portugal. Once bought I shall become a Portugese NHR and obtain the NHR residency certificate. Would it be at this point that I should complete a P85? Once I have proved non residency status would I not then receive an NT code? I assume I could then furnish this to the Pension administrator who would allow me to withdraw any amount free of holding tax (is this your understanding?) ..many thanks for your help.
Expert:  Sam replied 1 year ago.

Hi

Thanks for your response

You should have completed a P85 as soon as you were due to leave the UK so HMRC could establish your residency status for that year and subsequent tax years - I would rectify this as soon as possible - link here for the P85

https://www.gov.uk/government/publications/income-tax-leaving-the-uk-getting-your-tax-right-p85

This provides the option of completing online (if you are registered for online services) or to print off a paper copy, complete and post to HMRC

You only are issued an NT code if you have a source of income in which to use it against, which you have and will not (as the SIPP is not a income that can be taxed/paid tax free through the PAYE system) so this is not a viable option unless you make a test withdrawal initially after age 55 so that it highlights on HMRCs radar thereby allowing a PAYE record to be created by HMRC and a tax code issued (NT) But this is a long shot.

Instead you will normally have to suffer the tax deducted (code OT so the correct rates are applied) and then claim a tax refund through self assessment (with a pension part of the main SA100 return and also complete SA109 residency and remittance) which then should see HMRC reviewing for any refund due.

But usually with SIPPS you are only permitted to take a certain amount per year - so do check with the SIPP provider. And if this proves to be an issue then a suggestion that a consideration of transferring the whole pot into QROPS - but do take pension advsie and also what terms and conditions apply with accessing funds and the timeline relating to this.

Tis should be a transfer that can be made tax free - then fall out of UK jurisdiction -

BUT ensure it has the flexibility that you require and the ability to action also at 55

(I am sure you can appreciate we are tax experts and not pension or financial advisers!)

Do let me know if I can assist further - or, if you have all that you need, then it would be appreciated if you could rate me for the level of service I have provided (or click accept)

Thanks

Sam

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