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A bit of preparation can save you money
What do you do if it’s time to go home?
Maybe you no longer have a job and have to move back. Maybe you (or your partner!) have fallen out of love with this place and it’s time to move on.
In an ideal world, you need to prepare for this over a year in advance. If you’re on your way home or to a different country shortly, then do what you can.
The Joy of Tax
The biggest issue is going to be tax – unfortunately the most complex and least exciting issue. Getting a grip on your future tax situation can save you A LOT of money. When the door slams shut on your expattery, there may be no going back. You might get a tax hit that you could have avoided even a day before you stepped off the plane. Don’t be that person.
There’s little point in reading up on tax regulations in your future country more than 2 years in advance, as the regulations change so frequently. As the time gets closer though, you need to get on top of it. Many tax advisors tend to have little clue about expats, even if they pretend they do. Real tax experts are often eccentric, busy, pricey or don’t get back to you for weeks – sometimes all four. So they will be of little last-minute help.
Here’s where you can get some reasonable advice:
– Your government’s website, plus some clever googling to get to the relevant bits
– A financial independence fb group or website relevant to your future country and citizenship (e.g. Bogleheads)
– Websites of the big 4 accountancy firms, some sites and countries are better than others
– A recommended tax advisor (be careful they are not affiliated with commission-driven salesmen)
– Books (e.g. for Brits, taxcafe.co.uk have a great book on expat taxes)
– And that’s probably it, sadly
Try to back every key point up with evidence from two sources, unless it’s direct from your government and it very clearly applies to you.
Your country matters
There are 5 main types of country to move to, so know which category yours falls into and plan accordingly:
- US and South Africa have been busy taxing its citizens anyway, so not much changes
- Will tax you on your worldwide income and capital gains (most Western countries)
a) Will tax you on your realised capital gains from the day you moved back (e.g. Australia)
b) Will tax you on your realised capital gains from the day you bought the asset (ouch! e.g. UK)
c) Will tax you on your unrealised capital gains on stocks (double-ouch Ireland!)
- Will tax you on your local income but not on global income or gains (lots of Asian countries)
- Won’t tax your income or gains at all (thanks UAE)
If you earned money overseas, you can generally move it to your new country tax-free, unless you haven’t been away for very long. Where you should be careful is on the timing of bonuses, redundancy packages and gratuities. Most of us do not move back on Day 1 of the new tax year, so you may then have a ‘split’ tax year, with one half of low-tax freedom and a second half of high-tax misery.
If you receive any money after you have moved, it could well be taxed and at a very high rate if it’s a decent amount. Even worse, the taxman may disagree with you on what date the split occurred, thus grabbing your bonus! Those with empty property at home and no long-term rental contract in their previous country are most at risk.
It might be worth going travelling for a few weeks until you’ve received your money, though I appreciate travel is a bit difficult at the moment. Alternatively delay going home for as long as you can, until the money is in your account.
Getting taxed on your gains can come as a shock to former expats, as we’re just not used to it. If your assets have risen significantly in value since you purchased them (property or stocks), it’s often worth selling them before you move home. This is especially true of countries like the UK that will tax you on the gains since you bought the asset, not since you moved back to the country. That’s a big difference!
Taxes are usually on realised capital gains (unless you live in Ireland, sorry). So a stock goes up from $100 to $110, that’s an unrealised capital gain of $10. If you sell, it becomes a realised capital gain of $10 and the taxman starts to take notice. Selling before you leave and buying as soon as you arrive means you haven’t been out of the market for long but you have reset the clock on your capital gains.
You may well want to switch to a broker based in your home country anyway, especially if you will now be earning in your home currency. If you have an offshore brokerage such as Interactive Brokers, there’s no need to close it, and you can keep all your funds if you won’t get taxed on your worldwide income.
Capital gains tax isn’t always as painful as it seems – you will get a tax-free capital gains allowance each year. Many countries have tax-free savings accounts up to a certain level – use them immediately and max them out each year! In the UK, the simple and tax-free ISA could one day overtake the complex and expensive pension as the main retirement savings vehicle.
Not many people have huge gains at the moment, because the market is down! If you realise a capital loses by selling for lower than you purchased, you can in many countries use that loss to offset capital gains in future years. So it may still be worth selling at a loss to save future taxes, especially before the market recovers.
Get started with my free guide:
3 Steps to Expat Financial Independence
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If you suddenly have to go back home
If you’ve lost your job or need to return home in an emergency, don’t worry too much about currencies. There may not be the most favourable exchange rate at the moment but that is low on your list of priorities. Exchange enough cash so you have plenty to get you through the turbulence of moving home, renting a place, buying furniture etc.
You can always convert the rest of your cash buffer to your home currency over time, though trying to predict currency movements is impossible. Unless it’s a real emergency, try not to get ripped off on the exchange rate.
Using banks is often a good way to get ripped off on fees and foreign exchange spreads (the difference between what you pay and what the market rate is). Look into using an exchange house or online broker such as CurrencyFair, TransferWise or Revolut instead. Exchanging currencies on the Interactive Brokers platform is also really cheap if you already have an account with them for your fund investing.
If you’ve got some time before you move home, then the information below is for you.
Cash buffers & currencies
If you have no income in your home currency and that currency suddenly gets a lot stronger against USD before you move back, maybe you won’t be able to afford that size of house or have such a fancy retirement initially.
So 1-3 years before you move back, you might want to gradually move 50-75% of your cash buffer into your home (or new home) currency. This is less important if you will only stay there for a couple of years, we’re talking about near-permanent home really. Keep some buffer in the currency of your current location, just in case something rough happens and you need the cash immediately.
Investments & currencies
Figuring out which currencies to keep all your assets in is one of those things that can tie you in knots, but doesn’t matter so much if you’re investing in a diversified global portfolio. Don’t let it stop you getting started. And if you aren’t planning to move home for years, it matters even less – invest in the currency you earn in, especially if that’s dollars.
For a global stock fund, the underlying currency is US dollars, no matter what currency you sent over to purchase it. And when you go home and start purchasing more of that fund in your home currency, you will still be effectively converting it into dollars. So there’s nothing to think about here.
Bonds are sensitive to currency though and here you might want to plan your move back. You can buy bond funds containing bonds issued in your currency by your government (or other governments). For example, IGLS (iShares UK Gilts 0-5 Year UCITS ETF) in GBP or CBE7 (iShares EUR Government Bond 3-7 Year UCITS ETF) in EUR.
Or you can buy a global bond fund hedged into your home currency, so that the movement in that currency against others does not impact the value of the fund, e.g. IGLH (iShares Global Government Bond UCITS ETF GBP Hedged). You may pay 0.05% per year extra for that hedging, and the benefit may be questionable unless you think, for example, the UK is going to disappear as an entity and take the pound with it.
National Insurance & Social Security
This varies a lot between countries and is constantly changing, so check your government’s website for the latest info. Sometimes Google can actually help you find the right page on the website better than the site’s menu can.
While it may be that in 30 years’ time there will be no government pensions, for now this is the ultimate safety net. If you’ve paid your dues, you will get access to a state pension, healthcare and other benefits in your old age back in your home country. There are plenty of horror stories about expats living it up abroad and then discovering they won’t even get a basic pension to survive on back home when they retire.
For UK citizens, it is many times cheaper to make National Insurance contributions (including back contributions for previous years missed) while an expat. You will pay Class II rates, of about £3 per week. Can you afford that? Yes you can. You must get it set up before you return to the UK and the process is quite involved. Start of by checking the amount of your state pension on the HMRC site and don’t believe them when they say it will cost £780 per year to backdate contributions.
I’ll stop there as this will be an entire guide in itself, but I wanted to plant the seed – pay those contributions before you move back!
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