Finance expert, Nojan Rahimi from Blutin Finance breaks everything down for us.
Moving abroad is an exciting and life-changing experience, but it also comes with its own set of financial challenges. One significant concern for many individuals is the potential of paying capital gains tax twice—once in the country of origin and again in the new country of residence.
Understanding Capital Gains Tax
Capital gains tax is a levy on the profit from the sale of assets or investments. The tax is triggered when you sell an asset for more than its purchase price. Different countries have varied rates and rules regarding capital gains tax, and some may tax worldwide income, including capital gains.
Know Your Tax Residency Status
Tax residency status determines how you will be taxed in a particular country. Most countries tax residents on their worldwide income, while non-residents are usually taxed only on income earned within that country. Determining your tax residency status in both your home country and your new country is the first step to understanding your tax obligations.
Utilise Tax Treaties
Many countries have bilateral tax treaties designed to prevent double taxation. These treaties often provide mechanisms such as tax credits, tax exemptions, or reduced tax rates on certain types of income, including capital gains.
Steps to Utilise Tax Treaties
Research the Tax Treaty: Check if your home country has a tax treaty with your new country.
Understand the Provisions: Each treaty will have specific provisions. Focus on the articles related to capital gains.
Seek Professional Advice: Tax treaties can be complex. Consulting a tax professional familiar with international tax law is highly recommended.
Timing Your Move
The timing of your move can have significant tax implications. If possible, plan the sale of assets before or after changing your tax residency status to take advantage of more favourable tax conditions.
Considerations
Pre-Move Sales: Selling assets before you become a tax resident in your new country might help you avoid capital gains tax in that country.
Post-Move Sales: If your new country has more favourable capital gains tax rules, it might be beneficial to delay the sale until after you’ve established residency.
Utilise Capital Gains Tax Exemptions
Some countries offer exemptions or reliefs on capital gains tax for certain types of assets or under specific conditions. For example, primary residences often have significant capital gains exemptions.
Examples
Primary Residence Exemption: Many countries offer exemptions for capital gains on the sale of a primary residence.
Small Business Exemptions: There may be exemptions or reduced rates for gains from the sale of small business assets.
Consider a Tax-Deferred Account
In some cases, transferring assets into a tax-deferred account, such as a retirement account, before moving can help defer capital gains tax.
Benefits
Deferral of Tax Liability: Contributions to tax-deferred accounts can often grow without immediate tax implications.
Potential for Lower Future Tax Rates: You might withdraw from these accounts in the future when you may be in a lower tax bracket.
Dual Residency Planning
For individuals who may be considered dual residents, it’s crucial to understand the tax rules in both countries and how they interact. This might involve:
Claiming Foreign Tax Credits: If you pay capital gains tax in one country, you may be able to claim a credit for that tax against your liability in the other country.
Determining Tie-Breaker Rules: Many tax treaties include tie-breaker rules to determine tax residency in cases of dual residency.
Professional Tax Planning
Given the complexity of international tax laws, professional advice is invaluable. An experienced tax advisor can help you:
Analyse Your Situation: Understand the specific tax implications based on your assets, income, and the countries involved.
Optimise Your Tax Position: Develop a strategy to minimise your overall tax liability.
Ensure Compliance: Ensure you meet all reporting requirements and avoid penalties.
Moving abroad is a significant undertaking with many financial implications. By understanding your tax residency status, leveraging tax treaties, timing your asset sales strategically, utilising exemptions, considering tax-deferred accounts, and seeking professional advice, you can effectively avoid paying capital gains tax twice. Careful planning and informed decision-making are essential to ensure a smooth and tax-efficient transition to your new life abroad.
