Planning on retiring to Malta? Find out why residency may NOT be your best tax option...

Malta’s tax regime attracts many foreign nationals to the island. There are no wealth taxes, rates or council tax and there are various residence programmes you can benefit from. But which is right for you depends on your specific financial circumstances and needs.

Alliance tax and wealth management partners, Blevins Franks show in this case study that specialist advice is key to ensuring you make the most of your wealth in the most tax-efficient way possible.

Tracey is 59 years of age and single.  She received an inheritance from her grandparents 15 years ago, and from this has built a reasonably-sized buy-to-let portfolio.  She has lived off the rental income, and used the excess to save into ISA’s over the years.  The value of her assets are as follows:

• Her main home in Redhill is worth £800,000
• Her buy-to-let portfolio is worth roughly £2m, with an increase in value since 5 April 2015 of £100,000
• She has ISA’s worth £200,000
• She has a SIPP worth £200,000

Tracey is about to sell her main home, sell down her buy-to–let portfolio over the next 18 months, and make a completely new start in a new country.  She has visited Malta on several occasions previously, and is interested in their history, art and culture.

Having looked at various types of property, she feels £500,000 will buy a sufficient apartment.  She intends to live by drawing down on her capital, but does not envisage needing more than £40,000 per annum.

Malta’s interpretation of residence comes directly from English case law, and they also have a similar common law concept of domicile.

Tracey will be resident in Malta if she spends 183 days or more a year there, but this could be less if she intends to establish residence from the outset.

To encourage people to move to Malta, and buy or rent a reasonably sized property, there are numerous Residency Programmes, which offer a flat rate of tax of 15%.  But, there is a minimum requirement of €15,000 tax per annum, which means an income of €100,000 per annum to make it worthwhile.

As Tracey does not require an income of this size, she may consider not taking advantage of a residency programme, and become a regular tax resident and utilise her position as non-domicillary in Malta.

On this basis, she would be taxable on her Maltese sourced income and gains, but any income generated outside Malta would only be taxable if she remitted it to Malta. In addition, non-Maltese gains are not taxable, regardless of whether they are remitted or not.

Selling the UK main home should not give rise to a tax liability.  Selling down the buy-to-let portfolio is best left until Tracey has departed the UK, as any UK CGT liability will only be charged on the increase in value since 5 April 2015 rather than the whole gain, with relief for the annual exemption.

The Maltese non-domicile rules effectively exempt non-Maltese gains from tax, even if they are remitted to Malta.

Normally you would recommend selling down the ISA’s before leaving the UK, but the Maltese non-domicile rules mean there is no immediate requirement to do this.

The UK-Maltese Double Tax Treaty (DTT) gives the taxing rights on company, private and the UK State Pension to the country of residence (for government pensions, the right to tax remains with the country of source). So, these would only be taxable in Malta.

The Maltese non-domicile rule appears to suggest she could avoid tax altogether if she did not remit her pension income into Malta, but the DTT has a specific clause which allows the UK to tax any UK pension income not remitted to Malta.

Potentially, this could have been eliminated by transferring the SIPP to a Qualifying Recognised Overseas Pension Scheme (QROPS) which as it is outside the UK, would fall outside of the DTT rules.

But, the reduction in choice of QROP territories to basically Malta and Gibraltar provides a roadblock; Malta would mean the QROP would be taxable on Tracey in Malta on the arising basis, and Gibraltar does not allow commutation of benefits in excess of 150% of GAD.  It may therefore be the best Tracey can hope for is to take the 25% tax free lump sum, and then suffer UK tax on the pension income (the UK personal allowances are higher than those in Malta), and perhaps use these monies when she travels back to the UK or elsewhere, outside of Malta.

The excess cash from the sale of the UK main home, sale of buy-to-let portfolio, and ISAs when they are sold down, could be invested in a Maltese compliant offshore Life Assurance Contract.  Any ‘profits’ from investments held within the policy are regarded as capital gains (rather than as in the UK, where it is deemed income), which as we know can be remitted to Malta without a tax charge.

Tracey will need to obtain financial advice from a regulated firm, authorised to provide advice in this area, with advisers holding the required professional qualifications, and with the necessary Maltese tax knowledge.

Blevins Franks have been advising UK nationals retiring to France, Spain, Portugal, Cyprus and Malta for over 40 years, and have a local office in Mriehel, Malta.

Have a tax/pension question about Malta? Fill in the enquiry form below, visit our Financial Planning pages here, or give Blevins Franks a call direct on 0044 (0)20 7389 8133