Aliyah: Moving to Israel is good for your wealth
Olim may have found a profitable new home for their savings, says Simon Benarroch
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Not so long ago, the thought of moving to Israel in order to save tax would have been laughable, but that has all changed. Israel is now one of the most tax-efficient countries in the world. The way the tax rules work in the UK and how they interlink with the Israeli system makes aliyah from the UK particularly attractive.
The reason is that, a number of years ago, Israel wanted to encourage "voluntary" aliyah. It has had immigration from surrounding Arab countries, Russia, Ethiopia etc, but that was generally due to poor conditions in the home country. However, Israel also wanted to encourage British and American Jews to go on aliyah.
Initially, Israel gave a five-year tax break for new residents on non-Israeli sourced income. Now, noting the success of this, it has increased the break to 10 years. As a result, immigration has risen.
Indeed, traditionally March is not a particularly popular month to go on aliyah from the UK. Most people go either in the summer before the new school year or in December time. In the last few years, there has been a spike in the March aliyah numbers as many people use the opportunity to leave the UK before the commencement of the new tax year in April.
In my opinion, those who can gain the most from the tax benefits are older people or those with significant investment assets. Those who go to Israel to work will not benefit much. This article cannot go into great detail, but highlights some key opportunities:
Inheritance tax (IHT)
Israel does not have inheritance tax. In the UK, IHT is charged at 40 per cent on assets above the allowance. From experience, this is the tax that really irritates people. They feel that they have worked all their life and paid their taxes, so why should they pay tax again for giving money to their children? Israel sees this as an unfair tax and most of my clients are inclined to agree!
Great caution is needed when dealing with IHT - it is not a simply a matter of moving to Israel and IHT magically goes away. Potential IHT liability revolves around your "domicile" not your "residency". Advice is needed on exactly how you should structure your affairs in order to help the process of "losing" your UK domicile. Additionally, a point worth noting is that any assets left in the UK, for example, a property, will always fall into UK IHT, regardless of how long ago you moved to Israel.
Investments and savings
You will not need to pay income or capital gains tax in Israel for 10 years on your investments and savings. However, these should be arranged offshore, so as to avoid potentially having to pay UK taxes and in particular UK inheritance tax.
We manage tens of millions of pounds offshore on behalf of our clients living in Israel. We are able to maximise the return on their savings and investments along with sending regular tax-free income to those that require it.
For those of you who are considering aliyah at some point in the future, your investments can be structured in such a way that they are tax free even while you are still living in the UK.
This is another key area where British olim can take advantage of the Israeli tax breaks. This involves moving your pension offshore into a QROPS (Qualifying Recognised Overseas Pension Scheme). You may benefit during your lifetime and your inheritors should benefit on your demise.
As the law currently stands, when one takes income from their UK pension it will generally be taxable in the UK. Israel will not tax you (as part of the 10-year tax holiday).
HMRC wants to see your pension being taxed; if it is not taxed in Israel (due to the 10-year rule), HMRC will tax it here. I understand that the new tax treaty between the UK and Israel, which has been discussed for the last two to three years (and would have resolved this issue), has now been scrapped in practice.The UK will not ratify the treaty until it has defined Israel's borders. Considering the definition of Israel's borders is an ongoing discussion, I cannot imagine a new tax treaty will be agreed on at any time in the near future. I think it is fair to assume that the issue has become a political one, rather than an economic one.
A QROPS will pay your pension gross (from a non-UK country) and so will not suffer either UK tax or Israeli tax (for 10 years).
The other advantage of a QROPS is on death. New pension rules are coming into force in the next few weeks. These are meant to make pensions more flexible, but I wonder if the real reason behind the new rules is a higher tax take for HMRC. From April, a person taking income from their pension would have their pension pot taxed at 55 per cent upon their death. If you move your pension scheme to a QROPS then potentially there would be no tax to pay on death.
With the right planning, moving to Israel can be particularly attractive, not just for the Mediterranean sunshine but also for your finances.
For more information, contact Simon Benarroch at Raymond James Investment Services 020 8202 1944 or firstname.lastname@example.org. Simon is a regular speaker for the UK Jewish Agency and Nefesh B' Nefesh