Once Brexit takes full effect in 2021, can we expect the tax burden for expatriates to increase for UK property, investments and pensions?
Once Brexit takes full effect on 1 January, can we expect the tax burden for expatriates to increase for UK property, investments and pensions?
In preparation for Brexit, most UK expatriates in the EU have secured residence or put plans in place to settle before the transition period ends in December. While that’s entirely appropriate, the planning shouldn’t end there, especially if you still have assets and investments in the UK.
Taxation after the Brexit transition period
Brexit itself will not affect the double tax agreements that determine which country has the right to tax expatriates. However, two key changes are set to happen from 2021 that may change your tax treatment.
First, UK assets will no longer be EU/European Economic Area (EEA) assets. In some cases, this means they may stop receiving favourable tax treatment abroad.
Second, the UK government will no longer be bound by EU freedom of movement rules for capital, potentially giving them more scope to tax non-residents.
Even without Brexit, once you are living abroad it is a good idea to review whether holding on to UK assets is still in your best interests.
Tax on UK property
Capital gains tax
The UK has gradually increased the tax burden on property for overseas residents. For example, after years without capital gains tax liability, ‘non-resident capital gains tax’ (NRCGT) started applying to non-UK residents selling UK residential property from 2015, and most commercial UK property and land from 2019.
If you are non-UK resident, you may also attract capital gains tax in your country of residence (but can usually receive a credit for UK tax paid).
Beware that from April 2021, non-UK residents face a new 2% stamp duty surcharge when buying property in England and Northern Ireland. If you are resident in the EU and already own a home, even outside the UK, this means you could face up to 17% UK stamp duty costs on UK purchases.
Note that non-UK residents remain liable to UK income tax on all rental income earned there.
UK rental income is also taxable in Portugal if you are resident there, unless you have non-habitual residence.
Although not taxed directly in Spain or France, residents there must declare it as part of their taxable income, which could potentially push you into a higher income tax bracket.
When considering UK property as an investment, residents of Spain or France also need to remember that worldwide property counts towards wealth tax liability there.
How much will a UK property cost you in taxes?
Tax on UK investments
While the tax rules that apply to British expatriates today should not change after Brexit, watch out for situations where non-EU/EEA assets are taxed differently to domestic/EU assets.
In Spain or Portugal, for example, there are no capital gains tax charges if you sell a property there to reinvest in a new main home within another EU/EEA country. In January, once the UK leaves the EU/EEA, expatriates reinvesting gains into UK property may no longer be eligible for this relief.
France residents need to be aware that some key French tax advantages only apply to EU life assurance/assurance-vie policies, so UK equivalents may incur a higher tax bill post-Brexit.
Remember too that once you are non-UK resident, UK investment products such as ISAs become taxable in your country of residence. If you cash-in these investments, local capital gains tax can also apply.
Explore alternative investment vehicles available for local residents that may offer better tax-efficiency as well as potential estate planning and currency benefits.
Can a UK-based adviser continue to support you from 2021? See 4 things to consider
UK personal tax allowances
Currently, non-UK residents receive the same allowances for income and capital gains tax as UK residents, so long as they hold a British passport or are an EEA citizen. However, a few years ago the government seriously considered restricting the personal income tax allowance for non-residents. It is possible these allowances could again become a target for the government to increase tax revenue from non-residents after Brexit.
Tax on UK pensions
Of course, most retired British expatriates have pension funds in the UK, and benefit from leaving them there and drawing income as needed. But, depending on the type of pension and your circumstances, it may be worth weighing the pros and cons of transferring it out of the UK.
Transferring into a Qualifying Recognised Overseas Pension Scheme can provide various advantages for EU residents. Transfers to EU/EEA-based QROPS are currently tax-free for EU residents, but there is a 25% ‘overseas transfer charge’ for other transfers. While there is no change here from 1 January, the UK government could easily extend this to EU transfers once no longer bound by the bloc’s rules.
Another option may be to use the pensions freedom to take your fund as cash and re-invest in a tax-efficient arrangement in your country of residence. Again, seek regulated advice and take care not to jeopardise your retirement savings.
Financial planning should be based around your circumstances, objectives and risk profile, and the decision whether to retain UK assets is no exception. There are various issues to weigh up, taxation being just one of them, but it is worth considering if moving assets out of the UK may be beneficial. Do your research and take personalised specialist advice to establish what would work best for you today and your family in future.
Contact us for a tax and financial planning review
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.