It is important to review your wealth management arrangements from time to time, to ensure they continue to be effective. This includes your tax planning. British expatriates in Portugal need to follow changes to both local and UK taxation which affects them.
It is important to review your wealth management arrangements from time to time, to ensure they continue to be effective. This is particularly important for your investment portfolio, but also applies to tax planning. With tax regulations changing frequently, you need to consider the tax efficiency of your assets.
If you live in Portugal you need to follow changes to local tax rules and how this affects you. British nationals also need to keep up to date with reforms to UK taxation which may impact you.
The biggest change is to UK pensions, which I covered in my article last week, but other reforms are less welcome.
Capital gains tax on UK property
Under current legislation, gains made on UK assets are tax free for long-term non-residents. This will change from April 2015 when all non-residents will start to be taxed on gains made on the disposal of UK residential property.
The government said it was only fair that non-residents should pay tax on the sale of property the same as residents do. This applies to trusts, companies and partnerships as well as individuals, and to investment as well as residential property.
The consultation document on how this would work was published in June. It was not clear if the new rules will only apply to gains arising from 6th April 2015. It looks that way, but we still need confirmation.
Under the proposals, the net gain will be added to the owner’s other UK source income and taxed at the UK marginal rates of capital gains tax of 18% and 28%, depending on the amount of income. The UK annual capital gains tax exemption will be available.
As a Portugal resident, you are also liable to tax in Portugal. Under the UK/Portugal tax treaty you can usually offset Portuguese tax against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK; if lower, you do not get a refund for the difference.
UK personal tax allowance
Under current UK tax law, non-residents with taxable income arising in the UK benefit from the UK’s personal allowance. HM Revenue & Customs estimate that this costs the exchequer around £400 million each year.
The UK government is now considering whether entitlement to the UK personal allowance should be restricted for non-residents, and published a consultation document in July. The proposal is to remove the allowance from most non-residents, though those with a strong economic connection to the UK (likely to be based on a percentage test) would continue to benefit.
The view outlined in the consultation document is that although most non-residents would face increased tax liabilities in the UK, most would be able to claim relief in their country of residence, and so would not generally pay more tax overall.
This does however depend on the tax rates in their country of residence compared to the UK, and those living in low tax jurisdictions are likely to end up paying more tax than they currently do. Your tax liability in Portugal on the UK source income may well be lower than the UK liability; especially if you are eligible for the Non-Habitual Residence Scheme under which most sources of UK source income are exempt in Portugal.
With regards pension income, the government believes most retired expatriates would not be affected because (1) provisions of tax treaties generally mean that UK state, personal and occupational pensions are only taxable in the country of residence; (2) they do not have other income that is taxable in the UK, or (3) they are UK resident for tax purposes.
Under most tax treaties, including the UK/Portugal one, government service pensions are only taxed in the UK. However the document states that the government is concerned that individuals in receipt of such pensions, who are not eligible for double taxation relief, would be disproportionately affected. It does not intend to raise taxes on vulnerable groups or in situations where the UK has sole taxing rights.
However, if you have other UK source income such as rental or investment income, you may wish to reconsider the tax efficiency of your assets. Losing the personal allowance on such income could increase the effective tax rate on a government service pension as well.
Those who own property in the UK which they rent out could therefore potentially be hit twice, first with tax on the income, then on the capital gain if they decide to sell the property.
The personal allowance restriction is still a consultation, so it is possible that the proposals will change. If you will be affected by these developments you should seek personalised advice.
7 October 2014
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; an individual is advised to seek personalised advice.