In the aftermath of the UK general election’s unexpected outcome, we reach the milestone of one year since Britain voted to leave the EU. What do we know today about how Brexit might affect expatriates in Portugal?
Has the UK election changed anything for Brexit?
Faced with a hung parliament as the Conservatives failed to win by majority, Theresa May secured support from Northern Ireland’s Democratic Unionists (DUP) to retain leadership.
The election outcome, however, is generally considered a public rejection of her hard-line “no deal is better than a bad deal” Brexit approach. The big question now, then, is whether she will be able to pursue a ‘hard Brexit’ or yield to pressure for a softer strategy. This could mean Britain keeps access to Europe’s single market and remains part of the European Economic Area (EEA) or similar arrangement, with some freedom of movement.
How long until things change?
By triggering Article 50 earlier this year, Theresa May put Britain on course to leave the EU on March 29, 2019. That deadline still stands, so EU membership and associated rights for expatriates living in Portugal should remain until that date at least.
However, the nature of Brexit will only become clearer as negotiations develop. The Prime Minister intends for official discussions to start the week beginning June 19.
Reassuringly, the 27 EU states jointly announced that securing reciprocal citizens’ rights to residence, work and healthcare is “at the very top of our agenda” as part of “an ambitious solution where those affected continue to enjoy their rights”.
Theresa May has made it clear she agrees, provided guarantees are mutual. The terms of new reciprocal agreements, however, could prove less favourable for expatriates than today. Now is the time to look into securing your position in Portugal – before rules change – if you want to maintain current benefits.
Should you expect higher taxes?
Those currently enjoying tax advantages as non-habitual residents (NHR) can rest assured this will not be affected by Brexit. As a tax regime from the Portuguese government, NHR is available to any eligible foreign national, so Britons can continue to benefit and apply.
With taxation being a domestic – not an EU – matter, the tax treatment for other Portuguese residents should not change post-Brexit. The UK/Portugal tax treaty will continue to set the rules for taxing expatriates.
One exception concerns real estate. When selling a property in Portugal, you escape capital gains tax if you use the proceeds to buy a new home within another EU/EEA country. So if you are planning to sell your Portuguese home to reinvest in a UK property, consider doing so while Britain is within the EU/EEA to minimise your tax exposure.
Pounds or euros?
In these changeable times, the value of sterling is clearly vulnerable – the unexpected election news prompted the pound to drop 2% against the euro overnight.
Although currencies can swing both ways, if you have no choice but to convert from pounds to euros at a particular time – for example, by withdrawing UK pension income – this volatility can be costly. Living in Portugal, you should receive some income in euros to reduce currency exchange risk. Look for structures that let you hold investments in multiple currencies or consider transferring UK pensions to arrangements offering currency flexibility.
What about UK pensions?
While Brexit should not affect accessing or transferring UK pension funds, one uncertainty is the annual inflation increase in State Pension payments. Not currently guaranteed for expatriates outside the EEA, this could be an easy way for the Treasury to save money in 2019.
The UK’s new ‘overseas transfer charge’ may suggest post-Brexit changes for private pensions. Expatriates transferring to Qualifying Recognised Overseas Pension Schemes (QROPS) may benefit from tax-efficiency, estate planning advantages and flexibility over UK pensions. But since March 9, transfers to QROPS outside the EEA attract 25% taxation unless you live in the same jurisdiction – and liability lingers for five years.
Currently, this does not affect transfers to QROPS based within the EEA, like Malta or Gibraltar. However, Brexit offers the Treasury more scope to recoup revenue from Britons in Europe, so could prompt further penalties on pension transfers or make it harder to take advantage of today’s high transfer values for ‘defined benefit’ pensions. Consider acting now under current rules, but take personalised, regulated advice to avoid pension scams and ensure a suitable approach.
With so much uncertainty ahead and current opportunities potentially expiring in around 18 months, now is the time to review your financial planning and explore your options. With the right strategy in place, you can plan accordingly as Brexit unfolds.
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; an individual should take personalised advice.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.