What do you need to know to secure residence benefits, currency flexibility and avoid higher taxation on UK assets and pensions when Brexit takes full effect?
At last we have some clarity around Brexit. While we still don’t know what the UK’s new relationship with the EU will look like next year, the transition period provides some certainty until December 31, 2020.
If you are living in Portugal, what might change in 2021 when it comes to residence, taxation and UK pensions, and what steps can you take now to prepare?
Securing residence and existing benefits
UK nationals who are lawfully settled in Portugal before the end of the transition period can lock in a lifetime of citizens’ rights here under the UK/EU Withdrawal Agreement. This protects access to healthcare, social security, education and employment opportunities for as long as you remain resident.
If you already hold residency papers – whether temporary or permanent residence – you will need to convert these to the new documents (when they become available). Although the Withdrawal Agreement allows up to June 30, 2021 for this, register as soon as possible to protect your position.
Beware that you forfeit these guaranteed rights if you are absent from the country for five consecutive years. Also, there is no onward freedom of movement, so if you want to move to another EU state from 2021, you would have to apply as a non-EU/EEA citizen.
Anyone arriving in Portugal after December 31, 2020 will be subject to the new residence requirements. While yet to be defined, these are set to be much more stringent than today.
Taxation after the transition period
Each country sets their tax rules, not the EU, and tax treatment depends on residence, not nationality. Similarly, the UK-Portugal double tax treaty is independent of the EU. As such, Brexit itself has no effect on how Britons are taxed in Portugal. However, some non-EU/EEA assets are currently treated differently, so those with UK assets and investments are more likely to see increased taxation post-Brexit.
For example, if you sell a home in Portugal to buy a British property once the UK is outside the EU/EEA, you may no longer be eligible for capital gains tax relief.
In any case, the way you structure your assets and wealth can make a significant difference to the way you are taxed. Residents in Portugal can take advantage of highly tax-efficient investment opportunities that may also provide further benefits such as currency and income flexibility and estate planning advantages.
UK pensions after the transition period
UK nationals settled in the EU before December 31, 2020 can continue to receive yearly cost-of-living increases to their State Pension payments, even if you start claiming your pension after the transition ends.
As things stand, Brexit should not affect how you can withdraw or transfer other UK pensions. However, once the UK government no longer has to abide by EU rules in 2021, they gain more freedom to recoup taxes from expatriate pensions.
One target could be Qualifying Recognised Overseas Pension Schemes (QROPS). Currently, Portugal residents can transfer to a QROPS tax-free if it is EU/EEA-based, otherwise a 25% ‘overseas transfer charge’ applies. Many expect the UK may extend this to within the EU once it sheds its current obligations.
Take personalised, UK-regulated advice before taking any action to avoid pension scams and establish the most suitable approach for your personal circumstances and goals.
During recent Brexit uncertainty, the value of sterling has experienced much volatility. While more settled now, like any currency, it is always variable.
Once you are living in Portugal, it is sensible to hold some savings and investments in euros to minimise exchange rate risk. However, you may also have expenses in the UK or intend to return someday, so want to keep something of value in sterling. Explore investment structures that offer flexibility to hold investments in more than one currency and convert when it suits you. Transferring UK pensions into a suitable QROPS could also provide currency flexibility for your retirement income.
When exploring the best currency and investment mix for you, make sure your investments are well-diversified, tax-efficient and offer the right balance of risk and return for your peace of mind.
While the transition offers a welcome period of certainty for UK nationals living in Portugal, the clock is ticking to secure your position and take advantage of suitable opportunities. A locally based adviser with cross-border experience is best placed to help you prepare appropriately for the post-Brexit world.
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.
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com