In preparation for Brexit, most UK expatriates in Portugal have secured residence or put plans in place to settle before the transition period ends in December. But the planning shouldn’t end there, especially if you still have assets and investments in the UK.
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.
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 Portuguese resident, you may also attract capital gains tax here (but can usually receive a credit for UK tax paid). There is an exception for non-habitual residents, who remain exempt from Portuguese capital gains tax on UK property for their first 10 years. However, other Portuguese residents who are retired or aged 65+ can also avoid liability by reinvesting gain from a main home into an eligible insurance contract or pension fund. As well as tax efficiency, this can unlock other benefits such as multi-currency and estate planning flexibility.
Beware that from April 2021, non-UK residents face a new 2% stamp duty surcharge when buying property in England and Northern Ireland. So, if you are resident in Portugal and already own a home, even outside the UK, you could face up to 17% UK stamp duty costs on UK purchases.
Also, 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, unless you have non-habitual residence.
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.
For example, there are no capital gains tax charges if you sell a property in Portugal 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.
Remember too that once you are non-UK resident, UK investment products such as ISAs become taxable in Portugal. If you cash-in these investments, local capital gains tax can also apply.
Explore alternative investment vehicles that may offer Portugal residents better tax-efficiency as well as other potential benefits.
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.
Of course, most retired British expatriates have pensions 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. Transfers to EU/EEA-based QROPS are currently tax-free for EU residents, but there is a 25% ‘overseas transfer charge’ for other transfers. The UK government could easily extend this to EU transfers once no longer bound by the bloc’s rules. If you are considering this, take personalised advice now – pensions paperwork is a lengthy process and there is limited time before the transition period ends.
Another option may be to use the pensions freedom to take your fund as cash and re-invest in a tax-efficient arrangement in Portugal. 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.
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.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).