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 is entirely appropriate, the planning shouldn’t end there, especially if they still have assets and investments in the UK, writes Jason Porter, director of specialist expat tax and wealth management business at advisory firm Blevins Franks.
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 the 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, for those who are living abroad it is a good idea to review whether holding on to UK assets is still in their 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 CGT 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 non-UK resident, they may also attract capital gains tax in their country of residence (but can usually receive a credit for UK tax paid).
Stamp duty
Beware that, from April 2021, non-UK residents face a new 2% stamp duty surcharge when buying property in England and Northern Ireland.
If they are resident in the EU and already own a home, even outside the UK, this means they could face up to 17% UK stamp duty costs on UK purchases.
Rental income
Note that non-UK residents remain liable to UK income tax on all rental income earned in the UK.
UK rental income is also taxable in Portugal if they are resident there, unless they 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 them into a higher income tax bracket.
Wealth tax
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.
Tax on UK investments
While the tax rules that apply to British expats 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 a property is sold there for reinvestment in a new main home within another EU/EEA country.
In January 2021, 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 they are non-UK resident, UK investment products such as Isas become taxable in their country of residence.
If these investments are encashed, local CGT 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.
UK personal tax allowances
Currently, non-UK residents receive the same allowances for income and CGT 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 expats 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 personal 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.
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 the fund as cash and re-invest in a tax-efficient arrangement in their country of residence.
This article was written for International Adviser by Jason Porter, director of specialist expat tax and wealth management business at Blevins Franks.
Blevins Franks was recognised with two awards in the 2019 Best Practice Adviser Awards – Excellence in Business Strategy and Best Adviser Firm Europe.
