Some British readers may find these exciting times for the UK, as it prepares to leave the EU, others may be concerned about what the future holds. Either way, we do not yet know the detail of what the end result will be and it may be a while before we find out.
How will this uncertainty affect expatriates in Mallorca from a financial point of view? While you should not rush to make decisions, it is worth looking at your financial planning to consider if and where you may need to make changes.
Savings and investments
Many British investors tend to favour UK assets in their portfolio, even when living in Spain. They prefer to own shares listed on a FTSE index or corporate bonds issued by UK companies. Indeed UK advisers often structure their clients’ portfolios this way, but that may not be the right balance for you.
We are in new territory now and, while we hope for a smooth transition, there will be periods of uncertainty ahead for the UK economy. You need to review your portfolio to see if you are overexposed to UK assets and consider how to improve diversification over assets classes, countries, companies, sectors etc. Diversification reduces risk and gives your portfolio the opportunity to produce positive returns over time without being vulnerable to any single area under-performing.
For peace of mind ensure your portfolio is suitable for you and your appetite for risk. Your adviser should obtain a clear and objective assessment of your risk profile before making recommendations, and employ the services of carefully chosen investment managers who use a range of different strategies across all the geographical regions and asset classes.
While volatile markets can be unsettling for investors, those invested for the medium to long-term in a well-diversified portfolio should not be unduly concerned.
And volatility can create opportunities for fund managers and those with capital to invest. The ‘lower for longer’ interest rate environment is also generally seen as a positive for equity markets – though obviously not for those with bank account savings.
Currency is another important consideration for UK nationals living in Euroland. Your day-to-day spending in Spain will get more expensive if Sterling weakens against the Euro and you do not hold sufficient Euros to weather any short-term Sterling currency storm. Ideally you should hold some assets in Euros to avoid exchange rate risk. However you may also spend money in the UK, or expect to return someday or to leave an inheritance to UK residents, so discussing your particular circumstances and objectives with your adviser to determine the best currency mix for you is very good idea right now.
The above advice on diversification and suitability equally applies to the underlying investments in your pension funds.
What about QROPS? Will it still be possible to transfer UK pension funds to Qualifying Recognised Overseas Pensions Schemes once the UK leaves the EU? Although the core of the legislation can be traced back to an EU directive, the UK has a long history of permitting transfers to bona fide overseas pension schemes and QROPS are a function of UK law.
There is some speculation, however, that the UK could introduce a new ‘exit tax’ for pension transfers. This is not substantiated, but there has been quite a bit of talk about it. If you have a defined contribution (money purchase) scheme and are concerned about the potential of an exit, you could consider transferring into a QROPS. UK SIPPs and QROPS have basically the same structure so you would continue with your current benefits, but in a potentially future-proof QROPS.
Another significant benefit of QROPS is that you are able to choose the currency and so protect your pension income from fluctuating exchange rates. As always, though, the best approach for your pension funds depends on your circumstances and objectives and you also need to consider the tax implications in Spain – take advice.
If you live in Mallorca and have UK source income, or vice versa, the tax treatment is determined by the UK/Spain double tax treaty. This is a bilateral agreement between the two countries and independent of the EU, so unaffected by Brexit.
UK residents with assets in Spain may however be affected where Spain charges non-EU/EEA residents higher taxes than EU/EEA ones. This is the case, for example, with non-residents income tax. The capital gains tax exemption for reinvesting the proceeds of a previous Spanish main home into a new one does not apply where the new property is outside the EU/EEA. You may also be liable to Spain’s exit tax if you leave Spain to live in the UK and have enough shareholdings to liable.
Your succession tax planning may be affected by Brexit, depending on your family’s circumstances.
In Spain the local autonomous regions are able to adjust the state succession and gift tax rates and allowances, and in some cases the local regime is much more beneficial than the state one. However these local rules only apply to those who reside in an EU/EEA country.
So if you are resident in the UK when you die, and the UK is not an EU or EEA member, your estate does not benefit from the local rules. Also, if you are resident in Spain but your beneficiaries are not resident in the EU/EEA (remember succession tax is charged on the beneficiary, not the estate), the state succession tax rates and rules will apply for them.
However it is early days still and it is maybe an issue that is negotiated between the two countries.
The second estate planning concern is Brussels IV – the EU regulation that allows UK nationals living in Spain to opt for UK succession law instead of Spanish succession law. The good news here is that although Brussels IV is an EU law, it applies to third party countries as well. Brexit therefore has no effect on the ability for British expatriates to elect to use UK succession law.
That said, cross-border estate planning is complex and needs to take multi-jurisdictional succession law, inheritance taxes and probate into account, as well as your specific circumstances and wishes. Professional advice is essential here and this is a good time to get your estate planning in order.
Our final piece of advice is to use the services of a local financial adviser, one who lives here and is experienced in advising British expatriates in Spain. Blevins Franks has 9 offices and 17 advisers living in the country. Many expatriates continue using their UK financial adviser, with the result that their financial planning is often more suitable for a UK resident than a Spanish one, often with undesirable consequences.
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.
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists.
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For more information and personalised advice, contact Peter Worthington, Senior Partner at Blevins Franks, on +34 971 719 181 or firstname.lastname@example.org.
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Blevins Franks Mallorca specialises in giving advice for tax-driven, wealth management investments. […] Blevins Franks Tax & Wealth Management Specialists
This article was written on the 16th of September, 2016.