What steps can British expatriates take to secure their future when it comes to residency, pensions, savings and investments during the countdown to Brexit?
Now that Article 50 has triggered Britain’s official divorce from the EU, will we soon know more about what Brexit means for expatriates in Spain? Not quite. The only thing we really know is that the UK is on track to leave the EU on 29 March 2019, whether agreeable deals have been reached or not.
While we have to wait and see how negotiations unfold, here are four key steps you can take to future-proof your financial situation now.
1. Consider securing your residency
There are under two years left for current residency and freedom of movement rules. While we can expect a fresh reciprocal agreement between Spain and the UK to protect expatriates in each country, the new rules may be less favourable than today. So if you are still a UK resident but want to live permanently in Spain, now is the time to take steps to secure your position.
Once resident here, you secure the same tax treatment as other Spanish residents. Non-residents, however, may face higher taxes after Brexit. When it comes to non-residents’ income tax, for example, Spain charges more for non-EU and non-EEA residents. Also, non-EU or EEA residents may not qualify for the generally lower rates offered by the regional autonomous communities for wealth, succession and gift taxes.
Regardless of residency, UK-source income remains taxable according to the UK/Spain double tax treaty, which is unrelated to the EU and therefore unaffected by Brexit.
2. Review your pensions
Based on current law, Brexit should not affect how you can access or transfer UK pension funds. However, the UK’s new ‘overseas transfer charge’ indicates things may change post-Brexit.
Until recently, all UK pensions transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) were free of UK taxation so long as the combined value of pension savings came under the lifetime allowance limit (currently £1 million). Since 9th March, however, you face a 25% tax on pension funds transferred to a QROPS based outside the European Economic Area (EEA), unless you live in the same jurisdiction. While liability lingers for five tax years after the transfer date, you will not be affected if you transferred before 9th March 2017.
Currently, the new overseas transfer charge will not apply to expatriates in Spain moving pensions to a QROPS based here or in another EEA state, such as Gibraltar. But there has been speculation that the UK government may use Brexit as an opportunity to recoup revenue from UK nationals abroad with widespread penalties on overseas transfers. They may also change the rules to make it harder to take advantage of today’s high transfer values for ‘defined benefit’ (final salary) pensions. So consider acting now, under current rules, before the tax-free window of opportunity closes.
However, it is crucial to carefully explore your options and use a regulated provider to avoid pension scams and establish the right solution for you.
3. Diversify, diversify, diversify
When it comes to investing, many expatriates favour British assets, like UK bonds or FTSE shares. Not only could this approach overlook opportunities available in Spain and elsewhere, it can generate overexposure to UK assets. While markets have proved quite resilient to Brexit news so far, we cannot predict how the UK economy will continue to react. In uncertain times like this it is more important than ever to have a well-diversified portfolio.
You should minimise risk by spreading investments across countries, currencies, regions, asset types and market sectors. By limiting your exposure in any one area, you are better placed to ride out market turbulence – Brexit-related or otherwise.
4. Look for currency flexibility
With the fortunes of the pound and euro so tied up with Brexit developments, it is a good idea to reconsider the best currency mix for you. Living in Mallorca, ideally you should receive some income in euros to limit your dependency on exchange rates.
One solution is to use structures that allow you to hold investments in multiple currencies. You could, for example, invest in sterling now and switch to euros when rates are favourable, with flexibility to choose the currency of your withdrawals.
In any case, you should regularly review your affairs to ensure your assets and investments remain suitably diversified and tax-efficient for your unique situation. Not only can your circumstances change over time, uncertain times like this can also unlock opportunities.
The ticking of the Brexit clock offers one more compelling reason to fine-tune your financial planning. As an expatriate it is essential to understand the cross-border implications and be fully prepared so you can continue enjoying your life in Spain, whatever Brexit brings.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 19th of April, 2017.