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Domicile re-visited – has Brexit had an impact?

By John Lansley - Topics: Domicile, Spain
This article is published on: 8th February 2021

08.02.21

This article is aimed at those living in Andalucia, but also applies to the rest of Spain and further afield.

UK domicile has always been a rather difficult topic, but, as it determines whether UK Inheritance Tax (IHT) will apply to your estate or not, it has always been important to understand how it works, especially since Brexit.

Inheritance Tax in Andalucia provides much more generous exemptions. So, is it a matter of choice? Are you able to choose which Inheritance Tax regime applies to you?

Domicile
Firstly, some ground rules. As far as the UK HMRC are concerned, if you were born in the UK, the probability is that you will have a UK domicile of origin. Unless this changes, at your death your estate will be exposed to UK IHT, and this applies to your assets anywhere in the world.

If you are not domiciled in the UK, only UK assets will be subject to IHT. So, straightaway, it’s clear there can be a huge advantage in not being UK domiciled.

Example
For example, imagine someone who lives in Andalucia and is tax resident there, owns a house in the UK worth £300,000 and has £300,000 worth of assets outside the UK. If UK domiciled at death, his estate would face a bill of £110,000*. If domiciled outside the UK, the UK IHT tax bill would be zero.

So, on the face of it, losing his UK domicile would make sense as it would save his heirs £110,000 (don’t forget Spanish Inheritance Tax! See below). But is it as simple as that?

Can I change my domicile?
Changing domicile is very difficult in practice. In the old-fashioned sense of emigrating to another country, where all UK links were severed and new ones established with your new home country, you might easily acquire a domicile of choice elsewhere. However, these days, when moving to Spain or France, or another country close to ‘home’, it is not so easy – for example, retaining a property in the UK, having UK investments and income sources, and even writing your Will under English Law, can all demonstrate that you have not sufficiently severed your links and acquired a new domicile.

Intentions
Beyond simple facts such as these, domicile also hinges on intentions. So, someone who moves to Spain and vows never to return stands a better chance of losing UK domicile than someone who is pretty sure that, when poor health and family pressure become significant, a return to the UK is almost certainly going to happen.

Inheritance Tax in Spain
Spain’s Inheritance regime is different to the UK, in that it applies to those who die in Spain and also to assets situated in Spain. It is the recipient of an inheritance who pays the tax, and the amount depends upon the relationship between beneficiary and deceased.

As mentioned above, Andalucia’s Inheritance Tax rules are very generous, and an estate of the same size (ie, £600,000 or equivalent) located in Andalucia could attract no tax at all, if all the assets are left to the deceased’s children, for example, but a more distant beneficiary, or an unconnected person, would likely see tax having to be paid. Other Spanish regions are not so generous and bigger bills would ensue, as would be the case in many other countries, so it pays to check carefully.

Brexit

Brexit
So, has Brexit had any effect on this? Not in terms of UK and other Inheritance Tax laws themselves, nor Wills, but perhaps in the sense that your thoughts about moving back to the UK in later years might have been changed, especially if you have a non-UK spouse (due to the tough new income requirements in such cases). Or you might have UK assets that fall foul of various rule changes, and you need to consider making changes which could have an impact on your domicile, for better or for worse.

Loss of freedom of movement
If you have spent a lot of time in Spain in recent years, perhaps had a ‘foot in both camps’, and enjoyed the freedom of being able to come and go as you please, the recent realisation that you need to be rather more specific about which country you are based in might have meant looking closely at such things as where you pay tax, healthcare access, Wills, driving licences, bank accounts and other investments, and many more. Domicile and Inheritance Tax exposure in both the UK and Spain should have been part of the review because a wrong decision could prove costly.

Equally, if you left the UK after 31 December 2020, or considering doing so, you might find that the requirements for residence in Spain are too much of a hurdle and your intentions of remaining in Spain indefinitely (and saying goodbye to UK tax concerns) have had to be shelved and replaced with the alternative of spending much less time in Spain each year, with the resultant impact on domicile and UK IHT liabilities.

Wills
Don’t forget that your Will is an integral part of domicile and Inheritance Taxes planning in both Spain and the UK. Now is a very good time to consider whether yours needs to be updated.

So, as always, it’s vital to obtain proper professional advice, and this is a subject that, while perhaps not affecting you personally, could have a tremendous impact on the long term wealth of your family. Brexit has generated a number of less than obvious changes – domicile isn’t an obvious one, but it is certainly something that should be given careful thought.

*NB other exemptions and reliefs are available that might reduce the liability.

State Pension Benefits

By John Lansley - Topics: EU Pension Transfer, France, Pensions, Retirement, State Pensions After BREXIT, UK Pensions
This article is published on: 22nd May 2020

22.05.20

If you have moved from one country to another, while it may be comparatively easy to obtain tax advice in order to help you plan your finances, it can be very difficult to find out how your State Retirement Pension will be affected, and this has become more uncertain as a result of Brexit. This article aims to shed some light on the issue

This article aims to shed some light on the issue.

I retired in the UK and moved abroad
Let’s start with something easy – if you have already retired and moved to Spain, France or another EU country, the chances are your only State Pension will be from the UK. With Brexit in mind, as long as you were legally resident in your new home country by the end of 2020, nothing will change, and you will be entitled to the annual pension uplift indefinitely.

Coupled to this is your entitlement to healthcare, in that you will have a form S1 from the UK, which ensures you benefit from full care on an ongoing basis, and which in effect will be paid for by the UK Government.

If you have already left the UK but have not yet reached formal retirement age, as long as you were ‘legal’ in your adopted home before the end of 2020, you will receive the UK State Pension at retirement age and qualify for annual increases. You will also be entitled to a form S1.

Note that, if you have not regularised your situation in your adopted home by the end of 2020, the situation is uncertain, to say the least. You will be entitled to claim the UK State Pension when you reach retirement age, but the uplifts are only due for 3 years and, most importantly, form S1 will not be available.

I left the UK 5 years ago at the age of 55 and have been self-employed in Spain for the last 5 years
Have you been making voluntary contributions to the UK scheme? Are you making contributions in Spain? If you haven’t already done so, obtain a pension forecast from HMRC – use the gov.uk website, sign up for the Government Gateway access service, and check your National Insurance Contribution records, as well as your UK tax records. You’ll have to apply to contribute, using form CF83 attached to the booklet NI38, Social Security Abroad.

You will then be told what pension you can expect at your retirement age, and you can also see how many incomplete contribution years you have. It is generally good advice to continue to make voluntary contributions after leaving the UK (currently £795.60pa), but if you are currently self-employed, you will only have to pay at the Class 2 rate, which is £158.60pa for the current year.

You’ll receive details of how to make up the shortfall, by bank transfer or cheque for past years, and by direct debit for the future if you wish to see payments taken automatically. Importantly, you can also call to obtain advice concerning whether it would be worthwhile doing this, and how additional payments will increase your pension entitlement – it might take a while to get through, especially due to the current Coronavirus lockdown, as it appears they are only dealing with those on the point of retiring, but you should find the staff helpful when you do.

Also, make sure you understand what your Spanish contributions entitle you to and try to obtain a projection of your future pension in Spain. This might prove difficult at present, with offices closed or providing limited services.

defined-benefit-pensions

Having worked in the UK, Italy and now in Spain, I want to claim my State Pension
The first thing to understand is that you should retire formally in the country you are currently living in, unless you haven’t made any pension

contributions there – in which case you apply to the last country in which you contributed.

So, in this case, you approach the Spanish authorities and will have to provide details of all your employment and self-employment history. Spain will then check with each country concerned (the EU-wide scheme ensures this is possible – work history outside the EU means you may have to apply individually to those countries) and will calculate your entitlement. (But bear in mind that Brexit may have had an impact on this in practice, even though the scheme should not be affected – very much ‘work in progress’).

They will do this by adding together the contribution years of each country and then applying this to their own pension rules. This means that, even if you don’t have the minimum number of years’ contributions in one country, the chances are that the contribution years in other countries will ensure you get a pro rata pension. Don’t forget, official retirement age can vary in different countries, and some state pensions are more generous than others.

Each country will then pay their share directly to you, and if you have continued paying into the UK system it’s likely you’ll end up with a much higher pension than might otherwise have been the case.

How is healthcare affected? Any other issues?
The good news is that receiving your pension locally will mean that your access to the local healthcare system comes with it – no need for a form S1. So, any attempts by the UK to remove themselves from the S1 scheme will not affect you.

Note that, although the UK state pension is paid regardless of your other income, the state pension in Spain is not, in that if you wish to continue to work, Spain will not pay anything to you.

10 TIPS FOR MANAGING YOUR FINANCES

Other financial planning tips?
Despite the UK government’s attempts to water down the ability to ‘export’ your UK private pensions using the QROPS arrangements, this is still

possible – but perhaps won’t be for much longer. So, obtain advice about whether such a move would be beneficial, as soon as possible.

Any savings or capital you have should be invested tax-efficiently and with the aim of protecting it against both inflation and exchange rate fluctuations. Stock markets can fluctuate too, sometimes dramatically as we have seen, so be careful you understand the amount of risk your investments are exposed to, and seek help from a suitably qualified professional who will be able to help you over the long term.

Life assurance investment policies and Brexit

By John Lansley - Topics: Assurance Vie, BREXIT, France, Investments
This article is published on: 15th August 2018

15.08.18

Is the uncertainty over Brexit causing you uncertainty over whether to stay in France or not? Whichever side of the Brexit divide you are on, and in the knowledge that “nothing is agreed until everything is agreed”, there are some important issues to be aware of concerning life assurance-based investments and indeed insurance policies in general.

It is possible that ‘equivalence’ rules will apply, and UK insurers will continue to be treated after Brexit as they are currently. But bear in mind that some of the comments in this article are made against a background of a possible ‘no-deal’ scenario, where financial services would be hit hard, so it’s important to look objectively at some of the likely implications when considering your future options.

Firstly, in order to set the scene, Brexit is set to take effect at the end of next March, following which there may be a transitional period of 15 months, during which much will continue as at present. For many of us the most important question is whether we are able to remain in France (or other EU27 country) or whether we will have to, or simply wish to, return to the UK.

With such a move comes the question of if and when you cease to be tax resident in France and instead become UK tax resident again. This is a complex area, and of course many will have been spending large parts of each year in both countries, perhaps technically risking UK residence already, and clearly this is an issue that many will need to address in detail.

For those who have investments held via life policies, and who enjoy all the benefits these offer, a change in tax residence is an event that necessitates an early review of such investments in order to determine whether they can continue as they are or whether any changes need to be considered, and this is a matter you should discuss with your financial adviser at the earliest opportunity.

French Assurances Vie
These are offered by insurance companies in France, Ireland and Luxembourg, and provide considerable tax and succession planning benefits. They also provide access to diverse investment possibilities in different currencies, and French law even allows you to hold individual listed company shares, so certain assurance vie contracts provide this facility, which can be very useful.

However, it’s important to realise that such flexibility will be punished by the UK’s HMRC if you become UK tax resident – this is because such a policy would be regarded as ‘highly personalised’ (see also below) and would be deemed to generate profits of 15% pa, which would be subject to your highest income tax rate. This would be the case even if losses were made during the year, and is clearly something to be avoided if at all possible.

You may not even use the facility to hold shares, and hold only funds, unit trusts or similar, but fortunately this treatment can be avoided by converting the policy to a ‘collectives only’ version before moving to the UK. SEB Life International, a major provider of such policies, offers an easy conversion process for existing policyholders and, if you hold one of their policies, it would be worth asking yourself whether requesting this conversion is appropriate – if you don’t ever intend to hold shares, and there is a vague possibility of becoming UK resident in future, it might be worth acting now.

Other assurance vie providers don’t always offer such investment flexibility, and so are unlikely to be affected, but if you are unsure you should check with your financial adviser.

UK Single Premium Policies
Many people in the UK own these as they provide significant UK tax advantages, and operate in a similar way to assurances vie (although the precise treatment is different). As is the case with French assurances vie and similar local policies in other countries, these allow the (relatively) tax-free roll up of income and gains inside the policy, and much less onerous taxation of withdrawals than is the case with income and gains from conventional investment holdings.

For those who have moved to France and who still hold such policies, the tax treatment can vary. There is no means by which profits can be taxed as long as these remain within the policy; however, withdrawals and encashment proceeds need to be declared to the tax authorities and, since tax treatment can vary from area to area, it is as well to assume that any such profits will be fully taxable.

In the past, there has perhaps been some inconsistency in how the rules are applied, but it is extremely likely that British people living in France after Brexit will find their affairs subjected to greater scrutiny, and such policies will face a much more certain and consistent treatment.

An important additional point is that UK policies suffer a form of UK corporation tax on the profits generated by the insurance company (and which therefore reduces the investment reward), which can’t be reclaimed or set against a French income tax liability, so they therefore suffer a form of double taxation that cannot be avoided.

Returning to the UK will mean that the tax benefits will continue to be available, but for those who remain in France it is important to review such policies as soon as possible – indeed, the best way forward might be to surrender the policies before Brexit and reinvest the proceeds via an assurance vie, so that all future profits will enjoy the favourable assurance vie tax regime. However, again, this is a complex area and is deserving of proper professional advice, depending on your own personal circumstances.

Offshore Policies
These are policies issued by insurance companies in the Isle of Man, Guernsey and elsewhere. These jurisdictions are not part of the UK, and hence currently not part of the EU either, but which have over many years seen a large number of policies sold to people resident in the UK and in various expatriate locations around the world.

There are two types – highly personalised (often referred to as personal portfolio bonds) and ‘collectives-only’, similar of course to the two types of assurances vie as described above.

For the UK resident, the highly personalised version is deemed to generate a gain of 15% pa, as described above, but the collectives version is treated in a similar way to the UK Single Premium Policy, with the ability to take up to 5% pa (cumulative) on a tax-deferred basis and excesses being subject to your highest income tax rate. UK policies enjoy a tax credit, which reduces the actual tax paid, but offshore policies see their excess withdrawals fully exposed because there is no tax credit given.

There are a number of ways in which tax can be mitigated, and which are beyond the scope of this article. However, returning to the UK will involve a careful review of all such policies to ensure that unnecessary tax bills are avoided, and fortunately most providers will allow you to convert the highly personalised policy to a collectives version before becoming UK resident, as long as you accept certain investment restrictions.

Anyone resident in France who holds such a policy and who intends to remain in France after Brexit should give careful consideration to whether the policy should be retained or whether it might be best to surrender it, pay whatever French tax is due, and then reinvest using, for example, an assurance vie in order to ensure ongoing tax-efficiency in France. For some, this might be a costly exercise, but it would be a one-off event and would ensure full future compliance in France at a time when many aspects of people’s affairs are subject to higher levels of scrutiny.

Policies Held In Trust
In some cases, UK and offshore life policies were set up in a simple trust, provided by the insurance company. Trusts have enjoyed a less than favourable treatment in France in recent years, but can still provide tax advantages in the UK. So, if by chance you have such a policy, whether you intend to return to the UK or remain in France will determine what action should be taken.

Other UK Insurance Policies
On moving to France, many continue to hold UK insurance policies of different types – perhaps an ongoing endowment policy, other life insurance, medical cover, car insurance and so on. It has always been important to advise your insurer of your change of residence in such a situation – simply providing a change of address on its own is not good enough, because a change of residence often means a change in the risk and hence a change in the premium. Only providing change of address details can effectively result in the insurer having a reason to reject any future claim.

However, the post-Brexit situation will mean that such continuing policies may not be effective at all, even if your insurer knows you are resident outside the UK. This is because, as with Single Premium Policies, the provider will be based outside the EU and, unless the equivalence provisions or similar are confirmed, the policies may cease to provide cover.

Other Brexit Issues
Brexit has affected, and will continue to affect, exchange rates and investments. We have seen how Sterling dropped against the Euro immediately after the referendum, as it has on other occasions of course, and this has had an immediate and lasting impact on UK sourced income and pensions for those living in the Eurozone.

What can be done? The use of specialist currency exchange providers can help but it also makes sense to reduce the overall risk by reducing reliance on such Sterling sources, wherever possible. This is not so easy if you rely on UK pensions, or property investments, but a detailed review of your assets would be an important step to take.

As for investment, the fall in Sterling was matched by a rise in the UK stockmarket, and generally the FTSE100 has continued to do well because of the large number of companies that enjoy US Dollar income streams, and which have reaped the benefits of a low Pound. But the trade and other problems Brexit is creating will mean that British businesses are likely to experience many difficulties, and therefore their ability to generate profits for shareholders (such as funds that invest in the UK and UK pension schemes) are likely to be hit.

This could be seen as a contentious issue but reliance on UK investments will exacerbate the problems caused by over-reliance on Sterling, and a more diverse approach would probably be preferable.

One area of particular interest is the decision whether or not to transfer your UK pension to a QROPS provider, as this can help address the issues of currency and investment strategy by bringing your pension capital more directly under your control.

This is another complex area that requires very specific professional involvement, but your ability to use QROPS could be curtailed after Brexit. Already, transfers to non-EEA providers have been hit by a 25% exit charge, and this may be applied across the board after Brexit takes effect.

Conclusions
Change brings threats and opportunities, and can be especially challenging when you have retired and have made great efforts to adapt to what has perhaps been a very significant lifestyle change.

Fortunately, as ever, an awareness of the likely problems means you are better equipped to make suitable preparations. Hopefully this article has shone a light on some areas that could have a very significant impact on your finances and, more importantly, has suggested possible solutions.