https://www.blevinsfranks.com/uk-general-election-tax-and-pensions/
What changes can British expatriates expect for UK tax and pensions?
By Stephen Rankine, Private Client Manager, Blevins Franks
UK nationals living in Madeira may still be impacted by UK tax reforms, especially if they retain assets in Britain. You therefore need to keep an eye on both UK and Portuguese tax developments, as well as reforms to UK pensions.
It’s all change at Number 10, but what changes are in store for tax and pensions? It is early days, and the new government’s first budget is not until 30 October, but we can look at the Labour Party manifesto, King’s Speech and Chancellor’s 29 July statement for indications of what direction it may take.
Any new government will review tax revenue and spending costs, and Chancellor Rachel Reeves inherited a challenging economic situation. Public sector debt surged due to the pandemic, inflationary pressures and war in Ukraine. Increasing tax revenue would go some way to improving debt levels but, with the tax burden already the highest in 70 years, increasing taxation on families struggling with a high cost of living would not be a popular move.
Here we look at what we know, and what we don’t know, about the issues that may impact retired British expatriates.
Chancellor’s speech paves the way for tax rises.
In an address to parliament on 29 July, Rachel Reeves explained that an assessment of public spending since the new government took office has uncovered a projected overspend of £22 billion for this year.
She reiterated that they do not want to increase taxes on working people, but also warned that the 30 October budget “will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax”.
Income tax, national insurance, VAT.
The Labour Party manifesto confirmed that it would not increase income tax, national insurance contributions or VAT. Ms Reeves’ 29 July speech repeated this pledge: “We will not increase national insurance, the basic, higher or additional rates of income tax, or VAT.”
Raising tax rates is not the only way to increase revenue from such taxes, however, and keeping income tax bands and allowances frozen also serves to improve the Treasury’s coffers. The Conservative government employed this policy since 2021 and, with the resulting fiscal drag, many people are now paying more tax than previously.
We do not yet have a clear indication of where the new government stands on frozen tax allowances. It could maintain them till 2026 as planned, end them earlier, or perhaps extend them.
Capital gains tax.
This is where it gets interesting. The manifesto did promise not to tax an individual’s main home but did not include anything on capital gains tax rates. That said, during the campaign period Labour candidates maintained there were “no plans” to increase CGT rates – but this has not stopped speculation that this tax could be one of the targets for increasing revenue. The Chancellor’s latest speech only fuels this speculation.
If indeed that does happen, it may be further down the line, and we would not get much warning.
Non-domicile regime and inheritance tax.
The Conservative Party’s last budget included plans to abolish the non-domicile regime from 2025 and replace it with a residence-based system, though it was then missing from its proposed Finance Bill 2024.
The Labour Party manifesto followed this up by promising to address unfairness in the tax system and abolish ‘non-dom’ status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period. We need to wait for details, but this would be a significant change to how foreign nationals living in the UK are taxed, as well as potentially for British expatriates and their liability to UK inheritance tax (IHT) on worldwide assets.
We know the Labour Party plans to end the use of offshore trusts to avoid UK inheritance tax – non-domiciles would no longer be able to shelter offshore assets from IHT, regardless of when the trusts were established.
There has been no mention of other changes to the inheritance tax regime, such as to the 40% tax rate or the two nil rate bands.
Pensions.
These are interesting times for UK pensions. During the election campaign the Labour Party promised to review the whole pensions system, and the King’s Speech at the opening of parliament on 17 July confirmed that the new government will introduce a new Pensions Scheme Bill.
The Chancellor then launched a large-scale pension review to “boost investment, increase pension pots and tackle waste in the pensions system”. Described by Ms Reeves as a “big bang of reforms”, the review will look at issues such as:
• Making defined contribution schemes more productive by encouraging investment in the UK economy.
• Cutting down on ‘fragmentation and waste’ in the Local Government Defined Benefit Pension Scheme and looking at how it can be invested more productively (possibly meaning in the UK economy).
• Introducing legislation to encourage people to consolidate multiple small pension pots into one pot.
• Better options for savers when they reach retirement, to ensure they have proper pension drawdown options and not just a saving pot.
Requiring pension funds to invest more in UK markets could help re-energise the UK economy, but may mean less flexibility on which investments you can hold in your UK pension fund.
There is no mention of a new lifetime allowance, a harmonised pension tax relief percentage, or reducing tax-free cash, so reforms such as these are very unlikely to be implemented over 2024. The autumn budget, though, could potentially include measures for 2025.
Prior to the election, the Labour Party manifesto affirmed that the ‘triple lock’ will be maintained. The State Pension will continue to increase annually by whichever is highest of inflation, annual average earnings growth or 2.5%. A welcome pledge, but a costly one for the government.
British expatriates.
While many UK changes do not directly affect British expatriates (unless they later return to UK), taxation can have a long reach, especially if you own assets in the UK, and inheritance tax follows you around the world in most cases.
And reforms to the pension system could impact everyone with UK registered pensions, including retired British expatriates.
Until a tax or pension change is announced, we can only speculate what will happen in the ever-changing world of politics. Manifesto and pre-election promises can be broken or adjusted, and reforms are only set in stone when the government releases the relevant new documentation (budget announcements, finance bill, legislation etc).
We now await developments over the coming weeks, at the next budget, and whole parliamentary term. In the meantime, you may have a brief window to adjust your wealth management under current regulations, if you prefer acting on known rules rather than facing potential future changes.