It’s all change at Number 10, but what changes are in store for tax and pensions? It is early days, and we may have to wait until the autumn budget for any firm evidence of the government’s fiscal plans. For now, we look at the Labour Party manifesto for indications of what direction it will take.
Any new government will review tax revenue and spending costs, and new Chancellor Rachel Reeves inherits a challenging economic situation. Public sector debt surged due to the pandemic and inflationary pressures brought on by the invasion of 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.
Income tax, national insurance, VAT
The Labour Party manifesto confirmed that it would not increase income tax, national insurance contributions 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.
We do not 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
The manifesto promised not to tax an individual’s main home but did not include anything on capital gains tax rates. That said, during the campaign, Labour candidates maintained there were “no plans” to increase rates – but this has not stopped speculation that CGT could be one of the targets for increasing revenue.
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.
The Labour Party manifesto promised to address unfairness in the tax system and abolish ‘non-dom’ status once and for all, replacing it with a scheme for people genuinely in the country short term. We need to wait for details, but this could be a significant change to how foreign nationals living in the UK are taxed, and 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.
Pensions
These are interesting times for UK pensions, with the Labour Party having promised to review the whole pensions system.
This means we do not have much indication of plans yet, though the manifesto did affirm that the ‘triple lock’ will be maintained. The State Pension will continue to increase annually by the highest of inflation, annual average earnings growth or 2.5%. A welcome pledge, but a costly one for the government.
The manifesto also indicated the new administration would look at imposing requirements for pension funds to invest more in UK markets. This could help re-energise the UK economy but may mean less flexibility on which investments you hold in your UK pension fund.
One notable absence was the lifetime allowance. When the 2023 spring budget abolished this allowance and tax charges, the Labour Party was quick to voice its opposition and commit to reinstate it. This would be no easy task, however, especially after three new pension allowances came into effect this April. But no doubt the government will look at these allowances when it reviews the pension system.
British expatriates
While many UK changes do not directly affect British expatriates (unless you later return to UK), taxation can have a long reach if you own assets in the UK, and inheritance tax follows you around the world. Reforms to the pension system will 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.
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.
The 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 should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
By Sharon Farrell
|| features@algarveresident.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.
www.blevinsfranks.com
