By BILL BLEVINS features@algarveresident.com
Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
Tax rises hit the wealthier
The new Conservative-Liberal Democratic coalition government in the UK has, as a priority, the task of slashing the massive budget deficit of around £165 billion.
The new alliance has agreed to “significantly accelerate” its attack on the deficit.
There will have to be the toughest spending cuts for decades and tax increases to achieve this, with the wealthier taxpayers bearing the brunt of higher taxes. An emergency budget will be delivered on June 22.
In the run up to the election, none of the three major parties were open about the depth of cuts or tax rises which lay ahead. Immediately following the coalition deal the following had been agreed on tax:
Inheritance tax
During his pre-election campaign, David Cameron, now Britain’s prime minister, had pledged to raise the inheritance tax threshold, currently 325,000 pounds sterling, to one million pounds sterling. This has been dropped, in effect keeping more Britons liable to the 40% inheritance tax rate and robbing the wealthier of a welcome tax break.
Tax-free allowance
The tax-free allowance on income will rise to 10,000 pounds sterling from 6,745, at a cost of 17 billion pounds sterling according to the Institute for Fiscal Studies. The threshold will be increased in stages from April 2011 and will be funded with the savings made by the Conservatives to reverse the National Insurance rise next year.
National Insurance Contributions (NICs)
The 1% rise in NICs for employees earning more than £20,000, which was announced by the previous Labour government, will stay to help pay for the tax free allowance increase.
Capital gains tax
A substantial increase in capital gains tax (CGT) is planned on non-business assets such as second homes, buy-to-let properties, other investments and shares to also help finance the increase in the tax-free allowance. Currently at 18%, the CGT rate could rise to 40% or 50% on the sale of some assets. The current tax-free threshold of 10,100 pounds sterling per individual on investment income could also be lowered.
VAT
Although this wasn’t mentioned, most economists feel that VAT will undoubtedly be increased from 17.5% to at least 20%. In other European countries it is higher. An increase to 20% would raise 12 billion pounds sterling for the economy.
Tax rises already in place from the previous Labour government include a 50% top rate of tax, a bank bonus tax and partial increase in NICs. Other tax increases, including an additional increase in NICs and the withdrawal of pension tax relief for high earners, are due to come into force next year.
Stamp duty on property valued at over 1 million pounds sterling was hiked by 1% to 5%.
According to the European Commission, published five days before the Tory-Lib Dem coalition deal, the UK deficit is set to hit 12% of gross domestic product (GDP) this year and by 2011-12 the government debt would be 87% of GDP, twice the amount prior to the financial crisis.
Currently the UK deficit at about 11.6% is larger than that of Greece at 9.3%. The EU’s target is 3%.
In addition, Briton has committed its taxpayers to around 13 billion pounds sterling (15 billion euros) worth of support for the euro in a 95 billion pounds sterling (110 billion euro) “stabilisation mechanism” by underwriting loans to help European Union countries such as Portugal and Spain facing a debt crisis, and thought to be at risk of contagion from Greece’s financial crisis.
European countries with indebtedness are under pressure to tackle the problem and cut their deficits. Spain and Portugal have made a commitment to “take significant additional consolidation measures in 2010 and 2011.”
Portugal announced an austerity budget in March but on May 11 it added further austerity measures to reduce its 2009 deficit of 9.3% of GDP.
The government had already vowed to cut this year’s deficit to 7.3%, and has pledged to reduce its deficit to 2.8% by 2013.
The Portuguese parliament approved two tax measures, yet to be definitely adopted by Parliament, including plans to introduce a new 45% tax bracket for those earning over 150,000 euros, as well as a proposal to levy a 20% tax on stockmarket capital gains. Two days later it was reported that income tax will rise between 1% and 1.5% and VAT will go up 1% to 21%.
Before the UK general election, the National Institute for Economic and Social Research (NIESR) said that the next government must raise taxes by 6 pence in the pound and freeze tax allowances for the British economy to return to health.
“There is no longer any strong evidence that spending cuts are better than tax rises at bringing the deficit down,” said Ray Barrell, director of macroeconomic research at NIESR.
Many economists have commented that taxes will have to rise to reduce Britain’s debt and it will not be down to cuts alone.
It will take more than a generation – meaning your children and possibly grandchildren will be paying – before the public finances can be on an even keel.
British expatriates living in Portugal could well be affected by the economic measures being taken. If you should move back to the UK to live the potential tax increases, they will impact on your disposable income and wealth, leaving you with less to spend on your own comfort and to pass on to your family.
A wealth and tax adviser like Blevins Franks can help you to plan ahead and arrange your finances in legitimate tax reducing structures, whether you remain in Portugal or return to the UK.
To keep in touch with the latest developments in the offshore world, check out the latest news on the Blevins Franks website by clicking the link on the right of this page.
