Brits looking to retire abroad should be aware of liabilities under local wealth tax regimes in the more popular destinations in Europe, financial advice firm Blevins Franks has said.
While there is no such liability in the UK – or at least just yet – many countries in the EU do have one, with related allowances and exemptions.
But as these types of taxes rise every year and they are levied on income rather than from the cashing in of assets, this could significantly reduce expats’ disposable income.
Blevins Franks also warned that, as property and investment values increase faster than the available allowances and exemptions, more and more people will find they have a wealth tax liability. The firm said this means that UK retirees should consider acquiring other tax efficient investments rather real estate to reduce or even eliminate their tax liabilities.
Jason Porter, director of Blevins Franks, said: “As people generally become wealthier in their middle to later years, they can often have stopped working and have minimal income – known as being ‘asset rich-income poor’. Some could see their income exceeded by their wealth tax liability.
“In most cases, there are reliefs available to reduce the wealth tax payable when it exceeds a certain proportion of income, so it is important to understand how this all works and plan to minimise your wealth tax exposure, perhaps by reducing what is deemed taxable income. While wealth taxes have been discussed as a potential domestic solution to the UK’s covid-induced debt mountain, nothing concrete has ever materialised, but that is not the case in the EU.”
Porter provided three examples of the more popular retirement spots in Europe: France, Spain and Portugal.
In 2018, French president Macron changed the original 1989 wealth tax with a tax on real estate and property investments.
The ‘Impôt sur la Fortune Immobilière’ (IFI) is an annual progressive tax ranging between 0.5% and 1.5%, where a liability is triggered once the taxable wealth exceeds €1.3m (£1.1m, $1.5m), but is then applied on net assets above €800,000.
“Non-residents are only liable to IFI on French real estate, while residents must include worldwide real estate assets and investments,” Porter said. “New residents are exempted on foreign real estate assets for the first five years.
“Taxable real estate includes the main residence less 30% of its value, second homes, land, and rental property, shares held in French property companies, as well as shares held in property funds. Business property assets are totally exempt and mortgages and secured debts are deductible.
“For French residents, combined French income tax, wealth tax and social charges cannot exceed 75% of the total income for the previous year. Where the relevant taxes exceed 75%, the taxpayer can claim a refund of the excess taxes paid.”
In 2008, the Spanish government introduced a measure allowing the application of a 100% tax credit against a person’s wealth tax liability.
This, however, was scrapped in 2011 when the wealth tax was reinstated as a temporary measure but has been left in place ever since.
Porter added: “Spanish residents are liable to wealth tax on their worldwide assets, not just real estate, while non-residents are only liable on their Spanish assets. In Spain this is an individual tax, so the value of assets held jointly are apportioned 50:50. Each person has a €1m exemption, made up of €300,000 against the main home and €700,000 for general use.
“The rates of wealth tax laid down by the state range from 0.2% all the way up to 3.5% on assets valued at more than almost €10.7m. But each of the 17 autonomous regions of Spain can determine their own wealth tax rates, reliefs and exemptions. For example, in the Madrid region there is a 100% allowance for wealth tax, whilst Andalucia has a top rate of only 2.5%.
“Now the UK is no longer part of the EU, any Spanish assets owned by a UK resident are assessed to the national rates, not those of the autonomous region where they are located, as would apply to EU residents.
“Exemptions apply to business assets, shares in a family business and some rental/property company shares. Deductions include loans and mortgages. Pension plans have always been exempt, but some advisers now believe a recent government ruling may mean non-EU member state schemes like those of the UK are now liable to wealth tax.
“In terms of those Spanish resident retirees who are living off investments with little income, the total wealth and income taxes cannot exceed 60% of total net income, though this is subject to paying a minimum of 20% of the full wealth tax due. Again, planning and structuring accordingly will minimise the wealth tax payable.”
The Portuguese wealth tax (AIMI) is more recent as it was only introduced in 2017 by extending the country’s Imposto Municipal Sobre Imóveis (IMI property tax).
It is calculated on the patrimonial value (VPT) of the property, which is generally lower than market value of the property, and is an additional IMI for properties with a higher value, Blevins Franks said.
Rates are 0.4% for properties held by companies; 0.7% for properties held personally; or 1% when the value of the holding is between €1m and €2m, for both corporate and individual ownership.
If the property value exceeds €2m, the rate rises to 1.5%.
Porter added: “Everyone is entitled to a deduction of €600,000, or €1.2m for couples who are both the registered owners of a property. The deduction is denied to taxpayers who are not up to date with their tax affairs, or companies whose main activity isn’t industrial, commercial or agricultural, such as companies that trade in properties, or companies registered in tax havens.
“Apart from the exemptions of €600,000, or €1.2m for couples, there are not the similar reliefs to those in France and Spain where the AIMI exceeds a certain proportion of income, so planning for the eventuality of AIMI becomes even more important.”