Three senior experts at Old Mutual Wealth today laid to rest any lingering doubt there might have been that last month’s decision by British voters to leave the European Union will result in a period of major uncertainty for those in the business of financial services in the UK.
The three experts’ comments come as growing numbers of businesses are saying they are planning to relocate key operations out of the UK and into mainland Europe in order to ensure their businesses may continue to enjoy Common Market privileges without having to endure months or even years of not knowing what the final shape of relations between the UK and the EU will look like.
Anyone who is wondering what the UK’s pension tax relief strategy will be going forward, for example, may have to be patient, Old Mutual Wealth retirement planning expert Adrian Walker suggests, as he notes that “there is a big question mark over the future of pension tax relief” now that a Leave vote has been cast by the public.
“George Osborne has pushed through massive changes to the pension system already, many of which have been very positive, and it seemed the Treasury were keen to explore reform of tax relief,” Walker says.
“In the current climate, however, it remains to be seen whether Osborne, or any future chancellor, feels able to press ahead with further pension reforms.
“Similarly, a radical shift to a pension ISA system also now seems less likely. Such a reform would be a massive overhaul of the personal financial system, and in the near-term it is hard to see the government having the appetite to drive through such a divisive policy.”
What seems one possibility, Walker goes on, might be the introduction of a “flat-rate” reform, which he notes would be “likely to be revenue generative for the Treasury”.
“The overall cost of pension tax relief, including lost national insurance contributions, was nearly £50bn in 2013-2014, and introducing a flat-rate would reduce the amount of money the tax-office forgoes to fund higher-rate tax relief,” he says.
Also thrown into question by the Brexit vote, says Old Mutual Wealth financial planning expert Rachael Griffin, are some proposed changes to the way long-term non-doms living in the UK are taxed. The changes were due to take effect from 6th April 2017.
Currently, those individuals who are considered “non-domiciled” for tax purposes typically take advantage of the so-called remittance basis of taxation, whereby they pay between £30,000 and £90,000 toHMRC, depending on their length of UK residence, and don’t have to pay UK tax on assets and earnings held overseas, unless they’re remitted to the UK.
They also don’t fall under the UK’s inheritance tax laws unless they have been in the UK for 17 of the last 20 years.
“The rules were a big focus in the 2015 election, with some arguing that it is unfair to tax [long term UK resident non-domiciles] at UK rates on money they have earned elsewhere, while others argue that non-doms benefit from living in the UK without contributing a fair amount of tax,” Griffin notes.
For non-doms who have been UK tax resident for 15 tax years and who may have been planning for the old deemed domicile rules, this will mean having to decide whether to make changes to the way their wealth is currently invested, in order not to be caught out if the proposed changes do go through, or holding off, based on the assumption that the reforms won’t now happen.
That the automatic “up-rating” of UK state pensions paid to retirees who are living in the EU could be threatened by a vote to leave the EU was predicted more than a month before the vote by such pension experts as AJ Bell, the UK-based stockbroker and third-party pension fund administrator. It was also cited as a concern as recently as Friday by former UK pensions minister Steve Webb, now director of policy at Royal London.
Currently, expats living in EU countries benefit from having their state pensions increased by the greater of three annual measures: 2.5%; the rate of wage growth in the UK; or inflation.
Old Mutual Wealth pension technical expert Jon Greer, like AJ Bell and Webb, notes that this arrangement “will have to be renegotiated as part of the Brexit process” – thus meaning a period of uncertainty, at best.
“While it seems likely pensioners abroad will continue to get the same terms as those living in the UK, it is by no means guaranteed,” Greer adds, echoing a concern expressed by Webb.
“With Government likely to seek to make savings going forward, it is not impossible they may curb the benefits available to those retired abroad.”
Wills and estates
Another area that people will need to watch, according to Griffin, is how their estate would be divided up, were they to die while living in the country they are resident in now. Most EU countries have adopted a specific piece of EU legislation that deals with this matter, known as “Brussels IV”, which basically says that the estate-dispersal rules that would prevail in the event of a death would be those of the country “in which the individual was ‘habitually resident’”.
“This is important, because the rules differ from country to country,” says Griffin. “For example, many apply forced heirship, meaning you have to pass a certain portion of your money to your children.
“While currently part of the EU, the UK has not adopted the legislation, but it is still important for people to remember they could be affected [by it].
“If you’re retired in Europe or have a European passport, you may be deemed ‘habitually resident’ outside the UK, and if you own property abroad, you will be caught by the legislation if that country has adopted Brussels IV.
“Nearly half a million cross-border estates are divided up in Europe every year, so it affects a large number of families.”
Griffin says those who want to ensure their estate is passed on to the people they wish it to be should speak to a professional adviser about it…and this, at least, seems unlikely to change as a result of Brexit, as it is not related to the UK’s membership in the EU.
Old Mutual Wealth is the wealth management arm of Old Mutual Plc, the FTSE 100 financial services group originally founded in South Africa,