With UK finances in quite a pickle, the upcoming Labour budget is expected to bring significant changes, especially in areas like taxation, pensions, and inheritance planning.
As a British expat, these changes could have a serious impact on your financial planning.
While it is always a good idea to review your financial plan regularly, the proposed changes make it especially important to reassess how you manage finances.
In this post, we’ll take a closer look at the potential changes and what they could mean for you.
We’ll also look at some practical tips on how to navigate this evolving financial landscape.
Key Potential Changes in the Labour Budget
1. Taxation Reform: A Shift from a Domicile to a Residence-Based System for Inheritance Tax
One of the most anticipated changes is the potential shift from the current domicile-based system to a residence-based system for inheritance tax.
At present, British citizens are taxed on their worldwide assets, regardless of where they live, as long as they are considered domiciled in the UK.
This means that even if you’ve lived abroad for many years, if you are still deemed UK-domiciled, your estate may be subject to UK inheritance tax (IHT) when you pass away.
Under a residence-based system, individuals who have been resident outside the UK for 10 years or more would no longer be subject to IHT on their global assets (only their UK assets, such as property, would remain on the hook).
This shift could significantly impact how British expats plan their estates, and it’s something to keep an eye on as details emerge.
2. Pension Changes: Potential Adjustments to Pension Allowances
One of the most significant concerns for expats is how any changes to pensions might affect their retirement plans.
Here’s what to watch for:
Reduction in Pension Tax Relief
Currently, high earners in the UK benefit from tax relief at their marginal income tax rate, meaning they can receive up to 45% tax relief on pension contributions.
Labour may reduce this, perhaps capping relief at 20% or 25%, which would reduce the incentive to contribute large sums to pensions.
As an expat, if you have an employer who is continuing to contribute to a pension for you while you are overseas, this could mean it’s time to review your contributions strategy.
Potential Lifetime Allowance Adjustments
Although the lifetime allowance (LTA) has already been scrapped under the previous government, a Labour government could bring in alternative limits or penalties for exceeding a certain pension pot size.
If you’ve built up significant pension savings, you might need to monitor this closely.
While contributing more to pensions is typically beneficial for long-term retirement planning, changes to the LTA could see higher tax bills on large pension pots.
3. Tax on Dividends and Capital Gains
Changes to the taxation of dividends and capital gains could also be on the horizon.
Labour may introduce higher taxes on dividends, which could impact investors living abroad who hold shares in UK companies.
Similarly, capital gains tax (CGT) could be increased or reformed to generate more revenue, which might affect how you plan the sale of assets, such as property or shares.
4. Wealth Taxes: A Potential Introduction of New Levies
There’s speculation that Labour could introduce new wealth taxes targeting high-net-worth individuals.
This might include a tax on property holdings, shares, or even luxury goods.
While these changes are less certain, they are worth keeping in mind, especially if you have significant wealth tied up in UK assets while living abroad.
5. Green Investments and ESG Focus
Labour’s focus on green policies might lead to changes in regulations that encourage or require pension funds to invest more heavily in environmentally sustainable and socially responsible investments.
While this aligns with broader ESG trends, it may require pension funds to adjust their investment strategies, potentially affecting returns.
6. Increase in State Pension Age
To reflect rising life expectancy and to manage the costs of state pensions, there could be a proposal to increase the state pension age further.
This would delay when people can start receiving their state pension, impacting retirement planning.
Practical Financial Planning Tips for British Expats
Given the potential changes, now is the perfect time to reassess your financial plan. Here are some practical steps you can take to prepare for the Labour budget:
💡 Review Your Inheritance Tax Plan
With the possibility of a shift to a residence-based system for inheritance tax, it’s essential to revisit your estate planning.
If you’re currently domiciled in the UK but live abroad, speak to a financial adviser to understand how this change could affect your estate and whether there are steps you can take to take advantage of the changes.
💡 Reassess Your Pension Contributions
If Labour does lower the annual or lifetime allowances for pensions, it’s important to review your contributions to avoid any unnecessary tax charges.
You may also want to explore other tax-efficient saving options, to supplement your retirement savings.
For expats contributing to both UK pensions and foreign pension schemes, it’s essential to understand how the tax rules in both the UK and your country of residence interact.
Double taxation agreements can help minimise your tax burden, but the rules can be complex, so professional advice is crucial.
💡 Diversify Your Investment Portfolio
With the possibility of higher taxes on dividends and capital gains, diversifying your investments could help you protect your wealth.
Consider whether holding UK assets is still the most tax-efficient strategy, or if you should look at international investments that may offer better returns with lower tax implications.
You might also explore tax-efficient investment vehicles, such as offshore bonds, which can offer tax deferral and other advantages for British expats.
💡Consider Property Holdings
If Labour introduces wealth taxes or increases capital gains taxes on property, expats with UK property holdings could see their tax bills rise.
It may be worth reviewing your property portfolio and considering whether to sell or restructure your holdings.
Keep in mind that selling a property could trigger capital gains tax, so timing is critical.
If you plan to sell, it might be beneficial to do so before any new tax measures come into force.
Final Thoughts: Stay Informed and Be Proactive
While we don’t yet know the full extent of the changes that Labour will introduce, it’s clear that the upcoming budget could have significant implications for UK expats.
The key to navigating these changes is to stay informed and be proactive about your financial planning.
Work closely with your financial adviser to understand how the potential changes might affect your personal situation.
With the right planning, you can adapt your strategy and ensure that you remain on track to meet your financial goals, no matter what the future holds.
If you’re a British expat concerned about how the Labour budget might impact your pensions, investments, or tax situation, get in touch with us today.
We’re here to help you navigate these uncertain times with confidence and clarity.
