The impact of Brexit upon personal taxation is and will remain unclear for some time, but we have identified areas upon which a watchful eye will be required.
The first is the impact upon EU nationals looking to secure their right to live in the UK through acquiring British citizenship, and the impact that may have on their UK tax position. The second is the impact upon UK tax reliefs which are currently extended outwith the UK due to the requirements of EU law. The third is the impact upon UK nationals with property in the EU.
1 EU nationals applying for British citizenship
If you are an EU national living and working in the UK, you will not have had to be concerned about requirements relating to residence, citizenship and the right to work that apply to workers from outside the EU. You may now be asking questions about how best to ensure that you can continue to live and work in the UK after withdrawal from the EU.
1.1 British citizenship
If you are anxious to preserve your current status you may wish to consider applying for British citizenship. Brodies has published a guide that provides an overview of the rules on eligibility and the application process.
1.2 impact upon residence and domicile for tax purposes
However, before applying for British citizenship, you should consider what impact this will have on your current residence and domicile status for the purposes of UK personal taxes. Your domicile is distinct from your residence. Domicile is where your permanent home is. Many aspects would be taken into account in determining your domicile, and having British citizenship may be one such factor.
1.3 income tax and capital gains tax
If you are living and working in the UK then it is likely that you already meet the statutory residence test for tax purposes.
If you are UK resident and UK domiciled then your worldwide income and capital gains are subject to UK income tax. If you are also taxed in another country and rely on a double taxation treaty to ease the burden of being taxed twice on the same income or gains then that treaty sits outside of EU law and therefore should not be directly affected by Brexit.
If however you are UK resident but not UK domiciled, you may be claiming the remittance basis and therefore only paying UK tax on income or gains brought into the UK. Applying for British citizenship may prejudice that non-UK domicile status as being evidence of your intention to reside here permanently. This may bring your worldwide income and gains into the UK tax net. Further advice would be required.
1.4 inheritance tax
Inheritance tax (“IHT”) is paid on your death at 40% on the value of assets and certain lifetime gifts, subject to the nil rate band allowance of £325,000 (which is doubled up in the case of spouses). The usual spouse exemption from IHT is limited to £325,000 on transfers from a UK domiciled spouse to a non UK domiciled spouse. This is unless the non UK domiciled spouse elects for UK domicile for IHT purposes (doing so would not impact on your income and capital gains tax position). Applying for British citizenship may make such an election unnecessary if it brings you within UK domicile. The full spouse exemption would then apply, although then your worldwide estate would be subject to UK IHT.
If you can keep yourself out of the UK IHT net then the UK will only charge IHT on those assets in the UK. If you fall within the UK IHT net then your worldwide assets will be subjected to UK IHT.
You are UK domiciled for the purposes of UK IHT if you are domiciled in the UK for the immediately preceding 3 years. You would be deemed UK domiciled for UK IHT if you have been resident in the UK for 17 out of the last 20 tax years (although this is due to be reduced to 15 out of the last 20 tax years from 6 April 2017, regardless of when you first became resident in the UK). You can lose your UK domicile for IHT by leaving the UK permanently but it would take 3 years for the UK domicile to fly off (this period is due to be increased to 5 years if you leave after 5 April 2017).
Double taxation treaties, which failing unilateral relief provisions, may apply where the same asset is being taxed in two places.
Applying for British citizenship, and the link that provides with the UK, may tie you into breaching the 17 (or 15) out of the last 20 years limits and lead to deemed domicile. British citizenship may also be used as part of the evidence that you were domiciled in the UK. In either case your worldwide assets would be charged to UK IHT. Further advice is therefore required on the impact on your domicile of applying for British citizenship.
2 UK tax reliefs
2.1 agricultural property relief
Relief from UK IHT on the value of agricultural property currently extends beyond such property situated in the UK (plus the Channel Islands and the Isle of Man) to property situated in the European Economic Area (the “EAA”). The relief was extended in order to secure compatibility with the EU rules on the free movement of capital. Hold-over relief from CGT is also allowed on agricultural property in the EEA. It is unclear whether the extension may be removed as part of Brexit. Advice will be required as matters become clearer.
2.2 charity relief
UK tax reliefs on a gift to charity, whether during lifetime or on death, extend to charities situated in the EU. The reliefs were extended to comply with a decision of the European Court. A close eye will have to be kept upon whether the extension of UK tax reliefs will continue to apply. If a will makes provision for an overseas charity then the current IHT relief on this this may need to be reconsidered.
2.3 UK income tax personal allowance
If you are a citizen of the EEA but not UK resident and receive UK income then you currently enjoy a UK income tax personal allowance. This allowance may be affected by Brexit.
3 EU succession regulation
If you are Scottish and have heritable property (i.e. houses, land and buildings) situated abroad then Scots law says that property will be dealt with according to the rules of the country in which it is situated. If that foreign country has forced heirship rules, those rules might apply to the property, regardless of the provisions in your will. This may, for example, prevent you from leaving the whole of that property abroad to your spouse. There are no such forced heirship rules in Scotland for houses, land and buildings. It is therefore preferable in many cases for Scots law to apply.
If that property is situated in any of the EU countries that have signed up to the EU Succession Regulation, then the law of that country is that the law of the place of habitual residence (Scotland) applies. The UK did not sign up to the Regulation but it still allows a person habitually resident in Scotland to elect in their will that the law of Scotland will apply to houses, land and buildings situated in a country which has signed up to the Regulation.
Before Brexit we advised clients to take advantage of the Regulation and to elect that Scots law applies to the property abroad, to avoid forced heirship rules. This is still the case for now and we would continue to recommend that clients take advantage of the current rules but we will have to watch closely developments post-Brexit and advice will be required in this area.
Brexit brings scope for changes which may impact upon personal taxation. As matters develop considered advice will be required.