Property price rises can outstrip allowances and restricting real estate exposure and acquiring other tax efficient investments could reduce or eliminate liability to wealth taxes, according to Jason Porter, director at Blevins Franks Financial Management.
While we do not yet have a wealth tax in the UK, in popular retirement spots in the EU wealth taxes are payable - minus certain allowances and exemptions, he said.
As the liability arises every year, they tend to be paid from income - rather than cashing in assets - which reduces the sum available for living expenses and personal enjoyment.
They are often seen as another way of collecting an additional layer of annual taxes like income tax from the wealthy. But 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.
"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'," said Porter, adding "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," said Porter.
Retiring UK expats have always favoured three of the UK's neighbours - France, Spain and Portugal - and each of these has some form of wealth tax.
France
In 2018 Presidential Macron severely curtailed the original 1989 wealth tax and replaced it with ‘Impôt sur la Fortune Immobilière' or IFI, restricting it so that it only falls on real estate and real estate investments.
IFI is an annual progressive tax, with rates from 0.5% to 1.5%, where a liability is only triggered once taxable wealth is greater than €1.3m but is then applied on net assets above €800,000.
The tax is based on the property wealth of the household, and unmarried couples living together are treated as one household for wealth tax purposes.
"Non-residents are only liable to IFI on French real estate, while residents must include worldwide real estate assets and investments," said Porter. "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 like ‘SCI's', 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 your total income for the previous year. Where the relevant taxes exceed 75%, the taxpayer can claim a refund of the excess taxes paid."
Spain
Effective from 1 January 2008, the Spanish government approved a measure to apply a 100% tax credit against an individual's wealth tax liability and to remove the requirement to file a wealth tax return. Unfortunately, this was short-lived and in September 2011, wealth tax was reinstated as a temporary measure, but this has remained ever since.
"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," said Porter. "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."
Portugal
Portugal only introduced a form of wealth tax in the 2017 state budget, by extending its Imposto Municipal Sobre Imóveis, or ‘IMI' property tax (much like council tax in the UK), with AIMI. It is calculated on the Valor Patrimonial Tributário, or ‘VPT', which is not necessarily the same and generally lower than the market value of the property and as the name suggests, is an additional IMI for properties with a higher value.
The rates are 0.4% for properties held by companies, 0.7% for properties held personally or 1% when the value of the holding is €1m to €2m, under both corporate and individual ownership. This rises to 1.5% when the value of all property holdings is more than €2m.
"Everyone is entitled to a deduction of €600,000, or €1.2m for couples who are both the registered owners of a property," said Porter. "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."
The financial strife suffered by most states since 2008 led some to introduce a wealth tax, but Spain aside, the general aim has been to restrict this to real estate.
While Spain may have a wider asset base on which to charge, the exemptions when combined for a couple (€2m) are greater than that in Portugal (€1.2m) and France (€1.3m), with rates starting at a lower level and not hitting their peak until assets are worth more than €10m.
"Wealthy British expats retiring to the EU will need to know if wealth tax applies in the particular jurisdiction they are moving to, what liability it will generate, and how they can plan to reduce or eliminate it." said Porter.
