British expats are being urged to review the sources of any income they may derive from the UK in the fact of the proposals made by Chancellor Osborne to deprive non-UK residents of the personal tax allowance.
It is estimated that 175,000 expats get an income from property in the UK. They, as well as pensioners, could be affected by the proposed changes.
Currently expats can offset income earned in the UK against the personal allowance of £10,000, but if the proposals are adopted this condition will apply only to people who have a “strong economic connection” to the UK.
Some expat pensioners may be spared paying more tax on their pensions if they are UK residents for tax purposes which means they spend half the year in the UK or if their state or private pensions are only taxable in their country of residence.
But government pensions are only taxable in the UK. Former civil servants, NHS workers, some teachers, and council officials living abroad will pay more tax, unless exemptions are introduced.
Jason Porter, business development director at Blevins Franks, said that double taxation treaties will be of benefit to property owners – although there is no such relief available to affected pensioners.
“Any taxes payable in the UK against rental income should be available for relief in the country of residence under the terms of the double tax treaty. But, as a UK government pension is only taxable in the UK, and not the country of residence, it is individuals in this scenario who will bear the brunt of the extra tax, without being able to relieve it elsewhere,” he said.
He also said: “At this stage the proposals are in a period of consultation; any changes proposed will not take effect until at least the Budget in 2015, although it is more likely to be 2016. Given this, UK nationals living abroad should not panic, but should seek advice where the majority of their income comes from UK real estate and/or a UK government pension, as the consultation process unfolds.”
Dean Power at The Fry Group, said: “One possible method of reviewing this is a straight percentage test to assess where most of their income arises. There is no clear indication from the consultation document what this percentage could be, but other countries set the threshold between 75% and 90% of income arising in that country.
“If the withdrawal of the personal allowance does occur, those with UK rental income could simply accept a tax charge. To give an idea of what this liability could be, the starting rate of tax is currently 20%.
“The ownership of property between spouses should also be reviewed, which could be beneficial when bearing in mind the intention to tax capital gains arising on the sale of residential propertyafter April 6 2015. This way, if reporting a capital gain when selling the property, the gain would be divided equally between spouses, each with entitlement to an annual capital gains tax exemption.
“This proposal from the Chancellor also emphasises the importance of deducting all possible allowable expenditure against rental income. Those with accumulated rental losses on their UK property – where allowable expenses outweigh the income received – will be unaffected until such time that those losses have been offset against any profit.”
Howard Bilton, a barrister and chairman of Sovereign Group, said another solution for non-UK residents could be transferring income rights to a non-resident company to take advantage of the flat tax rate of 20% that they are subject to.
"This technique may well be useful for non-residents with an annual income in excess of £31,000 who will have greater exposure to the 40% income tax rate with the loss of their personal allowance," he noted.
"It may also be possible to transfer UK income rights to a spouse or children to utilise their 20% rate. Of course, specialist advice should be taken before considering utilising any of these planning techniques.”
This is part of an explanatory letter to British MP, Roger Gale from HM Treasury about a constituent's enquiry regarding the proposed changes:
The full consultation document is available at gov.uk/government/consultations
To sign the petition against changes, see: https://you.38degrees.org.uk/petitions/keep-uk-tax-allowance-for-expats
See also: http://www.blevinsfranks.com/
http://www.sovereigngroup.com/
and for interest: http://www.cyprusexpat.co.uk/blog/read/id:5313/keep-uk-tax-allowances-for-british-expats-campaign
