The UK Chancellor of the Exchequer delivered his Budget to Parliament on 19th March. By far the biggest surprise was the announcement of a complete overhaul to the pension regime. Here is a summary of the issues that may affect British expatriates.
The UK Chancellor of the Exchequer, George Osborne, delivered his Budget to Parliament on 19th March. By far the biggest surprise was the announcement of a complete overhaul to the pension regime.
Growth, the deficit and borrowing were at the heart of Mr Osborne’s speech, with the Chancellor making it clear this was a budget to support a resilient economy with savers at the centre.
Here is a summary of the issues that may affect British expatriates.
Personal allowances increase from £9,440 to £10,000 for the 2014/15 tax year, and again to £10,500 for 2015/16. As previously announced, the higher rate threshold also increases to £41,865 from 6th April 2014, and by a further 1% a year later.
The Government will consult on whether to withdraw the personal allowance from non-UK residents, except those with “strong economic connections in the UK”, as is the case with most EU countries.
As previously announced, married couples and civil partners will be able to transfer up to 10% of their personal allowance to their partner. This may apply to expatriate couples if one of you has UK source income (such as government service pension or rental income) and the other does not.
On 1st July 2014, cash and shares ISAs will merge into a “New ISA” or “NISA”, with an annual limit of £15,000. While this is beneficial to UK residents, expatriates will still be liable to tax in their country of residence on interest, dividends and gains, arising within ISA wrappers.
The amounts that can be invested in premium bonds will increase from £30,000 to £40,000 in 2014/2015 and to £50,000 from 2015/2016. The number of £1 million prizes will also increase. Winners of prizes resident outside the UK may be liable to tax in their country of residence.
Several measures were introduced in one of the largest reforms of the defined contribution pension system since 1921. The government decided that the existing pension regime perpetuated an unjust system for taxpayers who have “done the right thing” and saved all their lives. Pension holders are now being granted a far wider range of access to their funds after retirement.
The following changes came into effect on 27th March 2014:
- A reduction in the minimum income requirement for accessing flexible drawdown from £20,000 to £12,000.
- An increase in the capped drawdown limit from 120% to 150% of equivalent annuity.
- An increase in the total pension wealth people can have before they are no longer entitled to receive lump sums under trivial commutation rules from £18,000 to £30,000.
- An increase to the small pension pots lump sum limit from £2,000 to £10,000, and the number of pots that can be taken as a lump sum increased to three.
A key change will come into effect from 6th April 2015. Members of defined contribution schemes will have much more flexibility in how they deal with their pension on retirement. The requirement to buy an annuity has already been removed and the 25% tax free lump sum will continue to be available, but from 6th April 2015 retirees will have three choices for the balance of their pension:
- Withdraw their entire pension fund on retirement, with the withdrawal to be taxed at their marginal income tax rates, rather than 55% as currently the case.
- Purchase an annuity.
- Flexible drawdown benefits over time.
Remember, it is essential that you consider local tax in your country of residence.
A consultation has been launched regarding transferring out of public and private Defined Benefit Schemes into Defined Contributions Schemes.
Consideration will be given to allowing individuals aged 75 and over to claim tax relief on pension contributions.
The Government will also consult on increasing the minimum pension age so that it remains ten years below state pension age.
HM Revenue & Customs has been given new powers to help prevent pension liberation schemes being registered, and to make it easier to de-register such schemes. This measure is designed to catch schemes which allow members to access their pension fund before reaching retirement, which HMRC views as pension fraud.
Capital gains tax
The capital gains tax annual allowance increases to £11,000 on 6th April 2014.
The 2014 Finance Bill will introduce legislation to ensure that capital gains made by a remittance basis user in the overseas part of a split year are not charged to tax. This is a welcome amendment, and is expected to apply retrospectively.
The Chancellor’s Autumn Statement had included the announcement that the exemption from UK capital gains tax afforded to long-term non-residents on the disposal of UK property will be withdrawn from April 2015. This will affect many British expatriates who retain UK property. The budget itself did not contain any new information on how it would work, but a consultation was later published on 28th March. We will cover this in a later article.
One point to note, though, is that it looks like only gains arising from 6th April 2015 on disposals of UK-sited residential property will be taxed. We are still at the early stages of the consultation, however, so will need to wait for the legislation to published for any certainty.
The second change announced in the Autumn Statement comes into effect this April. The Principal Private Residence Relief – the period of deemed ownership where a property has been the main home and is exempt from capital gains tax – is reduced from 36 months to 18. This affects expatriates who delay selling their UK home after moving abroad.
Where companies own UK residential property valued at over £2 million, there is an annual tax charge – Annual Tax on Enveloped Dwellings (ATED) – currently between £15,000 and £140,000, depending on the value of the property.
New legislation will reduce this threshold to £500,000 and introduce a new range of annual charges. This is effective 1st April 2015 for properties valued at between £1 million and £2 million, and from April 2016 for properties between £500,000 and £1 million.
The charge will be extended to a broader range of residential property, so that eventually enveloped residential properties worth from £500,000 to £2,000,000 will be subject to the ATED, and brought within the related capital gains tax charge.
With immediate effect, the 15% rate of Stamp Duty Land Tax applying to purchases of residential property by companies will be extended to properties worth £500,000 or more.
Note that since non-residents selling UK real estate are likely to be liable to capital gains tax from 6th April 2015, anyone wishing to restructure out of current enveloped structures will need to focus on doing so in good time before next April.
UK inheritance tax is charged on the net value of a person’s estate, after deducting the nil-rate band, any reliefs and exemptions, and outstanding liabilities. Property situated outside the UK belonging to, or settled by, a non-UK domiciled individual is ‘excluded property’ and does not form part of a person’s estate.
Legislation introduced last year allows a deduction for a liability only if it has not been used to acquire, maintain or enhance excluded property, except in a few specified circumstances.
Foreign currency deposits in UK banks are not taken into account in determining the value of a person’s estate if the depositor is non-UK domiciled and non-UK resident at death.
Legislation will be introduced in Finance Bill 2014 to treat foreign currency accounts held in UK banks in a similar way to excluded property for the purposes of how liabilities are deducted for inheritance tax. This measure may affect expatriates who hold foreign currency accounts in the UK.
As announced in the Autumn Statement 2013, various measures will be introduced to simplify the inheritance tax treatment of relevant property trusts by aligning the filing and payment dates and treating retained income as accumulated after five years when calculating the ten year anniversary charge.
These changes could have a significant impact on the inheritance tax payable by existing trusts and no grandfathering provisions were proposed in the previous consultation. The majority of the changes are deferred until April 2015, pending further consultation. The latest round of consultation has not yet been published.
This is just a summary, and more detail tends to emerge following the budget. It is important to seek specialist advice to clarify how you are affected, particularly when it comes to the interaction between UK and local taxation in your country of residence, and if you want to explore your new pension options.
29 March 2014
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.