British expatriates are often affected by UK tax changes, even though they live abroad. The Summer Budget contains a few reforms that could have considerable impact on their tax and estate planning.
It is always advisable for British expatriates to keep an eye on UK budgets. They are often affected by tax changes, even though they live abroad. The latest Summer Budget contains a few reforms that could have considerable impact on their tax and estate planning.
Personal tax
Personal allowances will increase from £10,600 to £11,000 for the 2016/17 tax year. The higher rate (40%) band will apply for annual incomes of over £43,000.
The 10% dividend tax credit will be replaced by a new tax-free allowance of £5,000 on dividend income. Dividends will be taxed at 7.5%, 32.5% or 38.1% depending on the rate band.
Mortgage interest relief for rental income will be restricted to the basic rate of income tax and the ‘wear and tear’ allowance for furnished properties withdrawn. The Rent a Room scheme annual income limit will increase to £7,500.
There will be further limitation of tax relief for pension contributions and the maximum relief for high earners (earning in excess of £150,000) will be limited to £10,000.
Inheritance tax
A transferable main residence relief will be introduced in addition to the existing nil rate band. This will start at £100,000 per person from April 2017 and increase by £25,000 a year until it is £175,000 in 2020. This will create an effective £500,000 inheritance tax threshold, provided the main home passes to a direct descendent.
Any unused main residence allowance will be transferred to their surviving spouse or civil partner, making an effective inheritance tax threshold of £1 million for a couple. However, where the net estate exceeds £2 million the main home relief will be tapered away.
If you own property outside the UK it will also be covered by the new allowance if it was your residence at some point. Local succession tax may still apply however.
The current nil rate band will remain frozen at £325,000 until 2021.
Non-domicile regime
Mr Osborne unveiled plans to remove “fundamental unfairness” in the non-domicile regime. The government will abolish the permanent non-UK domicile (‘non-dom’) status. From April 2017, anyone who is resident in the UK for 15 of the last 20 years will have to pay full UK taxes on their worldwide income and gains, whether they remit them into the country or not.
From April 2017, anyone with a UK domicile of origin who leaves the UK to live abroad will be deemed a UK domicile for at least five years after they leave – at present it is three years – even if they intend their move to be permanent.
If they move back to the UK they will be treated as UK domicile from the date of return. This is a significant change from current law where, if they could show they had no intention of returning to permanently, their UK domicile of origin would not revert.
This could have considerable tax implications. Where someone has set up an excluded property trust while non-UK resident and non-UK domiciled, it will no longer have excluded property status on their return to the UK. They will therefore be taxed on income and gains arising within the trust if they can benefit from it.
This also means that the trust will be subject to inheritance tax, and the ten year anniversary charges and exit charges will apply.
There is still some measure of consultation that needs to take place before any of this becomes law, but once it is confirmed, anyone who may return to the UK in the future should take specialist advice to review their tax planning, ideally before they leave move back.
There is a further change regarding ‘enveloped’ residential properties owned by non-domiciles.
Pending consultation later this summer, from April 2017 all residential property will become subject to UK inheritance tax, whether held directly or indirectly. Currently, where a non-UK domicile holds the property through opaque structures such as non-UK companies and excluded property trusts, it is not subject to inheritance tax. Once the rules change, the tax will apply on any chargeable events.
Non-UK domiciled expatriates owning UK property through a company need to review their situation to establish the best route forward, weighing the costs of de-enveloping the property with the inheritance tax charges.
If you think you may be affected by any of the changes in the budget, seek specialist advice based on your personal circumstances. You also need to consider local taxation in your country of residence and the interaction between the two regimes.
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.
