UK Plans To Restrict Personal Tax Allowance For Non-Residents


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The UK government is considering another tax reform which could affect British expatriates, depending on your circumstances. It is considering whether to withdraw the personal tax allowance from non-residents, unless they have a strong economic connection in the UK.

The UK government is considering another tax reform which could affect British expatriates, depending on your circumstances. Following on from its plan to charge non-UK residents capital gains tax on the sale of UK residential property, it is now considering whether to withdraw the personal tax allowance from non-residents, unless they have a strong economic connection in the UK.

Under current rules, UK nationals are entitled to the UK personal allowances whether they are resident in the UK or abroad. At the moment the first £10,000 of income is tax free, increasing to £10,500 from next April. It is also granted to many foreign non-residents, especially where their country has a tax treaty with the UK, for example, EU nationals working in the UK for a short time.

Most other countries, particularly most of the EU, the US, Australia and Canada, restrict entitlement to their own personal allowances. The UK therefore collects less tax on the income of non-residents than comparable jurisdictions.

The government first announced its intention to consult on restricting this allowance in the March budget, and the Treasury has now published its consultation document, “Restricting non-residents’ entitlement to the UK personal allowance”.

HM Revenue & Customs estimate that at least 400,000 individuals who are non-resident for tax purposes claim personal allowances, and it costs the exchequer approximately £400 million a year.

The Treasury now proposes to restrict the availability of the allowance to non-residents, so that entitlement will be based on the economic connection the individual has with the UK.

Economic connection is likely to be measured by looking at what percentage of the individual’s worldwide income arises in the UK. Many other countries use this test, and the percentage is generally between 75% and 90%. So the percentage of your income arising in the country meets the set amount, you are eligible for the allowance.

The UK government has expressed that, because of the low administrative burden this method places on individuals, it is the preferred option. It wants to ensure that individuals with strong economic connections to the UK continue to benefit from the generous Personal allowance.

The Treasury consultation document explains that although the loss of the UK personal allowance would mean non-residents would face increased UK tax liabilities, most of them would be able to claim relief overseas either in the form of a credit for tax paid in the UK or exemption from tax in their home state.

Most people would therefore not generally pay more tax overall than they do now, though this will depend on the relative level of tax rates and allowances between the UK and their country of residence -those living in low tax jurisdictions are likely to pay more tax.
Are you affected?

The consultation document looks at the impact on groups of people.

Retirees – Most retired British expatriates would not be affected. Tax treaty provisions generally mean that UK state pensions, personal or private sector occupational pensions are only taxable in recipient’s states of residence. Government service pensions, however, are only taxable in Britain, unless the treaty states otherwise (as is the case in Cyprus). Many retired British expatriates do not have any other income which is taxable in the UK, so would not be affected by losing their allowance.

Non-resident landlords – These individuals are generally taxed on their UK rental income in their country of residence as well as the UK. They can claim double taxation relief, so should not face an overall cash loss without a UK personal allowance.

High income individuals are unlikely to be affected since their personal allowances are already tapered away by virtue of their high income.

Middle income individuals (including professionals or managers seconded to the UK for a few months) are already likely to claim double tax relief in their country of residence against any UK tax suffered, so probably only those in lower tax jurisdictions than the UK would face a loss.

Low income individuals – To avoid administrative burden and tax losses to these individuals, the government intends to put a de minimis limit in place.

At this stage this is only a consultation, so there are no changes to the personal allowance yet. The timing of the consultation means that the earliest something can happen is Budget 2015, although Budget 2016 is more likely. There is no need to worry just yet, though you should keep informed on the progress of this consultation if it is likely to affect you.

As an expatriate, you need to understand how UK tax, and changes there, could continue to affect you. Importantly, you also need to understand interaction of UK tax with the tax regime of your country of residence and ensure you are not missing out on opportunities to save tax.

14 August 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; individuals should seek personalised advice.