Expats urged to review sources of UK income amid tax raid plans

Property owners and pensioners who face losing their personal tax allowances can take steps now to protect themselves, say experts

Expats facing the possibility of losing their personal allowance under a tax raid proposed by George Osborne should not panic but look carefully at where their UK sources of income come from, according to experts.

The estimated 175,000 people who live abroad and earn an income from property in Britain could be affected, as could retirees. The measure could cut an expat couple’s income by up to £4,000 a year.

At present, EU nationals and British expats can offset income earned in the UK against the £10,000 personal allowance. Under the Chancellor’s proposals, this would be restricted to people with a “strong economic connection” to Britain.

Many of the 1.2 million British retirees living overseas will not pay extra tax on their pension because they are either UK residents for tax purposes, as they spend half the year in Britain, or because most state or private pensions are only taxable in the country of residence.

However, UK government pensions are only taxable in Britain, meaning that unless the Treasury introduces exceptions, former civil servants, NHS workers and council officials living overseas will pay more tax.

Dean Power, assistant tax manager and technical coordinator at The Fry Group, said: “The consultation outlines that the intention is that those with strong economic connections with the UK could maintain entitlement to a personal allowance. 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 per cent and 90 per cent 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 per cent.

“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 property after 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.”

Mr Power advised that expats should take “a considered approach” and seek professional advice once the outcome of the consultation process is known.

Jason Porter, business development director at Blevins Franks financial advisory group, noted 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 added: “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.”

Justin Harris, managing director of Chase Belgrave, an independent financial advisory company said the latest proposal may well prompt expats to remove their links with Britain altogether, if they can.

“This announcement represents a continuation of the assault on expats as a source of tax revenue for an exchequer creaking under the strain of austerity. It seems likely that the Treasury will continue to enact measures that increase the tax burden on expats,” he said.

“Our clients are increasingly telling us that the constant chopping and changing of UK regulations makes them feel very insecure having assets in the UK. We’ve seen them sell their UK properties, close their bank accounts and pull their pensions out of the UK and put them into QROPS.”

QROPS (Qualifying Recognised Overseas Pension Schemes) are HM Revenue & Customs-recognised pension schemes based in selected jurisdictions outside the UK.

Howard Bilton, a barrister and chairman of Sovereign Group, a consultancy specialising in international tax advice 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 per cent 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 per cent 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 per cent rate. Of course specialist advice should be taken before considering utilising any of these planning techniques.”