Under current rules, UK nationals are entitled to UK Personal Allowances wherever they are resident. The UK personal allowance is also granted to many non-residents who are not UK nationals, especially where the non-residents’ own country has a tax treaty with the UK.
Most other countries restrict entitlement to their own personal allowances. This means that the UK ends up collecting less tax on the income of non-residents than a comparable jurisdiction.
The UK Treasury has now published a consultation document entitled ‘Restricting non-residents’ entitlement to the UK personal allowance’.
It 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?
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. 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 living here in Spain, 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 Spanish tax, and ensure you are not missing out on opportunities to save tax.
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