Hundreds of thousands of British expats face paying tax on all of their UK income under new proposals being drawn up by the Treasury.
At present, European Union nationals and British expats are entitled to offset income earned in the UK against the national personal allowance of £10,000.
This means that for Brits who live abroad but rent out their UK home (of which there are estimated to be 175,000), there will be no entitlement to the allowance, which could make them thousands of pounds a year worse off.
Chancellor George Osborne announced the plans in his March budget and a consultation was put in place to gather reaction. Not all replies have been favourable. For example, accountants have said that many retired expats could be forced to return from overseas if the Chancellor presses ahead with the plans.
A Treasury spokesman said that the plan would mean that the personal allowance was only granted to those with a ‘strong economic connection’ to Britain and added that it would bring the UK’s tax regime in line with the United States, Canada and much of the EU.
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 pensioners are only taxable in the country of residence.
Retired expats drawing certain pensions could also be hit by the proposals, which could cut a couple’s income by up to £4,000 a year. For example, 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 could pay more tax.
British diplomats and missionaries who are currently entitled to the personal allowance may also be affected by the tax changes, the Treasury spokesman confirmed.
According to tax experts, some expats currently able to claim tax relief from their country of residence, such as those living in the low tax jurisdictions of Hong Kong and Dubai, will pay more tax overall.
Jackie Hall, a tax partner at accountants Baker Tilly, said expats should consider selling their UK rental properties and reinvesting the money in shares or property abroad, adding that some may be forced to abandon a carefully planned retirement overseas and return to Britain if the tax changes mean they no longer have enough to live on.
‘Pensioners who’ve gone abroad are going to suffer the biggest impact. If you have already jumped ship and are reasonably comfortable, this could turn the tide against you. Those people may begin to struggle because they haven’t got the income in retirement that they thought they had,’ she explained.
The Treasury spokesman stressed that a final decision has yet to be made. ‘We believe that it is reasonable to consider whether non-residents who receive income from the UK are paying a fair share of tax on that income, in this country,’ he added.