Expats Face £400 Million Tax Raid

Chancellor of the Exchequer George Osborne MP is preparing to push ahead with plans to stop British expatriates from offsetting income earned in the UK against the £10,000 personal tax allowance.

The move, which will affect those who rent out their homes and retirees drawing a government pension, could cut a couple’s income by up to £4,000 a year, affect up to 400,000 people and raise the Exchequer an extra £400m annually.

As it stands, individuals that derive an income from UK property, but are not resident here for tax purposes, are broadly entitled to the same allowances as UK residents as a result of a double tax treaty with the country in which they’re resident.

1.2 million of the 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. 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.

According to experts, expatriates may be forced to sell their UK rental properties if the proposal becomes law. At present, EU nationals and British expats are entitled to offset income earned in the UK against their £10,000 personal allowance.

While some expats will be able to claim tax relief from their country of residence, those living in low-tax jurisdictions – such as Hong Kong and Dubai – will pay more tax overall.

Jackie Hall, a tax partner at accountants Baker Tilly, said expatriates should consider selling their UK rental properties and reinvesting the money in shares or property abroad.

“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.”

Mr Osborne first indicated his desire to curtail the allowance in the  Budget 2014. Under Treasury proposals released for consultation, the allowance would be restricted to people with a “strong economic connection” to Britain, bringing the tax regime into line with the US, Canada and much of the EU.

British diplomats and missionaries who are currently entitled to the personal allowance may also be hit by the tax changes.

A Treasury spokesman said of the proposals:

“The increases the government has made to the personal allowance support hardworking people by helping them to keep more of the money they earn and, as a result, is one of the most generous in the world. At the same time, 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.”