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Expat Briefing Editorial Team
15 March, 2017
British expats living in the European Union continue to face huge uncertainty over their legal status and financial affairs. But, back home, at least Chancellor of the Exchequer Philip Hammond did not heap too much pain on expats in his 2017 Spring Budget, although there was a sting in the tail for those intending to transfer their pensions abroad.
This feature follows up on the Budget, outlining the main measures announced by Hammond (not that there were many of those!), with particular reference to those affecting expats, or those intending to expatriate from the UK in the near future.
Personal Tax, National Insurance, and the U-Turn!
For tax residents, rates of income tax remain unchanged as a result of the 2017 Budget (i.e. 20 percent, 40 percent and 45 percent). However, Hammond confirmed that the personal income tax allowance would increase by GBP500 (USD600) to GBP11,500 on April 6, 2017, with the higher rate threshold increasing by GBP2,000 to GBP45,000 effective the same date.
Hammond's headline measure in a Budget speech short on new announcements (several measures were signalled in previous budget or fiscal statements), was to lift the main rate of Class 4 National Insurance contributions (NICs) from 9 percent to 11 percent in two stages starting on April 6, 2018.
The Government will also reduce the tax-free allowance for dividend income from GBP5,000 to GBP2,000 to reduce the tax differential between the employed and self-employed on one hand and those working through a company on the other.
However, following a backlash against these measures from the self-employed and members of the governing Conservative Party, the proposed increases in NIC contribution rates will now not be introduced during the life of the current parliament, which runs until the spring of 2020.
It was confirmed in the 2017 Budget that the treatment of foreign pensions schemes for those employed abroad will be more closely aligned with the UK's domestic pension regime. This follows up on an announcement in the 2016 Autumn Statement.
Under the changes, the period over which UK tax charges arise on payments out of funds that have had UK tax relief in relevant non-UK schemes (RNUKS) will be extended from five years to 10 years. In addition, "section 615 schemes," special retirement schemes for employees or self-employed expats working outside of the UK, will be closed to new savings.
These changes will have effect from April 6, 2017, although the 2017 Budget clarifies that all lump sums paid out of funds built up before April 6, 2017, will be subject to existing tax treatment.
QROPS Tax Charge
Of most interest to those intending to retire overseas was probably the announcement of a 25 percent tax charge to pension transfers made to Qualifying recognized overseas pension schemes (QROPS), subject to certain limited exemptions.
According to the announcement, exceptions will be made to the charge, allowing transfers to be made tax free where people have a genuine need to transfer their pension, where:
If the individual's circumstances change within five tax years of the transfer, the tax treatment of the transfer will be reconsidered. The changes are effective for transfers requested on or after March 9, 2017.
The government will also legislate to apply UK tax rules to payments from funds that have had UK tax relief and have been transferred, on or after April 6, 2017, to a QROPS. UK tax rules will apply to any payments made in the first five full tax years following the transfer, regardless of whether the individual is or has been UK resident in that period.
Offshore Property Developers
The government will amend the legislation subjecting profits from trading in and developing land in the UK to income tax.
As announced in the 2016 Spring Budget, all profits from dealing in or developing land in the UK will be chargeable to corporation or income tax irrespective of the residence of the person making the disposal. However, this measure excluded profits from disposals made on or after July 5, 2016, but where the contract was entered into prior to July 5, 2016.
Budget 2017 amends this measure so that all profits from dealing in or developing land in the UK that are recognized in the accounts on or after March 8, 2017 will be taxed. However, this will be the case even if the contract for disposal was entered into prior to July 5, 2016.
Non-Doms And Inheritance Tax
As announced in the 2015 summer Budget, from April 2017 non-UK domiciled individuals ('non-doms') will be deemed domiciled in the UK for tax purposes where they have been UK resident for 15 of the past 20 tax years. Additionally, individuals who were born in the UK with a UK domicile of origin, but have acquired a domicile of choice elsewhere, will be deemed UK domiciled for all tax purposes while they are UK resident. Non-doms who set up a non-UK resident trust before becoming deemed domiciled in the UK will not be taxed on any income and gains retained in that trust.
Also as announced in the 2015 Summer Budget, the limit below which minor interests in UK residential property are disregarded for inheritance tax (IHT) purposes has been increased from 1 percent to 5 percent of an individual's total property interests.
However, the 2017 Budget confirmed that from April 2017 IHT will be charged on all UK residential property even when indirectly held by a non-dom through an offshore structure. This was also first announced in the 2015 Summer Budget.
In another change affecting non-doms, amounts of income, gains and capital within overseas mixed funds can be segregated to provide certainty on how amounts remitted to the UK will be taxed. Following consultation on the draft legislation this will be extended to income, gains and capital held in mixed funds from years before 2007 to 2008, as well as those from subsequent years, as announced in the 2016 Spring Budget.
Finally, those who become deemed domicile in April 2017, excepting those who were born in the UK with a UK domicile of origin, will be able to treat the cost base of their non-UK based assets as the market value of that asset on April 5, 2017.
The changes will have effect from April 6, 2017.
Tax Compliance – Declaration Of Offshore Interests
Following up on another previously announced proposal, Budget 2017 confirms that there will be a new legal requirement for those who have failed to declare UK tax on offshore interests to correct that situation, with tougher sanctions for those who fail to do so before October 1, 2018. This new "requirement to correct" is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at April 5, 2017.
In addition, draft legislation will be revised to ensure that the "reasonable excuse" provision doesn't apply where advice is received from an adviser who is not independent.
As announced at Spring Budget 2017, the government will consult on proposals to rent-a-room relief to ensure it is better targeted to support longer-term lettings. This measure is intended to benefit those providing affordable long-term lodgings, rather than short-term holiday lets, particularly those arranged through online platforms such as Airbnb.
While this was a Budget short on excitement, save for the ill-judged NIC proposal and subsequent rapid u-turn, there are still several measures buried in the small print which could have major tax consequences for expats, especially in the area of pensions and property income. These could provide expats with further financial planning challenges, and as we usually stress here, good, independent financial advice is the key to avoiding an unwanted tax hit.
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