THE UK government has announced plans to restrict UK tax-free personal allowances for non-UK residents.
As the personal allowance is currently £10,000 per year (or higher for over 65s/75s), a full removal of this for expats receiving UK income could have a significant effect, as has been highlighted by some alarmist UK headlines. However, once you delve into the detail of the plans, the changes in their current format may have limited effect for expats.
Expats with state pensions, private pensions or rental income from the UK
If you are tax resident in Spain, you are taxable on your UK (and worldwide) income and you are entitled to offset UK tax suffered against your Spanish tax liability. Fully tax-compliant expats will know that there is usually tax to pay in Spain in addition to that paid in the UK. If the personal allowance is removed, it would increase the UK tax liability and in turn increase the deduction for UK tax on your Spanish tax return, reducing your Spanish tax liability. There should, therefore, be no overall effect on the tax position of a Spanish tax resident UK expat.
Expats receiving government service/local authority pensions
If you are in receipt of a ‘crown service’ pension, which usually relates to government or local authority service, the UK has exclusive taxing rights on this pension and there is normally no Spanish tax liability. The removal of the UK personal allowance for expats receiving crown pensions could therefore have a significant effect, as there is no Spanish tax liability to offset. However, the government plans state explicitly that the UK personal allowance would be retained for income that is taxable exclusively in the UK. Individuals receiving crown service pensions should therefore not experience any changes.
How will it work?
The government plans to apply the personal allowance restriction by testing a non-UK resident’s economic connection to the UK. The proposed measure is to remove the personal allowance if less than 90% of a non-UK resident’s income is derived from the UK. As such, expats whose only source of income is from the UK may continue to benefit from the personal allowance.
The rules are currently at a consultation stage, where the government invites comments from interested parties prior to issuing draft legislation. The above rules are therefore subject to change. There is no set date for the application of the new rules; however it would be reasonable to assume that they would commence on April 6, 2015. The draft legislation is likely to be released in late autumn and any updates will of course be in the Olive Press.
If you require advice on UK/Spanish tax issues you can contact Alex at firstname.lastname@example.org or via www.taxforukexpats.com.