UK Personal Allowances: No change til April 2017

The Chancellor has confirmed that, following the recent public Consultation process, the Government has recognised the complexities of implementing a withdrawal of the UK personal allowance for some non-resident taxpayers.  Further consultation with tax professionals and the public alike will take place before any proposals become law.  In view of this further period of Consultation, there will be no prospect of a change until at least April 2017.  

UK Capital Gains Tax Latest News: Residential Property and Non Residents

The Government has released their response on the Consultative Document on implementing a capital gains tax charge on non residents, who were previously exempt from UK capital gains tax unless they were considered to be "temporarily non resident".  As expected, the legislation will be introduced with effect from 6 April 2015 and non-residents will then potentially be subject to capital gains tax on the disposal of UK residential property.

Principal private residence (PPR) relief will continue to be available but some fundamental changes to this relief will be introduced in the legislation.   Hitherto it was possible, if the taxpayer owned two properties, to elect to treat a particular property as the main residence but the Government is now proposing that it will only be possible make a PPR election if the property in question is situated in the same country where the taxpayer is tax resident.  Alternatively, the election would be valid provided the taxpayer spent at least 90 nights in the property in the year in question.  Any election will now be made at the time of the disposal.

There is some concern that, for expatriates working full time overseas, who typically let out their UK homes when on assignment, it will be difficult, or even impossible, to fulfil this 90 nights condition and we must await the actual legislation to see whether the former reliefs relating to periods worked full time overseas will continue to be available.

The rate of tax for individuals will be 18% or 28%, depending on the amount of the gain and the available basic rate tax band; the annual capital gains tax exemption, currently £11,000, will be available to non-residents.

The new capital gains tax charge will apply from 6 April 2015 so any gain accruing from this date will be caught under this new legislation but the taxpayer can choose whether to compute the gain by reference to the fair market value of the property at April 2015 (known as re-basing; this is likely to be the preferred option) or time apportion the gain over the period of ownership of the property.

There will be a deadline for reporting the disposal - a mere 30 days from completion of the transaction- which will apply to all taxpayers.    However, those taxpayers who already file UK tax returns and have a current Self-Assessment account will be able to declare the gain on the tax return for the year in question and pay the capital gains tax by the normal due date of 31 January following the end of the year of assessment.  Those taxpayers not in the Self Assessment system will be required to pay the tax at the time the gain is reported, ie. within the 30 day deadline.  The Government has not yet outlined the methods for reporting or paying the tax so we must await the legislation in the Spring for clarification on these points.

Non-Residents – Restriction of UK Personal Allowances

The Government announced in the last Budget that they would be consulting with interested parties regarding their proposal to withdraw or restrict the UK personal allowance for non-resident individuals.  The Consultation document was issued for consideration on 17 July 2014 and the consultation process closes on 9 October 2014.

From the Consultation document we can glean the Government’s reasons for the proposal - which is largely driven by:

·         achieving parity with most other EU jurisdictions that do not offer the equivalent to the UK personal allowance to non residents

·         establishing a link between economic activity and taxation so that taxable income arising in the UK to non-residents (who are taxed on their global income in their home jurisdiction) does actually result in some tax being payable to the UK Exchequer to reflect the UK economic activity

·          fairness in UK taxation for all non residents, regardless of the lack of non-discrimination clauses in the Double Tax Agreement with certain non residents’ home jurisdictions  which currently results in a denial of a UK personal allowances - for example, to US individuals

One of the major proposals discussed in the Consultation document is related to the concept of “ties to the UK”.  This concept is already enshrined in the recent Statutory Residence Test so the introduction of such a principle for entitlement to a UK personal allowance would seem to sit with the general principles now contained within UK tax legislation.

One idea is to measure the extent of non residents’ economic connections to the UK by referencing their UK income as a percentage of their worldwide income.  The value of the percentage used in other jurisdictions (where a similar concept has been implemented), is either 75% or 90%.  So, for non residents who could demonstrate that either 75% or 90% of their global income is UK sourced, then the personal allowance would be available.   We stress that,  at this stage, this is just a point for consultation but if this idea is adopted, then many non resident retired persons who have UK sourced pensions (not necessarily taxed in the UK) and UK investment income will probably still be able to claim the personal allowance.  The main losers are likely to be those non residents whose main economic activities are outside the UK, via their employments abroad; if these non residents have UK investment income eg rental income, they will lose the personal allowance and will pay UK tax on their UK rental income but, in most cases, they will be able to claim a corresponding credit in their country of residence.   

The Government is aware that pensioners in receipt of Government Service pensions could be disproportionately affected by any restriction of the personal allowance so has stressed that the personal allowance will still be available to set against income that is taxed solely in the UK in accordance with a Double Tax Agreement.   

We will be reporting periodically on the progress of the Consultation process as and when HMRC release any commentaries before the final closing date of 9 October 2014.      

Success with the French Tax Administration - re UK rental income!

PetersonSims and Aurecco (see Global Partners) are delighted to announce that, after a  wait of almost 18 months, we have finally received an official reply from the French Tax Authorities on the issue of UK rental income received by a tax resident of France.

Article 6 of the UK-France Double Tax Agreement gives the taxing rights of UK sited rental income to the UK but, for residents of France, under domestic French law (Article 4A of French tax code), France will seek to tax the worldwide income of its resident.  The elimination of double taxation on this income is achieved by France granting a tax credit equal to the French tax, provided that the income was subject to tax in the UK (article 24 3 a) (i) of the Treaty). The interpretation of the phrase “subject to tax” was a source of much controversy and divergence of interpretation between the professional tax advisers and the French Tax Administration.

 The question addressed specifically to the Tax Administration concerned the fact that most UK expatriate taxpayers were not actually bearing any UK tax on UK rental income, because their UK taxable income was under the personal allowance threshold. In our first informal exchanges, the French Tax Administration seemed to consider this personal allowance system as an exemption of tax, whereas we were contending that it is a zero tax bracket, similar to that found in the French system.

Eventually, after several exchanges with the Tax Authorities when we asked for a further review of the position, we received an official reply.  Now, the Tax Administration has conceded the point and has written (this is a direct translation of their letter) that “the fact that after the application of personal allowances related to income or age has the effect of reducing or cancelling all or part of the tax assessment in the UK, should not lead to refusal of the treaty tax credit to the French tax resident. This position is consistent with the French case law”.

So now, having correctly declared your rental income in UK and providing a copy of a UK self-assessment tax return showing this, you will get the tax credit on income tax and CSG/CRDS social contributions, regardless of whether or not you actually paid any income tax in the UK.

 For those of you who are in receipt of UK rental income,  we strongly recommend that you review past years’ avis des impots to ensure that you have received the correct French credit.  Also, review carefully the avis which you will receive in August or September, relating to 2013 income declared this summer.  If you have been charged income tax and/or CSG/CRDS social charges, then contact us for assistance in obtaining refunds of these amounts.   It is possible to obtain corrected tax assessments for the past three years so there are potentially refunds awaiting!

Consultation Paper – UK Capital Gains Tax for Non-Residents

The long awaited Consultation Paper, relating to the Government’s proposal to start to levy UK Capital Gains Tax on gains realised on UK-sited residential property by non-residents, was published this month.

Some of the measures proposed in the Consultation Paper are as expected but there are some areas which are still not clear but no doubt the consultation process will flush out many of these and help to ensure we get legislation introduced next Finance Bill (2015) which will have clarified the situation. 

 The main proposals are:

·       a chargeable gain will arise on residential property sited in the UK when disposed of after 6 April 2015 by non-residents

·         there is no reference in the Consultation Paper to any form of re-basing to establish a cost base valuation of the property as at 6 April 2015; so it is assumed that there will be some measure of relief in the form of a straight-line time apportionment of the gain over the total period of ownership of the property (similar to Principle Private Residence relief)

·         the definition of residential property includes student accommodation provided via the private sector ie off campus accommodation by private landlords

·         the wider definition also makes it clear that the new charge will apply to “property used or suitable for use as a dwelling i.e. a place that currently is, or has the potential to be, used as a residence” so properties currently being converted into accommodation will be caught

·         the annual Capital Gains Tax Allowance (currently £11,000 in 2014/15) will be available to the non-resident

·         the Capital Gains Tax rate will be calculated by reference to all other UK sourced income that remains taxable in the UK for the non-resident in order to establish the tax band appropriate to the gain on the property – this measure may impact those in receipt of Government  Service pensions particularly harshly as part, or all, of their basic rate band could already be assigned to their Government Service pension which remains taxable in the UK

·         the new charge will affect not only individuals but also many structures such as partnerships or non-resident trustees or funds

·         Non-UK resident companies were already targeted by a tax charge introduced a few years ago (the ATED scheme) for properties of more than £2m; the new regime will be extended to such companies but it is not yet clear how the inter-action with the ATED scheme will work in all cases

·         The proposed UK treatment is in line with the tax treatment of similar gains in many other jurisdictions, although the implications of the different Double Tax Agreements may impact whether there will be any further capital gains tax to pay in the country of residence

·         There is no specific reference in the Consultation Paper to losses made but it is expected that such losses will be available to carry forward but whether this will be of benefit to a non-resident will depend upon personal circumstances

·         The consultation process closes on 12 June 2014

US Treasury Form TD F 90-22.1 replaced for 2013 declarations

For those US citizens or greencard holders with foreign financial accounts there are new FBAR reporting requirements for 2013 declarations. 

There is now a new online filing system and  a new FinCEN form 114 which can be accessed at:  http://www.fincen.gov/forms/bsa_forms/   

The filing deadline remains at June 30 following the calendar year-end being reported.  There are no exceptions to this deadline, regardless of extensions granted to file a tax return.

Severe penalties will be imposed for failure to file. 

 

Note: some taxpayers may also be required to file form 8938 with their tax return.

Personal Allowances for UK Non-Residents At Risk!

Buried amongst the Budget Day announcements is a potential nasty shock for British expatriates - the Government intends to begin a consultation process on whether and how the Personal Allowance could be restricted to UK resident taxpayers and to those living overseas “with strong economic connections” in the UK.

This move is designed to bring the UK in line with most other EU countries where non-residents get no tax benefits when determining income which  is taxable.  Typically, the types of income on which UK non-residents actually pay UK tax are limited under the various Double Tax Agreements to income such as UK rental income or UK Government Service pensions.

It begs the question, what exactly are “strong economic connections” and we are sure this is going to be vigorously debated during the consultation process.  It is to be hoped that the retained ownership by British citizens of their former family home, now let out to produce an income, and UK public sector pensions will be within the definition of “strong economic connections”! 

Add this to the move announced in the Autumn Statement whereby it is intended to introduce a UK capital gains liability from April 2015 for non-residents disposing of UK sited residential property and it is understandable why British expatriates are beginning to feel the sand shifting under their feet.  

Dual contracts for non-UK domiciled individuals under attack

The 2014 Finance Bill will address the perceived abuse by high-earning non-domiciled individuals  manipulating duties of a single employment between offshore and UK duties by the use of dual contracts.

Where tax is not payable on the overseas contract at a rate broadly equivalent to the individual’s UK tax rate, then the overseas employment income will be taxed on the arising basis in the UK. However the legislation has been revised to prevent a tax charge arising on dual contracts which are not motivated by tax avoidance.

 No income tax charge will arise on income from employment duties performed in tax years up to 2014/15.  Furthermore, no charge will arise on directors with less than a 5% shareholding in the employing company or on employments held for legal or regulatory reasons.

These changes will take effect from 6 April 2014.

Retired savers benefit the most from the 2014 Budget

In his Budget today, the Chancellor gave a much needed boost to pensioners’ savings income in a raft of measures that were broadly welcomed.

·         Pensioner Bonds are to be introduced in January 2015 offering very attractive (in relation to bank saver rates over the last few years) interest rates of 2.8% and 4%.

·         Pensioners are to be given far more freedom in relation to their Defined Contribution Pension Plans and will no longer be forced to take an annuity but will be able to take any amount out of their pension pot and, instead of the penal rate of 55%, they will now pay at their individual marginal rate of tax on any withdrawal.  The 25% tax free lump sum facility is retained.

·         The 10% band of tax which applies, in certain circumstances, on the first £2,880 tranche of savings income in 2014/15, has been chopped and now effectively becomes a nil ie 0% rate band.

·         Furthermore the tranche at 0% has jumped to £5,000 in 2015/16.

·         ISA limits for everyone have been increased and there will no longer be the distinction between cash ISAs and Stock & Shares ISAs; the combined ISA will be known as a New ISA (NISA).  The new annual limit will be £15,000 and these NISAs will be available from I July 2014.

·         Transfers from existing ISAs can be made into a NISA and any combination of cash, stocks and shares can be invested, up to the £15,000 annual limit.

Paulette Peterson elected member of AIETP

We are delighted to announce that our Expatriate Tax Director, Paulette Peterson, has been elected  as a member of the prestigious body the Association of Independent Expatriate Tax Practitioners, which is based in London.

Membership of this professional body is by invitation only, with existing members voting to approve new admissions.  Paulette is well known in the professional circles within the Expatriate Tax world, having spent many years, firstly, at Arthur Andersen and then at Ernst & Young and was part of the UK National Expatriate Technical Training teams at both of these large firms.

She is looking forward to contributing to the Association, sharing ideas and discussing expatriate tax technical issues with colleagues from similar firms in the UK.  Currently Paulette is one of the few members of this Association with firsthand experience of the French personal tax regime.

Monaco residency continues to be popular….

Our Monaco Associate, Cécile Acolas, from Rosemont Consulting in Monte Carlo reports that figures recently released show that the number of foreign residents in Monaco has grown by nearly 3% in the past year.  A total of 1800 new residency permits were awarded in 2013.

 The principality's foreign population at 31 December 2013 officially stands at 24,992, which is an increase of 695 over last year’s figures.    The top of the list, by nationality, of the new arrivals during 2013 makes interesting reading:

 

·         Italians – 245

·         Russians – 107

·         Swiss  - 75

·         British -  37

 

Unsurprisingly, there has been a slowdown in the number of people leaving Monaco and there were just ten fewer French nationals living in Monaco than in the previous year.

Countdown to the UK Tax Return filing deadline

As the clock ticks down to 31 January, HMRC have released a list of “excuses” from taxpayers relating to the failure to file their tax returns by the due date – here are the Top 10 as chosen by HMRC:

1. My pet goldfish died (self-employed builder);
2. I had a run-in with a cow (Midlands farmer);
3. After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else (London woman);
4. My wife won’t give me my mail (self-employed trader);
5. My husband told me the deadline was 31 March, and I believed him (Leicester hairdresser);
6. I’ve been far too busy touring the country with my one-man play (Coventry writer);
7. My bad back means I can’t go upstairs. That’s where my tax return is (a working taxi driver);
8. I’ve been cruising round the world in my yacht, and only picking up post when I’m on dry land (South East man);
9. Our business doesn’t really do anything (Kent financial services firm); and
10. I’ve been too busy submitting my clients’ tax returns (London accountant).

Not surprisingly, every one of these taxpayers were unsuccessful when appealing against the £100 late filing penalty.

Remember the penalty is imposed even if no tax is payable to HMRC or even if you are due a tax refund!

Do not rely on using HMRC’s software if you are required to file the Residence pages with your tax return as this page option is not available on the HMRC software.  Please contact us on: info@petersonsims.com if you need help.