The UK Budget - Implications For Expatriates
It is always advisable for British expatriates to keep an eye on UK budgets. They are often affected by tax changes in the UK, even though they live in Spain. The 2015 Summer Budget contained a few reforms that could have considerable impact on your tax and estate planning.
Personal allowances will increase from £10,600 to £11,000 for the 2016/17 tax year. The higher rate (40%) band will apply for incomes of over £43,000.
The 10% dividend tax credit will be replaced by a new tax-free allowance of £5,000 on dividend income. Dividends will be taxed at 7.5%, 32.5% or 38.1% depending on the rate band.
Mortgage interest relief for rental income will be restricted to the basic rate of income tax and the ‘wear and tear’ allowance for furnished properties withdrawn. The Rent a Room scheme annual income limit will increase to £7,500.
There will be further limitation of tax relief for pension contributions and the maximum relief for high earners (earning in excess of £150,000) will be limited to £10,000.
A transferable main residence relief will be introduced in addition to the existing nil rate band, which remains frozen until 2021. This will start at £100,000 per person from April 2017 and increase by £25,000 a year until it is £175,000 in 2020. This is provided the main home passes to a direct descendent.
Any unused main residence allowance will be transferred to their surviving spouse or civil partner, making an effective inheritance tax threshold of £1 million for a couple. Where the net estate exceeds £2 million the main home relief will be tapered away.
Property in Spain will also be covered by the new allowance, provided it was your residence at some point. Local succession tax will still apply however.
Chancellor George Osborne unveiled plans to remove “fundamental unfairness” in the non-domicile regime. The government will abolish the permanent non-UK domicile (‘non-dom’) status. From April 2017, anyone who is resident in the UK for 15 of the last 20 years will have to pay full UK taxes on their worldwide income and gains, whether they remit them into the country or not.
From April 2017, anyone with a UK domicile of origin who leaves the UK to live abroad will be deemed a UK domicile for at least five years after they leave – at present it is three years.
If they move back to the UK they will be treated as UK domicile from the date of return. This is a significant change from current law.
This could have considerable tax implications. Where someone has set up an excluded property trust while non-UK resident and non-UK domiciled, it will no longer have excluded property status on their return to the UK. They will be taxed on income and gains arising within the trust if they can benefit from it. Also, the trust will be subject to inheritance tax, and the ten year anniversary charges and exit charges will apply.
This is still undergoing consultation, but once it is confirmed, anyone who may return to the UK should take specialist advice to review their tax planning, ideally before they leave Spain.
There is a further change regarding ‘enveloped’ residential properties owned by non-domiciles. Pending consultation, from April 2017 all residential property will become subject to inheritance tax, whether held directly or indirectly. Currently, where a non-UK domicile holds the property through opaque structures such as non-UK companies and excluded property trusts, it is not subject to inheritance tax. Once the rules change, the tax will apply on chargeable events.
Non-UK domiciled expatriates owning UK property through a company need to review their situation to establish the best route forward, weighing the costs of de-enveloping the property with the inheritance tax charges.
If you may be affected by any of these changes, seek specialist advice from Blevins Franks based on your personal circumstances. We also consider local taxation in Spain, the interaction between the two regimes, and the most effective tax planning for your circumstances. www.blevinsfranks.com.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.souce surinenglish