Another day, another sensationalist headline implying that expats face yet another tax raid, particularly those who rent out their homes, or draw a government pension.
“Expats who rent out their homes in Britain will be stripped of the right to use the personal allowance”…….. “ Changes to tax rules could force some to rethink their retirement plans abroad”…..Retirees drawing a government pension are also likely to be hit by the proposals, which could cut a couples income by up to £4,000 a year”.
All very worrying for expats living in Spain, who are still reeling from the potential impact of the Modelo 720, and other sensationalist reporting implying the expats over 65 will lose their exemption from capital gains if they sell their property. I reported on this last story at the weekend, assuring expats that the story was not true. This story is not dissimilar, and after reading the relevant documents, it’s not quite as it seems.
So, let’s unravel some of the mysteries of the story.
The UK government announced in the 2014 Budget it would consult on whether entitlement to the UK Personal Allowance should be restricted for non-residents and how this might be done.
The result was a consultation document that was published on the 17th July, but updated on the 4th August. This will be open to responses until the 9th October, and sometime later they will publish their proposals. So, the first thing to bear in mind is that these are proposals at this stage.
So, they key proposal is that there may be a restriction on the entitlement of a non-resident to receive a Personal Tax Allowance: currently £10,000 pa, and rising to £10,500 from April 2015.
Before we consider this, it is worth looking at whether you need a personal allowance in the first place. My notes on Personal Taxation, which can be found in the Library on our website, www.citizensadvice.org.es explain how income you receive in the UK is taxed in the UK or Spain. These will be updated soon to reflect the new Double Taxation Agreement, but the principles remain the same. Income is either taxed only in the UK (e.g. government pension), only in Spain (e.g. state or private pension) or both (e.g. rental income, dividends). I know that many people offset the tax they have paid on private pensions, but technically this is not correct. So, we are talking about either income taxable only in the UK, or income which is taxable in both countries which may be affected.
The consultation document sets out the approach of other countries and then details it preferred option. This centres on linking entitlement to the allowance with economic connections to the UK. It considers that the most effective way that this can be achieved is to apply the “percentage test”. This measures the amount of the individuals’ worldwide income which arises in the UK. The consultation ask for views on where the level of the percentage should be set. It suggests this could be either 75% or 90%. In my view a significant number of expats in Spain would meet this test.
It specifically considers rental income, and it is likely that the personal allowance would be restricted in these circumstances. What’s not exactly clear is whether you will receive the personal allowance to uses against rental income if you pass the “percentage test”. However, it makes the point that in any case, rental income will also be taxed in the country of residence, so many landlords would be able to claim relief from any tax paid in the UK. This is correct, and in fact Spain is quite generous in the taxation of rental income. Currently only 40% of net rental income is taxable in Spain. This will rise to 50% in 2015.
Finally it clearly states that anyone who receives a government pension would not be able to claim double taxation relief, and consequently they consider this would be disproportionate, so they do not intend to restrict the Personal Allowance under these circumstances.
So, I hope that this clarifies what’s being proposed, and the possible impact. I will follow the consultation and keep our members informed of development.
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