UK Budgets seem to come thick and fast these days and the latest one was announced on 8th July. This article is a brief overview of some of the main points with particular reference to any changes that could affect expats.
The Personal Allowance threshold will increase from £10,600 in the current tax year to £11,000 from April 2016. The plan had been to increase it to £10,800 in 2016 and £11,000 in 2017-18. The Government has pledged to increase it to £12,500 by 2020.
The Personal Allowance is steadily removed once someone has UK annual income over £100,000. The threshold for higher rate tax (40%) will also rise in 2016, from £42,385 to £43,000.
Landlords benefits to be reduced
Currently landlords renting residential property can claim relief for mortgage interest (not the repayment of capital) against their rental income, unlike home owners. This perk allows landlords to put the cost of the interest on a buy-to-let mortgage on their self-assessment forms, offsetting the income they receive in rent from tenants.
The system of mortgage interest relief will be retained but restricted to the basic rate of tax. The new measures will be introduced gradually from 6 April 2017 but will not affect properties that qualify as furnished holiday lettings.
Finance costs will include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. The gradual introduction of the restriction will be as follows:
- 2017 to 2018 – the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25 per cent being available as a basic rate tax reduction.
- 2018 to 2019 – 50 per cent finance costs deduction and 50 per cent basic rate tax reduction.
- 2019 to 2020 – 25 per cent finance costs deduction and 75 per cent basic rate tax reduction.
- From 2020 to 2021 all financing costs incurred will be given as a basic rate tax reduction.
For most expats who own one property and let this out whilst they are living overseas this will not make any difference but for those that own multiple properties with higher levels of rental income, their net income will reduce.
There is a proposed reform of the Wear and Tear Allowance. From April 2016, this will be replaced with a new relief that will allow all residential landlords to deduct the actual costs of replacing furnishings. Further details are expected in a technical consultation to be published at a later date.
The amount that couples can pass on tax-free will rise from £650,000 (double the individual allowance) to £1M including a property allowance.
A “family home allowance”, worth £175,000 per person on top of the existing £325,000 tax-free allowance, will be introduced with effect from 6th April 2017. This means that individuals can pass on assets worth up to £500,000, including a home, without paying any inheritance tax. For married couples, the total is £1M.
People with dividend income from investments, such as shares or some equity funds, outside of ISAs could face higher bills as a new dividend tax allowance of £5,000 a year replaces the dividend tax credit. Essentially higher rate or additional rate taxpayers will lose out.
Expats have the option to transfer many existing shares and directly held equities such as unit or investment trusts into an offshore bond with significant tax advantages. (Contact me for more details.)
Changes for non-doms
Expats are generally UK non-resident for tax purposes and this is entirely different to being non-domiciled. People who have been claiming non-dom status despite having lived in the UK for 15 of the last 20 years will no longer be able to claim this huge tax-saving perk with effect from April 2017.
- Insurance premium Tax will increase from 6% to 9%, increasing the cost of home and motor insurance.
- People earning more than £150,000 will have the amount they can invest in a pension each year, tax-free, reduced from £40,000 to £10,000.
- The introduction of National Living Wage. For all over 25 years, starting at £7.20ph in April 2016 and increasing to £9ph by 2020.
I have read through the budget (all 122 pages of it!) and can see nothing specifically related to taxing expats, although there is a firm commitment to tackle what are referred to as “imbalances in the tax system” and a Spending Review with further announcements due in the Autumn Budget. We will just have to wait and see if the tax benefits for non-resident expatriates will be affected.
Should you have any queries on the latest budget, or any other financial planning issues, please do not hesitate to contact me. email@example.com