In this week’s Money section, we’ve written about the difficulties UAE residents now face securing a mortgage in the UK. But property isn’t the only issue for investors. While The UK has often been considered a safe haven for investments, there are now some serious implications for those who have worked or held assets there. Here Andrew Prince, financial planner at Acuma Independent Financial Advice, offers some insights for any investors that have a property in the UK or perhaps has worked and accumulated a pension there.
The UK is currently some £1.3 trillion (Dh7.59tn) in debt and Her Majesty’s Government needs to raise money by one means or another.
If we look at the options available, it broadly falls into two camps:
1. Reduce allowances or
2. Rely on Fiscal Drag
Reduction of Allowance
You only have to go back a couple of years to acknowledge the generous allowances for tax relief on pension contributions. In the 2010–2011 tax year, you could have gained maximum tax relief on a contribution of £255,000, today that would be a mere £40,000.
OK, so what does this mean?
Had you written a cheque out for £153,000 in June 2010, the UK taxman would have added £102,000 to your pot thereby making a total contribution of £255,000 into your pension. Clearly this generosity was and is unsustainable and therefore the maximum amount you can now contribute that qualifies for full tax relief is only £40,000 (as of April 2014) or put another way, a paltry £8,000 from the tax man.
Casting your mind back to March, the same applies to the reduction in the Lifetime Allowance. What started at £1.8 million in 2006 has slowly been reduced to £1.25 and it is my contention that this will be further reduced in the coming years probably to £1 million. Unless appropriate action is taken early on, excess is charged at 55 per cent so prudent savers are being penalised not just for salting away for their future, but also to a degree on the capital growth within the fund as it is the pot value that is taxed not the contribution.
Fiscal Drag
Inheritance Tax (IHT) is a perfect example of where fiscal drag is being utilised to increase tax revenue, even if you are non-resident or non-domicile in the UK.
The Chancellor announced in this year’s budget that the Nil Rate Band (NRB) will remain at £325,000 until 2019. Clearly future budgets could change this; however it is a “nice little earner” and given the state of the UK’s finances, there will be much posturing but little desire to increase by whichever government wins next year’s election. Given those who are domicile in the UK by virtue of birth, choice or deemed, their entire worldwide assets are valued on death and the excess above the threshold / allowances is taxed at 40 per cent. In most cases the tax has to be paid before release of the asset which can cause significant issues if there is insufficient cash to pay HMRC.
Let me give you a simplified example:
The NRB in 2009 was £325,000 and therefore an estate of £1 million would face a tax bill of £270,000.
If the estate then grew at 10 per cent per annum, in 2018 your estate would be valued at £2,357,948; however the NRB has remained the same at £325,000 meaning the tax bill has increased to £813,179, a 300 per cent increase in tax. With property and equity markets improving over the past few years, how much are you worth?
UK Inheritance Tax can be complicated and therefore you are urged to seek professional advice. Ideally you should enquire if your adviser holds the G10 qualification as a benchmark. This is because there is a huge difference in the treatment between those who are domicile where you are taxed on your worldwide assets (note residency is irrelevant) and non-domicile which only affects those assets located in the UK.
More clouds on the horizon
The former British prime minister Harold Macmillan once said, “You’ve never had it so good.”
Well that is about to change if the proposals announced in March’s budget go through.
There is a proposal that from April 2015, expats will pay capital gains tax (CGT) on the sale of property located in the UK. Principal Private Residents exemption has been reduced from 3 years to 18 months and whereas CGT didn’t apply if you’d been non-resident for five full tax years, post April, this exemption will no longer apply. CGT will be charged.
Likewise, the personal allowance for income tax (currently £10,000) will be withdrawn for all non-residents. For example, you have a UK rental property generating an income of £10,000 net of deductible expenses (mortgage, maintenance etc.). Currently this income would be paid to you entirely free of UK income tax; however once the personal allowance is withdrawn, tax would be paid on every penny. In this case, you would pay the UK taxman (HMRC) £2,000. Should you decide to sell, post April you are then likely to fall within the CGT regime.
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