UK budget offers tax savings for expats

On Tuesday, George Osborne, the UK Chancellor of Exchequer, delivered what he described as a "tough but fair" first Budget. As expected he unveiled the biggest package of tax increases and spending cuts in a generation intended to cut the structural budget deficit and "balance the books" by 2016.

The Chancellor also said that he expected the UK's total debt levels to have started falling by 2016 with a possibility of the government meeting these targets a year early.

The UK's total debt which currently stands at more than 62 per cent of GDP is forecast to peak at 70 per cent of GDP in 2013-14 before falling to 68 per cent by 2015-16.

With this in mind there were a number of announcements made in relation to taxes, many of which will potentially impact on British expats.

Personal Allowance

British nationals who are not resident in the UK are entitled to claim the personal allowance to use against any income that they derive in the UK.

Osborne announced that the personal allowance for basic rate taxpayers under the age of 65 will be increased by £1,000 (Dh5,468) to £7,475 per annum. This change is to take effect from April 2011. Higher rate taxpayers will not benefit from this increase in personal allowance.

It was also announced that it is the long term objective of the government to gradually increase the personal allowance to £10,000 per annum -- a point that the Liberal Democrats pushed hard in their election campaign.

The rise in the personal allowance is good news for many British expatriates in respect of income that they derive in the UK as it means that from next tax year the point at which they will become subject to tax will be higher and therefore this is likely to remove many from the requirement of paying tax on their UK income such as rental income. The increase in the Personal Allowance is an effective tax saving of up to £200 per annum.

Capital gains tax

As expected, an increase in the rate of capital gains tax was at the heart of the tax measures announced, although the increase in the rate payable was not as high as many had feared. From midnight on Tuesday the rate payable by higher rate tax payers was increased to 28 per cent. The rate for basic rate tax payers remains unchanged at 18 per cent and the annual exemption of £10,100 remains.

No changes for the rules applying to non-UK residents were announced which means that the rules that sit around capital gains tax for non-uk residents remain relatively complex but can be summarised as: Suppose you owned an asset prior to leaving the UK and have not been out of the UK for more than 5 years. Now if you dispose of the asset and realise a gain you would be subject to tax on that gain. Whereas, if you have been out of the UK for more than 5 years and realised the gain while being a non resident, you would be exempt from the tax. If you acquire an asset after leaving the UK (i.e. invest in UK stocks and shares whilst living in the UAE) you would not be subject to capital gains tax on the gain on disposal. non-UK resident regardless of how long you have been outside of the UK.

The new tax rate of 28 per cent for higher rate taxpayers means that any British national repatriating to their home country in the future should potentially look to dispose of assets that are pregnant with gains prior to their return.

Impact of VAT

It would also be a good time to review your overall investment strategy and where you are investing as it is anticipated that companies in certain sectors will potentially be impacted by the VAT increase to 20 per cent which is to take effect from January 4, 2011, and therefore the performance of these companies' shares could well be impacted. Therefore, you should review the overall asset allocation of your portfolio to ensure that it is positioned correctly to meet with your expectations.

Compulsory annuity purchase age

It was announced that the requirement to purchase an annuity at age 75 with a UK personal pension will be abolished. The government is consulting on this aspect and more information is expected in due course.

However, in the meantime, anyone who was 75 on Tuesday or turns 75 from now on will be able to defer purchasing an annuity until the new rules come in. It is anticipated that the new age to be introduced will be 77. This is yet to be confirmed.

If you have a UK pension you should regularly review this to ensure that it remains suitable for your requirements and that the underlying investment strategy is aligned to your investment risk tolerance and time horizons. The changes announced also mean that anyone approaching age 75 may wish to reconsider their strategy for drawing an income from their UK pension.

Inheritance tax threshold

During the election campaign the Conservatives placed great emphasis on their intention to increase the Inheritance Tax threshold to £1 million.

However, as anticipated, they have rescinded on this point in their election manifesto and the Inheritance Tax Threshold remains at £325,000 for individuals and £650,000 for married couples, with no indication of how this may potentially increase in the future.

Therefore, this threshold will remain relatively low for the foreseeable future. It is good practice for British expats to review their inheritance tax situation because a non-resident's estates are still potentially subject to this tax.

Finally, it was announced that Insurance Premium Tax will increase to six per per cent from January 4, 2011.

The knock on effect of this increase means that Home Contents and Car Insurance in the UK will become more expensive.

Also, an area to watch out for is the consultation that the government announced on Tuesday into Aviation Duty. It is suggested that the government will be looking to move to taxing per plane rather than taxing per passenger which is currently the case.

A move to taxing per plane is likely to mean that the tax charged on flights to and from the UK will rise leading to higher ticket prices.

Future tax treatmentOver recent years and particularly since the Gaines-Cooper case earlier this year, there has been much speculation as to whether the UK will move to a model similar to that followed by the US, where, regardless of where you live you would still be subject to an element of tax in the UK.

Many living in the region breathed a sigh of relief when no such measures were announced. However, this may potentially be short-lived as the UK Treasury is conducting a full review of the residence and non-domiciled UK tax regime. The findings of this review are expected towards the end of year, the outcome of which could potentially lead to British expats being taxed in the future.

The writer is Chartered Financial Planner at Killik & Co (Middle East & Asia).

What expatriates should do

• n Review the level of income that you are in receipt of which is potentially subject to UK income tax e.g. rental income, bank interest, dividend payments
• Review your assets to determine whether any of them are likely to have gains and consider potential tax implications
• Review your inheritance tax situation and start taking steps to mitigate any potential liability
• Review your investment portfolio to ensure that it is still aligned to your expectations and time horizons, particularly review the overall asset allocation and the underlying sectors that you are invested in