Proposal to withdraw or restrict the UK personal allowance for non-resident individuals

The Government announced in the last Budget that they would be consulting with interested parties regarding their proposal to withdraw or restrict the UK personal allowance for non-resident individuals.  The Consultation document was issued for consideration on 17 July 2014 and the consultation process closes on 9 October 2014.

From the Consultation document we can glean the Government’s reasons for the proposal – which is largely driven by:

  • achieving parity with most other EU jurisdictions that do not offer the equivalent to the UK personal allowance to non residents
  • establishing a link between economic activity and taxation so that taxable income arising in the UK to non-residents (who are taxed on their global income in their home jurisdiction) does actually result in some tax being payable to the UK Exchequer to reflect the UK economic activity
  • fairness in UK taxation for all non residents, regardless of the lack of non-discrimination clauses in the Double Tax Agreement with certain non residents’ home jurisdictions  which currently results in a denial of a UK personal allowances – for example, to US individuals

One of the major proposals discussed in the Consultation document is related to the concept of “ties to the UK”.  This concept is already enshrined in the recent Statutory Residence Test so the introduction of such a principle for entitlement to a UK personal allowance would seem to sit with the general principles now contained within UK tax legislation.

One idea is to measure the extent of non residents’ economic connections to the UK by referencing their UK income as a percentage of their worldwide income.  The value of the percentage used in other jurisdictions (where a similar concept has been implemented), is either 75% or 90%.  So, for non residents who could demonstrate that either 75% or 90% of their global income is UK sourced, then the personal allowance would be available.   We stress that,  at this stage, this is just a point for consultation but if this idea is adopted, then many non resident retired persons who have UK sourced pensions (not necessarily taxed in the UK) and UK investment income will probably still be able to claim the personal allowance.  The main losers are likely to be those non residents whose main economic activities are outside the UK, via their employments abroad; if these non residents have UK investment income eg rental income, they will lose the personal allowance and will pay UK tax on their UK rental income but, in most cases, they will be able to claim a corresponding credit in their country of residence.

The Government is aware that pensioners in receipt of Government Service pensions could be disproportionately affected by any restriction of the personal allowance so has stressed that the personal allowance will still be available to set against income that is taxed solelyin the UK in accordance with a Double Tax Agreement.

We will be reporting periodically on the progress of the Consultation process as and when HMRC release any commentaries before the final closing date of 9 October 2014.