An expatriate tax specialist has claimed that thousands of UK nationals living in EU countries could lose their personal tax allowance and have their net incomes reduced in the event of a ‘hard Brexit’.
If the UK leaves the European Union without a deal on 31 October, UK nationals currently living overseas and classified as non-resident in the UK for the whole of a UK tax year could lose their entitlement to the UK personal allowance.
This is due to their loss of EU/EEA national status, according to Robert Salter, a specialist in expatriate and employment taxes at Blick Rothenberg.
Currently, UK nationals who are non-resident in the UK are entitled to the personal allowance, but Salter believes this could change in the event of a hard Brexit.
“The entitlement to personal allowances for non-resident UK citizens arises specifically from their status as EU/EEA nationals,” said Salter. “This position is laid down in UK tax legislation, which was introduced in 2007” [section s56(3) ITA 2007].
UN figures from 2017 put the number of UK-born individuals living in other EU countries at 1.3 million, and the government has previously commented that there are one million Britons living in the EU, not everyone in either figure would be impacted by the changes as many won’t have UK source income.
Automatically subject to UK tax
For the current tax year (2019/20), the personal allowance of £12,500 is available for non-resident individuals to offset against UK-sourced income which would otherwise be UK taxable, for example, UK letting income or UK government service-related pension income.
However, if the personal allowance were to be removed for such individuals, it would result in income automatically being subject to UK tax at a rate of at least 20%.
Following a hard Brexit, such a change may well reduce the net income of many UK nationals living overseas (for example in retirement) and requiring more UK nationals overseas to file an annual UK tax return each year, according to Salter.
Government incomes ‘particularly affected’
Those with government incomes like former civil servants, teachers and NHS employees may be particularly affected.
This is because government-service-related pensions are usually only taxable in the UK in accordance with international agreements, and the removal of the personal allowance would, therefore, be “an absolute additional tax charge on such individuals,” said Salter.
In order to maintain the status quo in the event of a no-deal exit from the EU, the government will have to change the law to allow British nationals who are non-resident in the UK in a tax year to retain their entitlement to the personal allowance.
However, Salter noted that at this present moment no moves to this effect appear to have been made by the government, and prospective PMs Boris Johnson and Jeremy Hunt have so far been silent on the issue.
“The government could as a ‘tax saving’ measure, choose to remove the entitlement to UK personal allowances for all non-resident individuals, regardless of their nationality,” added Salter.
HMRC was contacted for comment