With the UK set to leave the EU on 31 December 2020, there is still significant uncertainty about how the UK’s relationship with the EU will look going forward.
In theory, the UK, along with other member states, are free to make their own direct tax laws. Until now, however, these laws had to comply with the fundamental EU freedoms.
Below, we consider some of the areas where EU law has had a significant influence on UK tax rules when it comes to individuals. Note - most of the rules apply to European Economic Area (EEA) countries. The EEA comprises the member states of the EU plus Iceland, Liechtenstein and Norway.
Currently, an EEA national is entitled to a tax-free personal allowance even if they are not resident in the UK. This is a more favourable treatment for nationals of other countries (although the personal allowance may be available via other routes). Given that personal allowance is currently worth up to £5,000 per year, this represents a significant benefit for EEA citizens compared to, for example, US citizens.
Individuals can currently transfer their UK pension to certain qualifying recognised overseas pension schemes (QROPS). A punitive 25% tax charge applies, however, unless the taxpayer is resident in the same country as the QROPS. This residency requirement is relaxed if both the individual and the QROPS are resident in an EEA state. So, for example, a UK resident could currently transfer their UK pension to a Maltese QROPS (but not an Australian one) without charge.
Agricultural Property Relief can provide a valuable exemption from Inheritance Tax (IHT) for agricultural land, but is limited to the UK or the EEA. It is also possible to holdover capital gains arising on a gift of UK or EEA agricultural land but not land located elsewhere.
Furnished Holiday Lets (‘FHLs’)
Only rental properties in the UK or EEA can qualify as FHLs. FHLs are entitled to a range of tax benefits compared to a standard property business e.g. the ability to claim capital allowances and being treated as a trade for many CGT purposes.
Charitable donations can only qualify for gift aid if the charity is in the UK or EEA.
Possible changes from 1 January 2021
These rules all currently form part of the UK tax legislation. This means they will not automatically change on 1 January, it will be up to the Government to decide how they are used going forward.
In some areas (for example personal allowances), the Government has indicated that they will not withdraw benefits for EEA nationals. It will be interesting, however, to see whether these beneficial rules are extended to other nations given the UK’s desire to expand global trading relationships. It would seem odd if a US national with a UK rental property were not entitled to a personal allowance while a French national would.
One might assume they may expand benefits to non-EU countries where they see this would encourage investment into the UK (e.g. the personal allowance).
On the other hand, there could be an incentive for the Government to remove benefits given to the EEA where these could damage UK businesses or charities. For example, it is difficult to see the rationale for allowing QROPS transfers to any EEA country if the individual is not living there.
One area where we could see harsher taxation for international private clients is the anti-avoidance rules which apply to offshore trusts and companies with UK resident shareholders or beneficiaries. The Government’s focus on tackling perceived tax avoidance in recent years is only likely to intensify with the need to balance the books post Covid-19.
The UK was forced to narrow the scope of some of these provisions in response to challenges under EU law.
Individuals who rely on exemptions to such provisions based on EU law (either statutory or case law) would be well advised to review their position on the assumption such a defence will not be available long term.
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