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By: Carlton Crabbe

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October 2nd, 2014

Expat tax: Brits back home get higher tax allowances

Financial Education

Thousands of British expats could see a big rise in UK tax bills next year

Couples living and working abroad are set to pay up to £5,000 a year in extra tax by 2020 after the UK Government announcement yesterday. Expats with UK buy-to-let properties are expected to be hardest hit by the proposed new rules that will see overseas Brits lose their tax-free personal allowances, currently £10,000 each a year.

Free Guide: Taxes for expats »

The Government's new pledge is to increase this tax-free personal allowance to £12,500 a year for each individual by 2020, meaning a couple living overseas will end up paying £5,000 more tax a year than those staying at home.

Up to 400,000 Brits living and working abroad are expected to lose out, with those living in Dubai, Qatar, Saudi Arabia and Hong Kong most affected. This is because they have little or no taxable income which can be offset against the higher UK income tax bills proposed for introduction in April 2015.

Expats Lose Out as Brits Back Home Get Higher Tax Allowances

This latest blow to expats comes on top of the changes to the capital gains tax rules which will hit expats in April next year. From this date, any increase in the value of UK property or UK-based investments will be subject to capital gains tax, which starts at 18% and quickly rises to 28% for those on higher incomes. Currently, some expats living in tax free countries like Dubai and Saudi Arabia enjoy tax free growth on these assets, as long as they sell up and cash in before they return home. This new rule will catch all expats wherever they live, and make investments into the UK far less attractive.

Despite the bad news for expats, David Cameron also announced a rise in the higher rate 40% tax threshold on all earnings from its current £41,900 to £50,000 during the next Parliament. Whilst this is welcome news, the move simply keeps the banding rising broadly in line with anticipated inflation.

As a reminder, UK residents pay 20% on the first £31,865 of their earnings after any personal allowance, 40% on the next band of earnings up to £150,000 and 45% on any income above this amount. From next year, expats can expect to see this personal allowance removed if proposals go ahead.

Free Guide: Taxes for expats »

However, there are steps that expats can take to help counteract the proposed loss of personal allowances, especially if their UK sourced income comes from buy to let rentals. One solution is to re-mortgage the property and take on more debt. Whilst this won't be appropriate for everyone, having more mortgage interest to offset against your UK income tax bill is an efficient way to claw back some of the tax lost through the proposed cut to personal allowances next April. It could also be a way to take advantage of 300 year low interest rates, although the Bank of England is suggesting rate rises are imminent as the UK economy comes back to life after one of the longest slowdowns in history.

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About Carlton Crabbe

Carlton Crabbe was previously an Ultra High Net Worth and High Net Worth wealth manager at AES International. His blog posts remain relevant for expatriate investors.