Frozen tax allowances and its impact on expat investors

Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.

The Treasury needs more money to cover the additional costs of the coronavirus pandemic – and it is going to do it by… raising taxes and freezing current tax allowances. These changes, which cover a range of consumer and personal taxes, will undoubtedly impact local and expat investors and those saving for their retirement the most. 

Frozen UK Tax Allowances 2022 – 2026

While some taxes have been increased (such as dividend tax), Chancellor Rishi Sunak has decided to freeze crucial tax allowances. This decision, which is set to offset inflation, is hurting expats and non-residents with UK investments and capital. Four main taxes suffering from the Chancellor’s big freeze are:

Income tax

Expats with a UK taxable income and personal allowances such as landlords, will have their income tax-free threshold frozen at £12,570, or £50,270 for the higher rate threshold  – the point at which you start paying 40% income tax .These rates will remain the same until April 2026.

Any expat, be it a British National or not, who earns £50,270 a year or more will pay at least an extra £5,000 in income tax between April 6, 2022, and April 5, 2026. 

With rental income expected to rise over the coming years, due to the high rental demand but also because of an expected increase in and interest rate rises, landlords will have to pay higher taxes on their UK property investment. In fact, the Office for Budget Responsibility (OBR) predicts that by 2025/26 we’ll be paying £8.2bn more a year in income tax as a result. The higher inflation is, the higher income tax bill is likely to be.

Capital Gains Tax (CGT)

Investors selling property, stocks and shares or other assets will see their annual exempiont amount frozen at £12,300 until April 2026. House prices are increasing, on average, by 10.8 % in a year, which means higher CGT bills for second property investors when they decide yto sell their properties. 

HMRC’s CGT receipts should rise accordingly with the inflation and increases in property values. Freezing the annual exemption amount for another four years is expected to increase Treasury’s earning by an additional £30m a year by 2025/26 tax year. 

If you own an investment property or stocks, you should consider a trust or other tax efficient structure to hold your assets, as they are Capital Gains Tax Free upon disposal of assets.. 

Related: Taxes when selling a property in the UK

Pension lifetime allowance (LTA)

If inflation continues to stick at the current rate of 5.4%, freezing the pensions lifetime allowance (LTA) of £1,073,100 for four years is the same as cutting the timeframe that someone can save for retirement. 

International Retirement Plans, which are typically offshore and operate either as a trust or under a contract, will likely offer some flexibility and in some respect, can be used as a way of clawing back some of the time lost because of the frozen LTA. 

Related: The differences between contract-based and trust-based pensions.

Inheritance Tax (IHT)

The IHT threshold (£325,000 per person and  £650,000 per couple) and Main Residence Nil-Rate Band (£175,000) are also frozen at current levels until April 5, 2026. The annual tax-free gift allowance of  £3,000 hasn’t been increased in over a decade. 

This is bad news to all property investors, and homeowners. House prices in the UK continue to rise, leading to more individual estates ending up having to pay IHT. By 2025/26 the OBR calculates the freeze in the IHT threshold will cost the taxpayers a staggering £445m more a year.

How can expat investors cut taxes in 2022? 

While not all taxes can be mitigated in full, there are specific tax allowances and tax-efficient structures that can save expatriate taxpayers thousands of pounds. 

Private pensions are one of the mechanisms expats should learn more about and consider setting up if their UK assets are above the tax allowance thresholds. This is because UK-recognised pensions are generally IHT tax-free, CGT tax-free and can lower income tax rates on rental properties. Moreover, if set up properly, British expats can save more than the current lifetime pension allowance and if the pension fund is not used in full, it can be passed on to chosen beneficiaries at death. Get in touch with the team at Soteria Trusts to discuss different ways of reducing your UK taxes today!