With the end of the transition period for the UK to leave the EU on 31 December 2020, there is still significant uncertainty about the details of the UK’s relationship with the EU from 1 January 2021.
There are several areas where UK direct taxes (broadly taxes on income and gains rather than sales) have been heavily influenced by EU law. From 1 January, the UK Government is likely to be free to change tax rules without having to consider whether any changes comply with EU law.
In this post, we highlight just a few of the areas where EU law has had a significant influence on UK tax rules applying to private clients and what changes might be expected in the future.
| Income tax-free personal allowance | Currently, a European Economic Area (EEA) national is entitled to a personal allowance even if they are not resident in the UK. This does not apply to nationals of other countries. The personal allowance is worth up to £5,000 per year and represents a major benefit for EEA nationals. |
| Pension Transfers | Individuals can currently transfer their UK pension to certain overseas pension schemes (the qualifying recognised overseas pension schemes (QROPS)). However, a 25% tax charge applies unless the taxpayer is resident in the same country as the QROPS or both are resident in the EEA. So, a UK resident could currently transfer their UK pension to a Maltese QROPS without a tax charge but not to an Australian one. |
| Agricultural land | Agricultural land in the EEA can qualify for an exemption from UK Inheritance Tax and also potentially valuable Capital Gains Tax reliefs which are not available on land situated elsewhere. |
| Furnished Holiday Lets (‘FHLs’) | Rental properties in the EEA can qualify as FHLs. FHLs are entitled to a range of tax benefits compared to a standard property business. |
| Charitable donations | Only charitable donations to UK and EEA charities can qualify for UK tax relief. |
| Anti-avoidance provisions | Certain anti-avoidance rules which apply to offshore trusts and companies contain exemptions where the entity is based in an EU member state. |
UK individuals with assets in the EEA, and vice versa, should review their position to identify any areas where they received beneficial tax treatment as a result of the UK’s membership of the EU and consider alternative approaches should the rules change. Individuals relying on exemptions from UK anti-avoidance rules based on EU law should consider their position if these exemptions were removed.
On a more positive note, we may see beneficial tax arrangements being extended to non-EEA countries as part of the UK’s drive to forge stronger global trading relationships which might make investment into the UK more attractive.
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