Proposed UK tax changes will hit expats
A proposed change by the UK government of its tax regime to one taxing foreign income and gains on a residence basis will have significant consequences for South Africans planning to emigrate to the UK.
The change would cause the scrapping of the centuries-old nondomicile (nondom) tax regime that caused controversy in the UK due to the considerable tax benefits it gave Prime Minister Rishi Sunak’s multimillionaire wife, Akshata Murty, on her dividend income from India.
From April 6 2025, all UK residents will be subject to taxes on all foreign income and capital gains, regardless of their domicile status.
Institute for International Tax and Finance CEO Michael Kransdorff said that under the proposed regime SA expats would no longer be able to shield their SA assets from the UK tax authority.
“South Africans that move to the UK will be subject to UK tax on SA income earned and on the gains made on the disposal of their SA assets, including the withdrawal of their SA retirement savings,” he said.
Kransdorff said that nondom tax status allowed UK tax residents who could cite another country as their real domicile, to pay taxes only on their UKsourced income and assets, with the option of electing to pay UK tax on their foreign income and gains only if they remitted that money to the UK. “This benefited many SA-born UK tax residents over centuries who sheltered their offshore earnings and assets from UK taxation.”
To avoid discouraging foreign immigrants from moving to the UK and to soften the blow for existing nondomiciled residents, the UK government has established transitional rules that will allow new immigrants to receive a four-year tax holiday on their non-UK income and gains, regardless whether the funds are remitted to the UK.
“The scrapping of the nondom status for inheritance tax is still under review. However, the likely direction follows the residence-based regime with the inclusion of worldwide assets in the UK estate of deceased UK tax residents. The opposition Labour party is broadly in support of these changes but is likely to take a harsher approach to inheritance tax,” said Kransdorff.
THREE-YEAR WAIT
He noted that many SA emigrants retained significant wealth in SA, including their retirement savings held in preservation funds and retirement annuities. Studies had shown that more than 70% of SA expats retained their retirement savings in SA after leaving.
Kransdorff said South Africans planning to emigrate to the UK should reconsider their plans for transferring SA wealth abroad due to the proposed changes.
He cited as an example that South Africans with retirement annuities were required to wait three years from the date of the
formally ceasing to be SA tax residents with Sars before they could withdraw those funds from SA.
“This gives them a narrow window before the four-year UK tax holiday expires. Waiting too long could result in the lump-sum withdrawn being fully taxable in the UK at tax rates as high as 45%.”
Kransdorff said that SA expats would have to cease to be SA tax residents formally and apply SA’s double taxation agreement with the UK to avoid being taxed twice on the withdrawal.
The decision by the UK not to exercise its right fully to tax retirement savings under the double taxation agreement with SA would fall away with the expiry of the nondomicile tax regime, which mades the decision about when to withdraw it vital. The institute’s senior international tax consultant, Vanessa Grasslin, said that “with these new rules on their way, careful tax planning is essential for South Africans looking to emigrate to the UK, particularly regarding their decisions on when to withdraw funds from SA pensions and retirement annuities or sell SA assets”.
SA Institute of Taxation CEO Keith Engel said “the change for UK nondomiciles (including SA expats) would increase the costs of emigration to the UK for those with significant non-UK assets. However, some benefits remain, including the use of offshore trusts before entry. One has to query whether any of these remaining benefits will last if Labour assumes control.”