Double Taxation Agreement Wordings: HMRC Tightens Up To Tax Expats More

Double Taxation Agreements (DTA) exist between the UK and many countries around the World to avoid you being unnecessarily taxed twice on UK originating income, both in the UK and where you live (and vice versa).  This means you should only pay taxes once, where you live or in the UK.

HMRC Relaxed Approach is No More

Until recently, if there was a DTA in place, e.g., for your pension income or flexible drawdown then the UK would issue an NT code (No Tax to be deducted in UK) to your pension payment provider.  Any taxes paid ot withheld would then be refunded to you, to pay your taxes in full where you are tax resident. 

This is no longer the case as HMRC looks at each case individually.  This is because:

• Pensions (usually defined under Article 17 of country specific DTA) would usually be taxed where you are tax resident.
• Other Income and Lump Sums (usually defined under Article 20 of country specific DTA as “other income”) would usually be taxed in the country of origin of income/lump sums.  There are many elelments of pensions that are considered as Lump Sum payments and so, should have been taxed in UK when previously they were not.

Pensions Article in DTA (Usually Article 17) – Pension Income Definitions

If the pensions article within a DTA says “pensions, other similar remuneration or annuities arising in a Contracting State and paid to a resident of the other Contracting State, shall be taxable only in that other State.” i.e.  where you live.

If the pensions article on a DTA does not say “pensions or similar remuneration” e.g., pensions and annuities, a lump sum is then considered under the “other income” article.

For example, look at the following specific DTA Article 17 definitions including “similar remuneration” for 3 countries:

• Germany – “Pensions, other similar remuneration or annuities arising in a Contracting State and paid to a resident of the other Contracting State, shall be taxable only in that other State.”  In addition, there is a special 15-year rule depending on where the pension accumulated.
• France – “Pensions and other similar remuneration paid in consideration of past employment to a resident of a Contracting State shall be taxable only in that State”.
• USA – “Pensions and other similar remuneration beneficially owned by a  resident of a Contracting State shall be taxable only in that State” but there are special rules depending upon whether you are a National of UK or US or a Dual National.

For example, look at the following specific DTA Article 17 definitions NOT including “similar remuneration” wording for 2 countries:

• Australia – “Pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State”.
• Canada – “Periodic pension payments arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner thereof shall be taxable only in that other State”.  In addition, there is an allowance for the country of origin of income/lump sums to tax up to 10%.

Remember:  HMRC stated to us that if the pensions article on a DTA does not say “pensions or similar remuneration” e.g., pensions and annuities, a lump sum is then considered under “other income”, usually Article 20.  This states that the ‘income’ (including lump sums) may be taxed in the country where it arises and also the country of residence.

HMRC Now Strictly Enforcing the “Lump Sum” Rules

UK is now imposing taxing rights where they never used to with DTAs, so that UK is now taxing as per treaty.  The following are therefore considered “Lump Sum Payments”:

• Triviality Lum Sums – where you cash in a small Defined Benefit scheme.  25% is tax free in UK, 75% will have 20% income tax withheld.  You may be subject to an additional 20% UK income tax, if you are a 40% higher rate taxpayer.
• Pension Commencement Lump Sum (PCLS) – (tax free lump sum to most of us) is usually tax free in the UK e.g.  your 25% of fund value, so it will be tax free in UK but Article 20 may allow the other country to tax you.
• Small Pots Rules – you can cash in up to 3 small pots below £10,000 each (investment linked pensions).   25% is tax free in UK, 75% will have 20% income tax withheld.  You may be subject to an additional 20% UK income tax, if you are a 40% higher rate taxpayer.
• Uncrystallised Fund Pension Lump Sum (UFPLS) – a full encashment of just part of a larger pension fund 25% is tax free in UK, 75% will have emergency income tax withheld.  You may be subject to a tax refund if you have overpaid UK income taxes.
• Flexible Drawdown -  These are not regular withdrawals that may be taxed overseas as HMRC considers Flexible Drawdown as a lump sum withdrawal but taxed as regular income.
• Regular Withdrawals - This will then differ depending upon whether the Treaty wording.  If the wording includes “pensions, other similar remuneration” HMRC will refund any withheld taxes and tax payable where you are tax resident.  If the Treaty wording does not include “similar remuneration” HMRC will treat all as a lump sum withdrawal (Article 20) and be taxed in the UK under regular ‘income tax’ rates (you may also pay further taxes where you live e.g.  the difference if a larger tax bill due where resident with credit given for UK taxes already paid).
• Ad Hoc Withdrawals – These are considered lump sum withdrawals and subject to UK taxes and taxed in the UK under regular ‘income tax’ rates (you may also pay further taxes where you live e.g.  the difference if a larger tax bill due where resident with credit given for UK taxes already paid).

Full List Tax of Treaties https://www.gov.uk/government/collections/tax-treaties

Double Tax Digest 2018

This is HMRC’s technical guide and is set out by country DTA and how HMRC will enforce it:  You should take professional advice from us and also, we suggest you refer to this digest  https://assets.publishing.service.gov.uk/media/5b05425fed915d1317445ed2/DT_Digest_April_2018.pdf

Contact  Call Back  Calculators  Our Fees