Tax shock: SA immigrants in UK brace for taxation of SA income and gains by UK tax authority
02 May 2024
South Africans residing in the UK are facing a new reality regarding the taxation of their South African income and gains. No longer will South African expats be able to shield their South African assets from the UK tax authority (HMRC).
According to Michael Kransdorff, CEO of the Institute for International Tax and Finance, “Historic amendments have been proposed to overhaul the current UK tax regime with a new system focused on taxing foreign income and gains on a residence basis. Consequently, the over two hundred thousand South Africans now living in the UK, will be subject to UK tax on South African income earned and on the gains made on the disposal of their South African assets, including the withdrawal of their South African retirement savings.”
Fortunately, transitional measures have been proposed in an attempt to blunt the initial impact, offering tax efficient wealth re-structuring opportunities for those that act soon.
Understanding the UK’s old non-domicile tax regime
The UK’s non-domicile (non-dom) tax regime dates back to 1799, when it was introduced, to exempt colonists from paying tax to the Crown on their colonial investments. A non-dom tax status allows UK tax residents who can site another country as their real domicile, to pay taxes only on their UK-sourced income and assets, with the option of electing to pay UK tax on their foreign income and gains only if they remit that money to the UK.
This benefited many South African born UK tax residents over centuries, who sheltered their offshore earnings and assets from UK taxation. Over the last few years, this tax regime has been seen as increasingly controversial in the UK, raising questions around fairness of taxation treatment with foreign born, wealthy individuals not paying their fair share of taxes towards public services.
The new foreign income and gains tax regime
Under increasing public pressure ahead of the upcoming general election, the Conservative government under Rishi Sunak, recently announced the dramatic step to scrap the non-dom tax regime. From 6 April 2025, all UK residents will now be subject to taxes on all foreign income and capital gains, regardless of their domicile status.
The UK government has however, established transitional rules, to avoid discouraging wealthy foreign immigrants from moving to the UK, while and at the same time, they have also sought to soften the blow for existing non-domiciled residents.
New immigrants and returning UK residents will receive a four-year tax holiday on their non-UK income and gains irrespective of whether the funds are remitted to the UK.
Existing non-doms will be able to bring foreign income and assets on-shore to the UK at a significantly reduced tax rate (12%) for the next two years, to encourage inward investment. They will also benefit from a rebasing of the value of the base cost of their foreign assets to their value on 5 April 2019 when calculating their future foreign capital gains.
The scrapping of the non-dom 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 will likely take a harsher approach to the transition rules
How these changes affect South Africans
While many South Africans may physically emigrate, a surprisingly large number retain significant wealth in South Africa. Studies have shown that over 70% of South African expats for example retain their retirement savings (preservation funds and RA) in South Africa after leaving. Consequently, South Africans thinking of emigrating to the UK or those already there, urgently need to re-look at how they structure their South African wealth in light of these proposed changes to the UK tax system.
For example, a South African currently living in the UK since April 2021 should strongly consider taking advantage of their soon to expire non-dom status to cash-out their South African retirement savings. Waiting till after the implementation of the new regime, could result in the lump-sum withdrawn to be fully taxable in the UK at tax rates as high at 45%.
The interplay with South African tax legislation also needs to be considered. The South African expats tax status in South Africa and the Double Tax Agreement all need to be taken into account.
Vanessa Grasslin, Senior International Tax Consultant of the Institute for International Tax and Finance adds, “With these new rules on their way, careful tax planning is essential for South Africans looking to emigrate or already living in the UK, particularly regarding their decisions on when to withdraw funds from South African pensions or sell South African assets.”
Seek professional tax guidance
South African immigrants in the UK are strongly advised to consult with a qualified tax professional to understand how the UK’s new residence-based tax regime applies to them. By carefully analysing their financial situation and future plans, they can develop a tax strategy that minimizes their tax burden and maximises the advantages offered by the transition rules.
See also:
- What Income is Taxable in South Africa?
- SARS attempts to slow the bleed? New SARS application process to invest or emigrate overseas
- A global minimum tax? What could it mean?
- South African businesses should apply for a section 11D tax incentive today
