Foreign pension funds set for tax refunds on UK property income

A recent ruling by the UK Tax Tribunal decided that the imposition of UK income tax on the property income of a German pension scheme was unlawful under EU law. This article considers how overseas pension schemes might benefit from the decision and the potential impact of Brexit going forward

UK tax for property investors

Non-UK residents are, in principle, liable to tax on UK sourced income. Tax is generally collected before income is received by requiring the UK-based payer to withhold an amount and pay it to Her Majesty’s Revenue and Customs (HMRC).

For most types of income, UK rules limit the non-resident’s liability to any tax withheld. Ultimately this could mean that little or no tax is incurred in circumstances where EU/UK rules, or a treaty between the UK and the non-resident’s home country, remove or limit the payer’s withholding obligation.

A different regime, however, applies to property income. Non-residents (other than individuals, who are taxed at the rates applicable to UK-resident individuals) are taxed at the basic rate (currently 20%). Tax must be withheld in full unless a relevant treaty specifies a lower withholding rate or HMRC have allowed income to be paid gross. Any tax not withheld must be accounted for through the self-assessment scheme.

This article was first published in Investment & Pensions Europe. View the full article here.