Expat couples could be £4,000 a year worse off under plans to strip non-residents of the personal tax allowance
Expats who rent out their homes in Britain will be stripped of the right to use the personal allowance, under a tax raid prepared by George Osborne.
Britons could be forced to return from retirements overseas if the Chancellor presses ahead with plans to force non-residents to pay tax on all their UK income, accountants warned.
Retirees drawing a Government pension are also likely to be hit by the proposals, which could cut a couple’s income by up to £4,000 a year.
At present, EU nationals and British expats are entitled to offset income earned in the UK against the £10,000 personal allowance.
Mr Osborne first indicated his desire to curtail the allowance in the March budget.
Under Treasury proposals released for consultation, the allowance would be restricted to people with a “strong economic connection” to Britain, bringing the tax regime into line with the US, Canada and much of the EU.
The move could affect up to 400,000 people and raise the exchequer an extra £400 million a year.
It would include 175,000 people who live abroad and earn an income from property in Britain.
Many of the 1.2 million British retirees living overseas will not pay extra tax on their pension because they are either UK residents for tax purposes, as they spend half the year in Britain, or because most state or private pensioners are only taxable in the country of residence.
However, UK government pensions are only taxable in Britain, meaning that unless the Treasury introduces exceptions, former civil servants, NHS workers and council officials living overseas will pay more tax.
British diplomats and missionaries who are currently entitled to the personal allowance may also be hit by the tax changes, the Treasury consultation says.
While some expats will be able to claim tax relief from their country of residence, those living in low-tax jurisdictions - such as Hong Kong and Dubai - will pay more tax overall.
Jackie Hall, a tax partner at accountants Baker Tilly, said expatriates should consider selling their UK rental properties and reinvesting the money in shares or property abroad.
Some Britons may be forced to abandon a carefully-planned retirement overseas and return to Britain if the tax changes mean they no longer have enough to live on, she warned.
“Our pensioners who’ve gone abroad are going to suffer the biggest impact,” she said.
“If you have already jumped ship and are reasonably comfortable, this could turn the tide against you. Those people may begin to struggle because they haven’t got the income in retirement that they thought they had.”
The Treasury said no decision has yet been made.
A spokesman said: “The increases the government has made to the personal allowance support hardworking people by helping them to keep more of the money they earn and, as a result, is one of the most generous in the world.
"At the same time, we believe that it is reasonable to consider whether non-residents who receive income from the UK are paying a fair share of tax on that income, in this country.”