Ruling has serious cash consequences

By Shimon Shaw, September 7, 2012

In a move which will have serious financial consequences for some British emigrants to Israel, the UK tax tribunal has ruled that anyone benefiting from the current 10 year Israeli exemption from overseas tax needs to pay tax in the UK on their UK pensions.

For many, this could reduce their income by 40 per cent.

Paul Weiser benefited from this 10 year exemption from Israeli tax on his UK pension income. But he also claimed exemption from UK tax under the terms of a tax treaty between the UK and Israel.

He argued that the treaty exempts UK pension income that is “subject to Israeli tax” from UK tax, even if, in practice, no tax was due.

HMRC won the case, meaning that Mr Weiser and others in his position are only exempt from UK tax if their pension income is actually taxed in Israel.

Since Mr Weiser’s was not, it should have been subject to UK tax.

Many advisers will have already been working on the basis that the tax treaty requires payment of tax in either Israel or the UK.

However, others have relied on the same uncertainty as Mr Weiser (to pay tax nowhere) and olim who took this view may now face real financial difficulties. This decision will not only disappoint anyone who took that approach, but also anyone intending to make aliyah, who had planned their finances on the basis of a tax-free pension.

This is especially worrying given a recent clampdown by HMRC on tax breaks for offshore pensions, meaning that there are fewer options available for ex-pat pensioners wishing to save tax.

Those who have already made aliyah and had based their financial planning on paying no tax in the UK will need to consider their options carefully.

HMRC will argue that this tax was always due and, following this case, it will be very hard to refute that. British ex-pats in Israel will now need to include their UK pension income on UK tax returns — and past tax returns may also need to be reviewed.

Anyone who made aliyah with the benefit of pension or tax advice, may have a claim against their advisers, in particular since there may have been better choices available at the time when they moved.

Those contemplating such a claim should not delay, as there are some changes to UK litigation rules which will make pursuing a professional negligence claim in these circumstances more difficult (and more expensive) in the near future.

Anyone who was wrongly advised must therefore consider taking UK legal advice as soon as possible.

Anyone who has not yet made aliyah, but was relying on the tax treaty, needs to reconsider their finances and whether any options remain for them. They will benefit from specialist pensions advice and tax.

A tightening of the rules for offshore pensions means that choices are more limited than in the past but there may still be tax efficient routes.

Anyone not able to change their pension arrangements may be able avoid UK tax by opting to pay tax in Israel. It may be possible for them to opt out of the 10 year exemption in Israel.

Again, tax and pensions advice prior to any such steps this is a must, but this decision may also be based on a range of factors such as the convenience of paying tax locally or even Zionist principles.

Either way, careful consideration is required before any steps are taken.

Shimon Shaw is a tax lawyer with Matthew Arnold & Baldwin LLP

Last updated: 2:40pm, September 7 2012