# NHR and UK tax on state pension



## geological (Jan 18, 2019)

I receive a UK state pension, have NHR status and have to complete UK and Portuguese tax returns. Reading lots of articles and the double taxation treaty convinced me that my UK state pension would be tax-free. But an HMRC technician told me that cos of NHR they would tax my state pension via my tax code. He referred to the 'subject to tax' clause for 'other income' in the Double Taxation Treaty digest. But this digest does not reflect the treaty as far as I can see. The treaty does not even suggest that a state pension is 'other income'. But even accepting the digest is right, is it right to think that my UK state pension is NOT 'subject to tax' in Portugal (under the old NHR rules, that is)? 

I guess there are many on here who would be affected by this. Is it a change in HMRC practice? Or is the technician wrong? Any advice/ info would be very gratefully received.


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## proud.to.be.EUROPEAN (Feb 14, 2020)

What is your UK income tax code?

Just packing bags and moving out doesnt free you for liability to UK taxes.
From what HMRC told you, it would imply that you are still liable for UK taxes.
There are strict requirements for one to be released from UK taxes. Have a look at gov.uk, leaving UK (not EU). 

If you were not subject to UK taxes, your UK pension will be at 0% tax rate at source.


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## jumblemon (Mar 29, 2020)

proud.to.be.EUROPEAN said:


> What is your UK income tax code?
> 
> Just packing bags and moving out doesnt free you for liability to UK taxes.
> From what HMRC told you, it would imply that you are still liable for UK taxes.
> ...




I thought under NHR your pension would be subject to a flat 10%?


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## Strontium (Sep 16, 2015)

jumblemon said:


> I thought under NHR your pension would be subject to a flat 10%?


That is the new NHR rules but he/she/they are talking about the old NHR rules of 0%.


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## geological (Jan 18, 2019)

proud.to.be.EUROPEAN said:


> What is your UK income tax code?
> 
> Just packing bags and moving out doesnt free you for liability to UK taxes.
> From what HMRC told you, it would imply that you are still liable for UK taxes.
> ...


Thanks, I will not be tax resident in the UK but despite that I will pay UK income tax on some of my income (rent for our house and a public service pension) which is why I will need to submit a self-assessment return. The question is whether HMRC will tax my state pension. I am still confused about this 'subject to tax in Portugal' clause, which seems new and does not seem to have stopped many people from the UK with NHR status avoiding tax both in the UK and Portugal.


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## geological (Jan 18, 2019)

jumblemon said:


> I thought under NHR your pension would be subject to a flat 10%?


I come under the old regime. But ironically if my HMRC interlocutor was right I would be better off under the new regime! I have never seen it suggested that anyone would be which is another reason why i am confused.


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## proud.to.be.EUROPEAN (Feb 14, 2020)

geological said:


> Thanks, I will not be tax resident in the UK but despite that I will pay UK income tax on some of my income (rent for our house and a public service pension) which is why I will need to submit a self-assessment return. The question is whether HMRC will tax my state pension. I am still confused about this 'subject to tax in Portugal' clause, which seems new and does not seem to have stopped many people from the UK with NHR status avoiding tax both in the UK and Portugal.


That is correct, UK rent and civil service pensions are taxed in UK, regardless of your status or residence.

Your UK income tax code will tell you how much tax (or none) will you pay on other UK gains/income. If your tax code is still 1250L, you are subject to UK taxes.

All usefull info is on gov.uk site: https://www.gov.uk/tax-uk-income-live-abroad .

Extract:
Non-residents do not usually pay UK tax on:

the State Pension
interest from UK government securities (‘gilts’)


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## geological (Jan 18, 2019)

proud.to.be.EUROPEAN said:


> Your UK income tax code will tell you how much tax (or none) will you pay on other UK gains/income. If your tax code is still 1250L, you are subject to UK taxes.
> 
> All usefull info is on gov.uk site: https://www.gov.uk/tax-uk-income-live-abroad .
> 
> ...


Thanks. However, as I have a number of codes that keep changing I am not sure it is that simple. Also, 'usually' does not help as it tells me nothing about the specific Portuguese case where a 0% is levied/ no tax is taken.


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## proud.to.be.EUROPEAN (Feb 14, 2020)

geological said:


> Thanks. However, as I have a number of codes that keep changing I am not sure it is that simple. Also, 'usually' does not help as it tells me nothing about the specific Portuguese case where a 0% is levied/ no tax is taken.


That is quote from gov.uk and "usually" wording is perfectly correct.
It would apply to most but there are exceptions. Tax affairs can be very complex
and cant be one shoe fits all.

You need to identify where your tax responsibility is to, UK & PT or just PT.
If you have dual tax liabilities, then you need to check double taxation agreement and NHR.

If it's possible, it would be best to close all tax affairs with UK and therefore avoid/limit liability to UK taxes. Guidance are on gov.uk site. If your tax affairs are complex, then you need tax accountant with UK/PT tax expertise.


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## TonyJ1 (May 20, 2014)

The HMRC technician did not read the treaty with the proper attention. According to the treaty, whether the UK classifies the state pension as a pension or other income, Portugal would have the sole taxing rights - refer to article 17 and article 20 of the treaty. The technician saw something in the treaty which is not there
On the issue on whether it is tax free (under old nhr rules) or subject to tax in Portugal, this would be determined by Portuguese internal law and not UK law. There is no reversion clause in the Portuguese / UK treaty giving the UK taxing rights if the state pension is not taxed in Portugal. Some treaties do have the reversion clause.


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## geological (Jan 18, 2019)

TonyJ1 said:


> - refer to article 17 and article 20 of the treaty. The technician saw something in the treaty which is not there
> On the issue on whether it is tax free (under old nhr rules) or subject to tax in Portugal, this would be determined by Portuguese internal law and not UK law. There is no reversion clause in the Portuguese / UK treaty giving the UK taxing rights if the state pension is not taxed in Portugal. Some treaties do have the reversion clause.


Well, on the face of it the technician read something that WAS there: 'Items of income of a resident of a Contracting State *who is subject to tax there in respect thereof *being income of a class or from sources not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.'
For me this is straightforward, only if I am subject to tax in respect of that income (the UK state pension) would the UK relinquish its right to tax it. I am not sure what a reversion clause is and in any case no such clause appears necessary, the text quoted appears to do the trick. One can argue about what 'subject to tax' means but the HMRC view is that this is more or less the same as 'is actually taxed or would be if it were big enough'. One can argue about whether the state pension is a pension but again the HMRC settled view seems to be that it is not.

Sorry to be the bearer of bad news but, however much I would like you to be right.......


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## TonyJ1 (May 20, 2014)

I suggest you read the commentaries to the double tax treaties to which, both Portugal and the UK have contributed, and in respect of this issue, neither county has placed reservations:









Model Tax Convention on Income and on Capital 2017 (Full Version) | READ online


This publication is the tenth edition of the full version of the OECD Model Tax Convention on Income and on Capital. This full version contains the full text of the Model Tax Convention as it read on 21 November 2017, including the Articles, Commentaries, non-member economies’ positions, the...




read.oecd-ilibrary.org


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## geological (Jan 18, 2019)

TonyJ1 said:


> I suggest you read the commentaries to the double tax treaties to which, both Portugal and the UK have contributed, and in respect of this issue, neither county has placed reservations:


This, I would venture, is a different matter. I was referring to the Treaty in force, not discussion of models for future treaties. I cannot see what discussion of models has to do with the matter at hand unless in discussing them the UK makes reference to the interpretation of the existing treaty. Are you claiming it did in a way pertinent to the case? If so, I would be very grateful if you were to point me to it. (Perhaps I should emphasise that I mean that genuinely.)


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## TonyJ1 (May 20, 2014)

geological said:


> This, I would venture, is a different matter. I was referring to the Treaty in force, not discussion of models for future treaties. I cannot see what discussion of models has to do with the matter at hand unless in discussing them the UK makes reference to the interpretation of the existing treaty. Are you claiming it did in a way pertinent to the case? If so, I would be very grateful if you were to point me to it. (Perhaps I should emphasise that I mean that genuinely.)


The issue is on the interpretation of whether the state pension is taxable in Portugal or the UK under the nhr rules. The commentaries to the treaty sets out more extensive rules on the interpretation of the treaty provisions. The commentaries are the guidelines / rules used by both tax authorities and judicial authorities as to how the treaty should be interpreted. Though the judicial authorities do not have to follow the interpretation followed in the commentaries, it is very rare that they divert from the agreed interpretation, specially where the specific issue leaves no room for interpretation.
The commentaries are not restricted to future treaties but apply to the interpretation of 'in force' treaties ie a list of agreed to rules on how the treaties should be interpreted. Of course the commentaries only apply to signatories to the commentaries - both Portugal and the UK have signed on the commentaries.

As to the issue of the state pension, unless the UK has reserved the right to tax (called reservations in the commentaries) (has not done so), or else worded the treaty appropriately, it should follow the commentaries.
Should the UK not follow the treaty, off course the only remedy taxpayers have is to follow appeal procedures and eventually the courts. The commentaries are clear on who has the right to tax bearing in mind that the general rule is that international treaties are above internal law (reminder on current debate on Northern Ireland) - though often forgotten. The only major country that, to some extent does not follow this rule, is the US.
Sometimes the dice falls the other way, and if the treaty provides that both country have the right to tax a certain income stream, then the countries will do so, though, in this case the treaties generally provide a route of agreement in hardship cases - but good luck to anybody who finds themselves in such a situation


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## geological (Jan 18, 2019)

TonyJ1 said:


> As to the issue of the state pension, unless the UK has reserved the right to tax (called reservations in the commentaries) (has not done so), *or else worded the treaty appropriately*, it should follow the commentaries.


I am puzzled why you started my impugning the competence of the HMRC technician, suggesting that he had not read the *Treaty *correctly and have now focused on the commentaries that are part of an OECD process with no legal force, as far as I can see (I think the current UK government might not be very happy with international law in effect being determined by unelected bureaucrats). But leaving that aside, and the fact that there is plenty of official HMRC guidance in the public domain which clarifies the issues should that be needed, I would venture that the words I have emphasised in the quote above a key: the treaty is worded appropriately. Pensions are defined in a way that means the state pension is not a pension within the terms of the treaty and the UK has the right to tax other income if Portugal chooses not to do so. So, even accepting your argument (which at the moment I cannot), you would seem to be admitting that the treaty wording is key.


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## TonyJ1 (May 20, 2014)

The treaties are approved by Parliament. The interpretations are not - but courts have been referring to these interpretations for decades in most jurisdictions - at first they tended to be merely guidelines, but courts all over the world are using the commentaries as 

In terms of guidance etc - I seem to think that not all decisions made by the tax authority are necessarily followed once they get to court. A guidance, is what it is - it is not even secondary law. A guidance has to be followed internally, but does not bind taxpayers if they have good reason (with backup of course) to follow a different route.

As to whether the state pension is or not a pension - the UK may classify it as other income, but that does not change the taxing rights as per the tax treaty, as both other income and private pensions are exclusively taxable in the country of residence.

The right to tax it, under internal rules and maybe under some other treaties maybe retained by the UK, but in the case of the specific treaty in question, and supported by commentaries which help in their interpretation, and often referred by the courts when it comes to it, support the the above interpretation.

Whether the technician gave you the right information, that is another question.

In any event, the general practice is that the UK does not tax state pensions on pensions paid to Portuguese residents nor other private pensions when proper procedures followed. Not saying that in your particular case that the general rule has been followed.


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## geological (Jan 18, 2019)

TonyJ1 said:


> As to whether the state pension is or not a pension - the UK may classify it as other income, but that does not change the taxing rights as per the tax treaty, as both *other income *and private pensions *are exclusively taxable in the country of residence.*


I am afraid you have still not explained how the Treaty could possibly be interpreted as you claim. Again I quote : Items of income of a resident of a Contracting State *who is subject to tax there in respect thereof *being income of a class or from sources not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State. 

You would appear to be ignoring the clause above that in effect means that the state pension, which under the NHR v1 is not subject to tax in Portugal, is not 'taxable only in that state' (i.e. Portugal).


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## geological (Jan 18, 2019)

This court case concerning UK and Israel seems very pertinent: Interpretation of Double Tax Treaty - Meaning of "Subject to Tax" TC02178


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## TonyJ1 (May 20, 2014)

geological said:


> I am afraid you have still not explained how the Treaty could possibly be interpreted as you claim. Again I quote : Items of income of a resident of a Contracting State *who is subject to tax there in respect thereof *being income of a class or from sources not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.
> 
> You would appear to be ignoring the clause above that in effect means that the state pension, which under the NHR v1 is not subject to tax in Portugal, is not 'taxable only in that state' (i.e. Portugal).


I could spend an inordinate time in analising these issues etc - but they would be academic exercises - in the end these issues are ultimately decided by courts anyway. From a practical level (plenty of this) - I have never seen a challenge from the UK, but there is always a first. I have only seen it from Germany and only in one tax administration - others accept it. Could have the consequences of treaties being cancelled as happened with the Finish treaty


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