Exiting the UK from the European Union at the end of March 2019 can have significant tax consequences when taxing individuals by eliminating tax exemptions. In addition, the External Tax Act can have significant tax implications for private individuals.

Taxation of individuals / individuals

The taxation of natural persons in the form of income tax is a so-called personal tax, since the personal circumstances of the taxpayer are taken into account individually. [1] The individual consideration is illustrated by the progressively increasing tax rate in the sense of § 32a EStG and the personal tax exemptions. [2] Exiting the United Kingdom from the European Union can also have tax consequences in the taxation of natural persons, by eliminating tax exemptions or by the External Tax Act having a significant tax impact.

In the following, exemplary tax effects regarding taxation at the level of natural persons are shown.

Certain income of an unlimited taxpayer or a limited taxpayer, to § 50 para. 2 S. 2 No. 4 EStG applies, are subject to the progression reservation in accordance with § 32b EStG.

Certain incomes may be tax-free within the meaning of § 3 EStG, such as unemployment benefits acc. § 3 No. 2 EStG or the sick pay according to § 3 No. 1a EStG, but not only the income part is exempted, but also the average tax burden is reduced. [3] By reducing the income tax burden, the taxpayer is not assessed according to his economic performance as provided by the legislature. [4] Since certain incomes are included in the progression reservation according to § 32b EStG, they remain tax-free, but there is no relief of the remaining income due to a reduced progression. [5] § 32b EStG thus ensures taxation according to personal performance. [] 6]

For this purpose, the special tax rate is applied to the taxable income, which is based on § 32b para. 1 EStG is determined in such a way that the tax-free income is attributable to the taxable income and the applicable tariff according to § 32a EStG is determined on this income. [7] From the resulting income tax and the income thus determined, the special tax rate is to be calculated, which is then applied to the taxable income without the tax-free income. [] 8]

2.2. Taxation of progression after Brexit

In principle, according to § 32b para. 1 S. 1 No. 3 EStG also apply the special tax rate to income which is exempt under an agreement to avoid double taxation. This income thus increases the average tax burden. However, § 32b para 1 p. 2 EStG excludes sentence 1 no. 3 for certain income, such as pursuant to § 32b para. 1 S. 2 No. 3 EStG the income from renting and leasing of immovable property, provided that it is located in a country other than a third country.

By the withdrawal of Great Britain from the European Union and the associated status as a third country within the meaning of § 2a para. 2a S. 1 No. 1 EStG, will in future be subject, among other things, to the reservation of progression income from the rental of a property located in Great Britain.

The positive income of the property occupied in England must be taken into account in full, while the negative income from rental and lease are not taken into account in the calculation of the tax rate. [9] The negative income from the rental and lease of the property in the third country may acc. § 2a Abs. 6(a) EStG can only be offset with positive income if it comes from the same species and the same state.

Taxation Comparison: Before and After Brexit

Compared to the current situation, there is therefore an additional tax burden on income from the rental and lease of a property located in the United Kingdom by increasing the special tax rate of § 32b EStG. Meanwhile, losses from the rental and lease of the same property, provided there are no other properties in the UK that generate positive income from the rental and lease, are not taxed. [] 10]

Assuming a single taxpayer in Germany has an annual taxable income of 100,000 euros and positive annual income from renting and leasing a residential property in London of 30,000 euros. The income from the rental is tax-free in Germany according to Article 6 of the double taxation agreement with Great Britain and is subject to income tax in Great Britain and is taxed at the basic rate of currently 20 percent[11].

So far, the income from the rental and leasing of the property occupied in Great Britain according to § 32b para. 1 p. 2 no. 3 EStG are not taken into account in the calculation of the German tax and the tax rate. The taxpayer would only pay a tariff income tax according to the basic table for 2019 in the amount of 33,219 euros on the taxable income.

4th conclusion for private individuals

After leaving the European Union, the British income from rental will continue to be subject to income tax in the United Kingdom and increase the tax rate on taxable income. The relevant income to be calculated for the tax rate is 130,000 euros, whereupon the tax according to the basic table is 45,819 euros, so that a tax rate of 35,245 percent would result.[12] The application of the special tax rate to the taxable income of 100,000 euros results in an income tax of 35,245 euros and an additional burden for the taxpayer of 2,026 euros.

For taxpayers, income generated before the withdrawal of Great Britain from the European Union under § 32b para. 2 no. 1 to 5 EStG, thus an additional tax burden in the future. income not covered by § 32b Abs. 1 pp. 2 no. 1 to 5 EStG, were already subject to the progression reservation beforehand, so that no additional burden arises for the receipt of these incomes.