UK tax update for British expatriates in Spain

Following the UK spring budget in March, and the start of the new tax year in April, here is an in-depth look at the changes and announcements that may affect British expatriates living in Spain and the Canary Islands. 

Tax rates and allowances from 6th April 2024

UK income tax rates and allowances remain the same as last year: 20% for income up to £37,700, then 40% for income up to £125,140 and 45% after that (Scotland has different bands and rates). Everyone, currently including non-residents, benefits from the £12,570 personal allowance.

The higher rate of capital gains tax (CGT) for residential property gains has been cut from 28% to 24% (the lower rate remains 18% for gains falling within your basic rate band). Remember that you are liable to UK CGT on property sales even if you live abroad, though only on the gains made since April 2015 for residential property and 2019 for commercial property. 

The capital gains tax annual exempt amount has been halved from £6,000 to £3,000 (after being halved from £12,300 in 2023).

The tax-free allowance for dividends was also cut from £2,000 to £1,000 in 2023 and has now fallen to just £500.

The 0% band for the starting rate for savings income is frozen at £5,000 for 2024 to 2025.

The main rate of primary Class 1 National Insurance contributions has been cut from 10% to 8% and Class 4 National Insurance contributions for self-employed individuals from 8% to 6%. 

If you own UK property and rent it out for short-term holiday lets, note that the Furnished Holiday Lettings tax regime will be abolished from April 2025.

Tax allowances remain frozen

Many of the UK’s tax allowances have been frozen since April 2021, and are scheduled to remain unchanged for another two years. 

Freezing allowances has a similar effect as raising taxes for the government (often referred to as ‘stealth taxes’). As incomes and assets increase with inflation while allowances remain static, many more people pay more tax than previously, an effect known as ‘fiscal drag’. 

The inheritance tax (IHT) nil rate band has been frozen at £325,000 since 2008, while the residence nil rate band remains at its 2021 level until at least 2026.  This pushes more families into the IHT net and increases how much of their inheritance is lost to tax.

New UK pension allowances

The previous Lifetime Allowance was applied at a rate of 0% from April 2023 and then fully abolished from April 2024, but it has been replaced by three new allowances with effect from 6th April 2024.  This could affect you if your pension funds (excluding state pension) reach £1,073,100, and you need to be aware that some aspects of the legislation remain unclear and subject to change.

The Lump Sum Allowance (LSA) limits how much tax-free cash you can take from your pension arrangements to £268,275 (25% of £1,073,000), unless you have lifetime allowance protection in place.

The Lump Sum and Death Benefit Allowance (LSDBA) will impact your beneficiaries if, on death, a pension death benefit is paid the value of which is over £1,073,000.  When paid as a lump sum, any excess over the available LSDBA will be taxable at their marginal rate of income tax, regardless of your age of death. If the beneficiaries designate the money to drawdown and take the benefit as pension income, they’ll pay zero income tax if they die before the age of 75, and income tax at their marginal rate of tax if they die after the age of 75.

The Overseas Transfer Allowance (OTA) is also set at £1,073,100.  If you are an EU resident and transfer a UK-registered pension scheme to a Qualifying Recognised Overseas Pensions Schemes (QROPS), you may have to pay a 25% charge if you exceed the allowance.

UK non-domiciled status abolished

The biggest announcement of the UK spring budget was the abolishment of the UK’s non-domiciled (‘non-dom’) status, which will come into effect in April 2025.

Much of the reform affects foreign nationals living in the UK and their UK income and capital gains tax liabilities. If enacted as currently proposed, the current remittance basis of taxation will be replaced by a new regime for those who become UK residents after a period of ten years of non-residence. For their first four years of residence, qualifying individuals will not pay UK tax on foreign income and gains, but from the fifth year, they will be treated the same as other UK residents and pay tax on worldwide income. 

The core of the proposals means using residence rules for the basis of taxation; thus, these proposals could also apply to British expatriates who return to the UK after living abroad long-term. 

Domicile and inheritance tax

Liability to UK inheritance tax on your worldwide assets currently depends on whether you are a UK domicile, deemed UK domicile or non-domiciled. This has been a major complexity for British expatriates as you cannot simply ask HM Revenue & Customs for a ruling on your status.

The UK government now plans to move away from these non-domiciled rules and replace them with a residence-based regime for inheritance tax. It is looking at imposing IHT on worldwide assets once a person has been a UK resident for ten years and then for the ten years following their departure. After living abroad for ten years, only a person’s UK assets will be liable for inheritance tax. 

So far, we have very few details on how this may work. The government is opening a consultation on these IHT proposals, so their plans may change along the way in any case, but the hope is that it will start next April and provide more clarity for British expatriates. This will, however, be after the general election which may also have an impact if there is a change of government.

In the meantime, the Conservative government confirmed that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change. The Labour Party, however, has said it will remove this protection for trusts if elected to power. 

Tax planning advice

This is a good time to review your tax and financial planning to establish if it is up to date and structured to be tax efficient in the Canary Islands. Many expatriates find that moving assets out of the UK improves their overall tax position, so it’s worth exploring this option if still have assets in the UK and intend to live abroad for the foreseeable future. Take specialist cross-border advice for your specific circumstances and objectives.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice. 

You can find other financial advisory articles by visiting Blevins Franks website here: www.blevinsfranks.com