The last three months of 2024 were pivotal for 2025 taxation, with important announcements in the UK budget and failed budget talks in France leading to the resignation of French Prime Minister, Michel Barnier. As the situation continues to unfold in France, this article will focus on the UK reforms that may reach expatriates across the Channel.
Chancellor Rachel Reeves’ first budget included £40 billion in tax rises. Over half of this will be met by increasing employer National Insurance contributions and reducing the threshold when national insurance becomes payable. This shouldn’t affect retirees, but other reforms will.
Income and investment taxes
As promised, there was no increase to income tax rates.
Encouragingly, the freeze to income tax thresholds, in place since 2021, will not be extended past the scheduled April 2028, when they will start to rise with inflation. That said, over the intervening years many more people will pay more tax as a result of fiscal drag. Official figures reveal that 4.2 million more workers are paying income tax, and 1.6 million moved into the high-rate band compared to three years ago – and there are still another three tax years to go.
As expected, capital gains tax rates on investment returns increased to 18% and 24%, to match rates paid on real estate. It had immediate effect, applying to disposals made from 30 October. This is after the CGT allowance was slashed from £12,300 to £3,000 since 2023.
The business assets disposal relief rate will increase to 14% from April 2025, then to 18% a year later.
The Chancellor also froze the maximum ISA contribution at £20,000 until 2030 and increased the surcharge on stamp duty land tax on secondary homes from 3% to 5%.
Inheritance tax (IHT)
Mrs Reeves opted to extend the inheritance tax threshold freeze to April 2030 rather than increase it with inflation. This means the main nil rate band will have been frozen for a staggering 21 years! Considering how much house and other asset prices have risen over the period, this has dragged many more families into the inheritance tax net, and all are paying more tax.
Remember that any assets you own in the UK (to soon include pensions) always remain liable to UK inheritance tax, regardless of how long you have lived in France. The domicile reform won’t change this either.
Significant reductions to business and agricultural IHT reliefs were also announced, angering family business owners and farmers.
However, the most significant change is that pensions will become liable for inheritance tax.
With effect from 6 April 2027, any unused UK pension funds and death benefits will be included in the value of your estate for UK inheritance tax purposes. This will apply to UK registered pensions and Qualifying Non-UK Pension Schemes (QNUPS). The government has not mentioned Qualifying Recognised Overseas Pensions Schemes (QROPS) at the time of writing.
Pensions Overseas Transfer Charge hits retirees in France
The other pension surprise in the budget (albeit not actually mentioned in the Chancellor’s speech) was that, with immediate effect, transfers to EU/EEA QROPS incur the 25% Overseas Transfer Charge (OTC).
The OTC was introduced in 2017, but with a key exclusion – if you lived in or moved to any EEA country and transferred your UK pension into an EEA or Gibraltar QROPS, the charge did not apply.
The reform now prevents UK residents from benefiting from a double-tax-free allowance. This may be fair enough, but the way it was legislated means that to benefit from the exclusion, you have to be resident in the same country as the QROPS. And for retired people, QROPS are only available in Malta and Gibraltar.
Since the Policy Paper states that the reform “will not affect individuals relocating to an EEA country or Gibraltar bringing their pension savings with them,” the government may have gone further than intended. But only time will tell. Currently, any France residents transferring a UK pension into a QROPS will be hit by this 25% levy.
Pensions dilemma for expatriates
As things stand, over the coming years, British retirees in France will face a conundrum: swallow the 25% hit and move their pension out of the UK into arrangements that are tax advantageous in France, or leave it in the UK and face the 40% inheritance tax liability. If your heirs are caught by income tax when they withdraw income or capital sums from the pension, their overall tax liability will be much higher.
Weighing your options will involve careful tax calculations, considering both UK and French taxation and planning opportunities, and analysis of your financial situation, circumstances, and long-term plans. Take professional advice from Blevins Franks. We have been the leading cross-border tax and pensions specialist for UK nationals moving to and living in Europe for 50 years, and can also guide you on alternative options to QROPS to help you meet your objectives.
Non-domicile reform
This pivotal reform was initiated by the Conservative government in its spring 2024 budget and confirmed by the Labour Party in its October one.
From 6 April 2025, the current domicile/non-domicile regime will be replaced by the new residence-based system. This will apply to tax liabilities for foreign nationals living in the UK and new arrivals, as well as British expatriates, in relation to inheritance tax.
Put simply, an individual will be liable for UK inheritance tax on their worldwide assets when they are classified as a long-term UK resident, that is, living in the UK for 10 of the last 20 years. When someone leaves the UK, they will remain liable to inheritance tax for up to 10 years, depending on how long they had lived there.
Given the complexity of the domicile system, this reform will simplify inheritance tax planning for British expatriates. UK nationals in France haven’t had the same uncertainty thanks to the UK/France double tax treaty, but this reform is still of interest since it can provide benefits to long-term expatriates returning to the UK.
A call to action
The UK budget included many messages, but my key takeaway is a call to action. Review your wealth management to ensure it is as tax-efficient as possible for you and your family. The start of a new year is the perfect time to make a plan. If you’re living in France with UK assets, make a plan to take them out. If you’re still in the UK and dream of living in France, make a plan to move there – the French tax system is less harsh than the UK’s for many people. These days, most of our clients are better off being French tax residents than UK tax residents.
Whatever category you are in, seek cross-border tax and wealth management advice with Blevins Franks. This will ensure you follow the tax rules of both countries correctly and use solutions designed around your circumstances and to achieve your specific objectives.
Contact Blevins Franks now.