The UK tax reforms announced in the autumn budget extend beyond the UK to impact UK nationals living in Spain. These include changes to pension transfers, inheritance tax, the domicile regime and capital gains tax.

The start of a new year is an excellent opportunity to review your financial planning, ensuring it is current and aligned with your long-term goals. Changes in your circumstances might necessitate adjustments to your previous plans. Additionally, it is crucial to evaluate any tax, pension or legislative reforms announced over the past year to understand their impact on your arrangements.

2024 brought us a new UK government, and the tax rises and reforms introduced in its autumn budget make it more important than ever to review your wealth management. For example, if you live permanently in Spain but still hold UK assets, it may be time to reconsider your strategy. Moving assets out of the UK could potentially improve your tax liabilities for yourself and your heirs in the future.

UK income and investment taxes

While income tax rates have not increased, frozen thresholds will result in many people paying more tax over the next couple of years. The Chancellor did promise not to extend the freeze beyond the previously scheduled April 2028, but that is still three years away.

Capital gains tax rates on investment returns increased on 30 October 2024. They are now 18% and 24%, which aligns with rates paid on real estate gains. The capital gains tax allowance remains £3,000 (it was reduced from a much higher £12,300 over the last two years).

The business assets disposal relief rate will increase to 14% from April 2025, with another rise to 18% in 2026.

Additionally, the maximum ISA contribution was frozen at £20,000 until 2030, and the surcharge on stamp duty land tax on secondary homes increased from 3% to 5%.

UK inheritance tax (IHT)

In contrast to income tax thresholds, the Chancellor chose to extend the freeze on both inheritance tax nil rate bands to April 2030 – the main threshold will have been frozen at £325,000 for 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.

The budget also included significant reductions to business and agricultural IHT reliefs.

Don’t forget that most of the assets you own in the UK are subject to UK inheritance tax, no matter how long you have lived in Spain. The domicile reform (see below) will not alter this.

However, the most momentous change is that pensions will become subject to inheritance tax. Starting 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 have a significant impact on many families’ inheritance.

Remember too that if you die over age 75, your heirs will additionally be caught by UK income tax when they withdraw income or capital sums from the pension.

Pensions Overseas Transfer Charge

While the inheritance tax liability and potential income tax charge may encourage you to move your pension out of the UK, since 30 October 2024 transfers from UK pensions into EU/EEA Qualifying Recognised Overseas Pensions Schemes (QROPS) incur the 25% Overseas Transfer Charge (OTC). The exemption now only applies if you live in the same country as the QROPS and there are no QROPS in Spain (the only suitable schemes are in Gibraltar and Malta).

Note too that if you transfer your UK pension into a QROPS after becoming a tax resident of Spain, the Spanish income tax charge levied on the whole fund can be prohibitive.

Weighing your options will involve careful tax calculations considering both UK and Spanish taxation and planning opportunities, plus an analysis of your financial situation, circumstances and long-term plans. At Blevins Franks, our cross-border tax and pensions specialists will help you with this.  We will also guide you on alternative options to QROPS to meet your objectives and recommend personalised pension solutions.

Non-domicile reform

Starting in April 2025, the current domicile/non-domicile regime will be replaced by a new residence-based system. This will be a pivotal change for expatriates since it determines whether you are liable for UK inheritance tax on worldwide assets or only on UK assets.

In simple terms, once you have left the UK, you could be liable for inheritance tax on your worldwide wealth for up to 10 years, depending on how long you have been resident in the UK. This will be more beneficial for many expatriates than the previous domicile regime. Now is the time to review your estate planning to take full advantage of the new system, such as by shedding UK assets.

This new residence-based system may also provide long-term benefits to expatriates who return to the UK, with four years of tax benefits on foreign income and gains.

Reviewing your wealth management for 2025 and beyond

These UK tax reforms highlight the importance of proactive tax and financial planning for British expatriates. With the changes to investment, inheritance and pension transfer taxes, as well as the new residence-based system for inheritance tax and those moving to the UK, now is the time to reassess your long-term wealth management strategies.

To understand how these reforms impact you and your family, get in touch with Blevins Franks.  Our expert advice will help you navigate these changes effectively, ensuring your financial plans remain aligned with your long-term goals and minimising your tax liabilities in both the UK and Spain.

Contact Blevins Franks today.