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Proposed changes to UK Inheritance tax

By Jeremy Ferguson
This article is published on: 24th April 2024

Are you British and living in Spain?

One of the hardest things I have to explain to a lot of clients who live here is what the difference is between residence and domicile. My objective is always to explain things in a way that makes sense and is understood, so typically endeavouring to simplify things as best I can, very often using analogies or examples that will help me get the relevant point across.

Residence is simply where you reside, typically, where is  your ‘main’ home? That answer will then normally determine your residence, so if you live in Spain, you will be a resident here. That will then normally (not always, but in the majority of cases) also determine where you will be paying tax.

Domicile however is something very different, but I always like to say that in most cases your domicile is simply determined by where you were born. So if you were born in the UK, having spent a large part of your life there before moving to Spain, your country of domicile will highly likely be the UK.

Over the years I have seen many articles published here about how you can do certain things to change your UK domicile, and they were always full of so many ifs and buts. Without going into detail, the reality is, it is really quite difficult to lose your UK domicile. However, the reason people would try and do this is usually focused on UK Inheritance Tax (IHT) planning. This is the bit people have sometimes struggled to comprehend. If you are UK domiciled, you will pay IHT on your assets outside the UK, regardless of where you live. So ‘clever’ people would try and help you lose your UK domicile so you could avoid UK IHT in the event of your demise.

That could now all be a thing of the past, as the UK Government has recently proposed changes to how IHT is calculated. Essentially, what they are proposing is that IHT in the UK is moved to a basis where residency, and not domicile, determine whether the estate on death is subject to tax in the UK or not.

residence based regime’

Under these proposals to move to a ‘residence based regime’ from 2025, the estates of Britons living abroad will no longer be charged UK IHT on their estates globally, as long as they have lived outside of the UK for more than the last ten years.

This could have significant and valuable implications for the amount of tax levied on death on the estates of Britons who have lived here for more than ten years.  For many people, this could be very positive and welcome news.

Being the cynic I am, the question has to be asked, why would they do this?  Well, as an example, currently the UK is a very attractive place to own property and be resident as a non-UK domicile. This creates many favourable tax breaks for these people. This is one of the reasons we hear of the huge swathes of property in London being in the hands of foreign owners.

Chancellor Jeremy Hunt announced in his most recent Budget that generous tax breaks for non-domiciled individuals will be replaced with a“fairer system” from April 2025, with new arrivals to the UK paying the same tax as everyone else after four years. This of course means that if you are changing to a residence based test in the UK, then people who no longer live there would, or should, be treated with similar fairness.

So, retirement abroad could suddenly become a much more attractive prospect for many people as a result of this change, so fingers crossed it actually happens.

If you have any questions about being a Spanish resident and Inheritance Tax, please feel free to get in touch to see if I can help answer things in a clear and concise manner.

Article by Jeremy Ferguson

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