Following the UK spring budget in March and start of the new tax year in April, we look at changes and announcements that may affect British retirees in Portugal.
Tax rates and allowances from April 6, 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). The personal allowance stays £12,570.
The higher rate of capital gains tax (CGT) for residential property gains has been cut from 28% to 24%. You are liable to UK CGT on residential property gains since April 2015, even if you live in Portugal, and since 2019 for commercial property.
The capital gains tax annual exempt amount was halved from £6,000 to €3,000 (after being halved from £12,300 in 2023). The tax-free allowance for dividends was cut from £2,000 to £1,000 in 2023 and now to just £500.
New UK pension allowances
The previous Lifetime Allowance (LTA) was applied at a rate of 0% from April 2023 and fully abolished from April 2024, but has been replaced by three new allowances with effect from April 6, 2024. This could affect you if your pension funds (excluding state pension) reach £1,073,100. Note 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 LTA protection in place.
The Lump Sum and Death Benefit Allowance (LSDBA) will impact your beneficiaries if, on death, a pensions death benefit valued over £1,073,000 is paid. 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 you die before age 75, and their marginal rate of tax if you die after 75.
The Overseas Transfer Allowance (OTA) is also set at £1,073,100. EU residents transferring a UK registered pension scheme to a Qualifying Recognised Overseas Pensions Schemes (QROPS) may have to pay a 25% charge if you exceed the allowance.
UK non-domiciled status abolished
As announced in the UK spring budget, the UK’s non-domiciled (‘non-dom’) status will be abolished from 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 proposed, the current remittance basis of taxation will be replaced by a new regime for those who become UK resident after a period of 10 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 mean 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 – a major complexity for British expatriates.
The 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 UK resident for ten years and then for the ten years following their departure. After 10 years of non-residence, only their UK assets will be liable for inheritance tax.
We only have few details on how this may work, and the plans may change following the consultation, but the hope is that it will start next April and provide more clarity for British expatriates. This will, however, be after the next general election which many have also an impact if there is a change of government.
The government has 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, but the Labour Party said it will remove this protection for trusts if elected.
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 Portugal. Many expatriates find that moving assets out of the UK improves their overall tax position. 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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com
