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One of the biggest challenges as an expat is navigating taxes. The UK, for instance, will tax income and wealth differently to Spain and other countries. One often overlooked area is capital gains tax (CGT). Below, we explain how CGT works, how expats can inadvertently “trip up” on it when living abroad and how to plan effectively for it.
We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a free, no-obligation financial consultation:
+34 966 460 407
info@scottsdale.eu
What is capital gains tax (CGT)?
When you buy an “asset” (e.g. a share in a company) and later sell it for a higher price, this is known as a capital gain. Capital gains tax (CGT) may be levied on this profit, depending on your circumstances and relevant tax laws.
The gain itself is taxed, not the asset. For instance, suppose you invest £10,000 in an ETF (exchange-traded fund) and its price rises by 50%. At this point, you “dispose of” the shares and make a £5,000 profit.
Capital gains tax (CGT) might apply to the 50% profit you achieved but not the full £15,000 received after the asset disposal. In the UK, the CGT rate depends on two main factors:
- The type of chargeable asset disposed of (i.e. residential property or other).
- The highest marginal rate of the taxpayer.
How CGT can catch out expats
When a UK citizen moves abroad, their tax residency status is vitally important when considering CGT. If you are deemed resident in the UK for tax purposes, then UK tax rules will likely apply. If you are considered a tax resident in your new country, however, then the CGT rules of that country will plausibly dictate your CGT treatment.
Unfortunately, many expats do not know their tax residency status. They also may not understand how their status might change and how this could affect their wealth and finances. Spain and the UK are cases in point.
In the former, the financial year is the same as the Gregorian calendar year – it starts on 1 January and ends on 31 December. However, in the UK, the financial year runs from 5 April until 6 April. If a UK expat living in Spain is unaware of this difference, then they might make decisions about CGT based on false assumptions – leading to a costly tax bill later.
An illustration might help to show how UK expats can run aground with CGT. Suppose a British couple sell their UK home and move to Spain in early 2024. They originally bought the property for £100,000 and sold it for £600,000, making a £500,000 profit. If they had remained in the UK during 2024, no CGT would likely be due.
However, if the couple spent 183 days or more in Spain during 2024 (the Spanish financial year), then they would likely be deemed tax residents. Their UK property would become liable to Spanish CGT. This is levied at between 19% and 26%, potentially leading to a CGT liability over €100,000. Had the couple moved to Spain later in the year, they might have avoided paying a needless (and likely shocking) CGT bill in the following January when filing.
Navigating CGT as an expat
When living (or planning to move) overseas as a British person, dealing with CGT does not simply involve thinking carefully about any property you own. You need to think about your whole asset base – ISAs, pensions and more.
The best approach is to organise yourself before relocating from the UK. You will thank yourself later. For instance, in the UK in 2024-25, you can withdraw up to 25% of your pension pot (up to £268,275) after reaching your Normal Minimum Pension Age, tax-free. However, if you move to Spain and become a tax resident there in 2024, you lose this benefit.
In the UK, a tax resident is also entitled to a £20,000 ISA allowance each year. Any interest, capital gains or dividends earned inside ISAs are tax-free. However, if an individual becomes tax resident in Spain, any profits from ISA assets become taxable under Spanish law.
There are other CGT differences between the UK and other countries which can catch out British expats. In the UK, for instance, spouses can give assets to one another, typically without CGT. However, in Spain, there is no similar mechanism for spousal transfers. With so many different tax rules (which can also change in different jurisdictions), it can be beneficial to seek specialist financial advice to avoid inadvertently falling foul – even with the best intentions.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu