Gibraltar Residency Mistakes: 10 Common Errors UK Nationals Should Avoid

10 Common Mistakes UK Expats Should Avoid

1. I don’t have to worry about UK inheritance tax

A major attraction for British expats moving to Gibraltar is that no inheritance tax or wealth tax is payable in the overseas territory. However, as a UK citizen the reality is more complicated.

Obtaining permanent Gibraltar residency will not shield you from UK inheritance tax, even if you have lived in Gibraltar for several years or decades. This is because UK inheritance tax is based not on residency but domicile. Most British citizens born in the UK are deemed to be UK domiciled. While it is possible to shed this domicile of origin and acquire a new domicile (domicile of choice), it is a complex and difficult to achieve process as there are no fixed requirements.

Furthermore, any UK ties, however seemingly insignificant, can still trigger exposure to inheritance, from family links and social connections to property and business interests. HMRC will rigorously investigate your personal circumstances, including any plans to return to the UK. If HMRC decides you are UK domiciled this means your entire estate will be liable for UK inheritance tax. What does this entail?

If your estate is worth more than £325,000 you will have to pay 40% inheritance tax. If you’re married or in a civil partnership, you have a shared allowance of £650,000 that is protected from UK IHT. Should your partner die first they can pass their estate to you tax-free. If you are their sole beneficiary you can inherit their IHT allowance, meaning you could have a tax-free allowance of up to £1000,000 if you include the main residence exemption, which is £175,000 each (may also be available.)

As outlined above, while there is some tax-relief available for UK inheritance tax, it still does not compare to Gibraltar, where no IHT is payable. The best step you can take is to speak with an experienced financial advisor who understands both the Gibraltar and U.K. tax systems and can help legitimately reduce your exposure to UK inheritance tax.

2. I can live in Spain while tax resident in Gibraltar

The close proximity of Spain to Gibraltar means that many British expats will be tempted to buy an additional home in Spain for holidays and leisure time. It seems like the best of both worlds, but beware.

The double taxation treaty between Spain and Gibraltar came into force in March 2021. Designed to enhance tax cooperation and transparency, it introduced rules to avoid double taxation for those living in Spain and working in Gibraltar. These ‘tie breakers’ will deem you a Spanish tax resident if the following applies:

• You have 183 overnight stays in Spain during a calendar year.
• Your spouse/partner and dependents such as children habitually reside in Spain
• Your only permanent home is in Spain or two-thirds of your assets are directly or indirectly in Spain.

Even if none of the following apply you can still be deemed a Spanish tax resident unless you can show you spend more than 183 days a year in Gibraltar and have a permanent home there for your own exclusive use. It’s also worth noting that Gibraltar residency schemes such as HEPSS or Category 2 cannot be relied upon as conclusive proof of Gibraltar tax residency.

Many British expats are moving to Gibraltar to take advantage of its extremely benign tax regime, but these financial benefits will be negated if you fail to educate yourself on the rules concerning Spanish tax residency. Remember that to maintain Gibraltar residency you must spend at least 183 days in Gibraltar in any one year, or more than 300 days in aggregate over three consecutive tax years and income is assessed each year of assessment. Speak to a financial advisor to avoid making any costly mistakes.

3. I can exit the UK without considering my tax position

Moving to Gibraltar from the UK isn’t just a matter of booking flights and packing up your belongings. You will need to plan your exit carefully to ensure you don’t pay more UK tax than you need to.

The 2013 UK Statutory Residency Test will let you plan the date on which you become non-resident and it can tell you how much time you can spend in the UK without triggering tax residency. This will be based on your ties and connections, including work, family, property etc.

Ideally, you would exit the UK at the end of the tax year on 5 April but if that’s not possible there are scenarios where split year rules will automatically apply. They include starting full time work overseas; your partner or spouse starting full time work overseas; you ceasing to have a UK home.

You must also inform HMRC of your departure date – this can be done by filling out Form P85, available at: hmrc.gov.uk

Consult an experienced financial advisor familiar with both tax laws in the UK and Gibraltar to ensure your exit plan does not negatively affect your overall tax position.

4. I don’t need to re-evaluate my pension planning

If you’re planning on retirement in Gibraltar then your pension will likely be your main source of income. It’s important to decide if your current pension strategy is suitable for your new life as a British expat or whether you need to reassess your pension planning.

You can leave your pension in the UK, but any pension drawings will be subject to UK tax which can be as high as 45%. Instead, many British expats explore transferring UK pension benefits to a Gibraltar-based Qualifying Recognised Overseas Pension Scheme (QROPS). Where appropriate and structured correctly, pension income drawn from a Gibraltar QROPS are subject to tax at rates as low as 2.5%, depending on individual circumstances and residency status.

This advantage can also extend to estate planning after you die. Any benefits remaining in a UK pension if you die after the age of 75 will be subject to tax (at the recipient’s marginal rate). However, the rules are different for a Gibraltar QROPS. If your spouse is the nominated beneficiary and they remain in Gibraltar after your death, tax on pension drawings is capped at 2.5%. Upon your death, if you have both been non-UK tax residents for at least five complete tax years then your UK-based beneficiaries can receive the remainder of your pension without paying UK inheritance tax.

However, there is a major factor that you need to consider when it comes to pensions in Gibraltar. Since 2015, anyone in the UK over the age of 55 is now able to withdraw as much or as little as they like from their pension. However, such flexi-drawdown is not available in Gibraltar, which retains the old GAD (Government Actuary’s Department) rules and only offers capped drawdown. What this means is that QROPS members can only withdraw a tax-free lump sum of up to 30% and 70% of their pension assets must remain to provide a pension income for life.

This is something important to consider for those who desire flexibility and freedom when it comes to their accessing their pensions. Speak to a Gibraltar-based financial advisor who can guide you through the options and help optimise your pension within Gibraltar’s year of assessment framework.

5. Buying a property will be easy in Gibraltar

While many choose to rent first when they move to Gibraltar, if you plan to make your stay on the Rock permanent it’s likely you will want to buy your own home eventually. However, doing so could be much more challenging in Gibraltar than in the UK. There is a chronic shortage of housing in the overseas territory, driven by a lack of space and large numbers of foreign buyers – such as retirees and high net worth individuals – moving to Gibraltar. These supply and demand issues also mean house prices are being driven ever higher.

You should factor in the higher costs of property in Gibraltar in your budget when planning your relocation and expect to spend longer searching for the perfect home. Consider seeking legal and financial advice early to ensure your purchase aligns with Gibraltar’s residency and tax regulations.

6. As a British citizen I can move to Gibraltar and acquire tax residency whenever I want

As Gibraltar is part of the UK it’s easy to assume that moving there and obtaining residency will be straightforward. Unfortunately, the rules for doing so have been toughened post-Brexit.

For UK nationals, the only true self-sufficiency route is available to those in receipt of a UK State Pension who can transfer their S1 healthcare entitlement to Gibraltar. This pathway is therefore limited in scope and does not apply to all UK retirees. While Gibraltar offers favourable tax treatment on certain forms of income, eligibility for residency on self-sufficiency grounds is tightly defined.

Applications for self-sufficiency Gibraltar residency are processed under Gibraltar’s Immigration, Asylum and Refugee Act. Under the terms of the Act, UK citizens with no material connection to Gibraltar are treated as EU nationals and those who want to obtain residency must do so as a ‘qualified person’. What this means is that UK citizens may qualify for residency either through the limited self-sufficiency route (UK State Pension with S1 transfer) or by entering Gibraltar on an employed or self-employed basis.

Number one is for British citizens of retirement age who will make Gibraltar their permanent home and can transfer their UK medical rights to Gibraltar. Number two is if you enter Gibraltar on an employed or self-employed basis.

One development to bear in mind is Gibraltar’s 2022 budget, which announced changes to how certain income is assessed for tax purposes for anyone without a Category 2 certificate and who was not in true third-party employment. They can now be taxed on their full savings income, including pensions, interest, dividends and other passive sources of income.

However, while this is understandably concerning for those planning on moving to Gibraltar, no action has been taken thus far and it’s a situation that could change with a likely general election in Gibraltar later this year. Nevertheless, please consult a financial advisor who will review your current financial planning to accommodate any possible developments.

The 2022 Budget also stated that any non-Gibraltar nationals affected by the new tax could retrospectively apply for Category 2 status. However, while it is possible to obtain a Category-2 certificate, eligibility and requirements are rigorous enough to make it unsuitable for many British expats who will still find self-sufficiency the better option.

Note: Gibraltar operates two personal income tax systems — the gross income based system and the allowance based system — which determine how your income is taxed for each year of assessment.

Obtaining Gibraltar residency on self-sufficiency grounds is still very much a viable choice for UK citizens but engaging a qualified Gibraltar relocation expert with experience in serving British expats toguide you through the process is very important.

7. I can sell my UK main residence at any time

Once you’ve made the decision to move to Gibraltar it’s likely that you will sell your main home in the UK so you can afford to purchase a new property in Gibraltar. While capital gains tax is payable on property in the UK, you will be exempt from this if you sell your main home before leaving the country.

If you sell your home within nine months of exiting the UK that tax relief is still available, but if you sell after this period you will be entitled to less. This might not be an issue if you’re just a few months past the window, but anything longer will mean you have to pay CGT on any gains.

When you start planning your move to Gibraltar you should speak to an estate agent and kickstart the process of selling your UK home as soon as possible so you can take full advantage of CGT exemptions. Your financial advisor can also ensure the sale aligns with your residency timeline.

8. I don’t need to explore the different options to obtain residency in Gibraltar

There are different options for obtaining Gibraltar residency and it’s essential you retain the services of a relocation expert so you can pick the right one for you.

As mentioned earlier, residency on self-sufficiency grounds is a popular option. There are two other pathways to Gibraltar residency.

Category 2 status, aimed at high-net-worth individuals, is best suited for expats who receive large amounts of untaxed income from global business interests and want to minimise their tax liability.

If you have a Category 2 certificate you are taxed only on the first £118,000 of assessable worldwide income. The tax payable is £44,470. It’s a lifelong status as long as you meet the ongoing requirements and it can include your partner/spouse and any dependents.

Eligibility criteria for Category 2 status is stringent. It includes proof of a net worth of minimum £2 million; ownership/rental of qualifying property in Gibraltar for your exclusive use; and private medical cover for you and your family. You must also demonstrate that you have not been resident in Gibraltar for the five years before the application. Nor can you engage in any kind of trade or employment that competes with a local Gibraltarian business. You must pay tax one year in advance.

Because of this extensive list of requirements, a Category 2 certificate might not be suitable for many British expats, who will instead find self-sufficiency the more tenable option.

Another pathway for Gibraltar residency is High Executive Possessing Specialist Skills (HEPSS) status. It aims to attract high-level executives with specialist skills to Gibraltar. Under this scheme, income tax is capped at £39,940 for the first £160,000 of salary.

To qualify, you must have skills that are not already available in Gibraltar itself and that are of economic value. You must earn more than £160,000 a year and cannot have been resident in Gibraltar in the three years preceding the application. You must also have exclusive use of an approved residential property in Gibraltar.

9. I can become ordinarily resident in Gibraltar, but still spend long periods of time in the UK or Spain without becoming tax resident

If you spend long periods of time in other jurisdictions – such as the UK or Spain – you may trigger tax residency in these countries. To protect yourself you must be able to prove that you are tax resident in Gibraltar. To do so you must follow the rules for becoming ‘ordinarily resident’ in the overseas territory, which are as follows: You must spend at least 183 days a year in Gibraltar or more than 300 days over three consecutive tax years.

Whether you are planning on visiting Spain or returning to the UK to visit friends and family, speak to a financial advisor about how much time you can spend in these countries without potentially triggering residency. As mentioned earlier, the 2013 UK Statutory Residency Test will let you determine how much time you can safely spend in the UK without triggering tax residency. If you want to spend longer periods of time in Spain (such as in a holiday home, for example), speak to your advisor about any possible double taxation issues that could arise.

Be aware that Category 2 or HEPSS 2 status does not make you immune from paying tax in another country. Tracking your “days in aggregate” is key to maintaining tax compliance with Gibraltar’s residency rules.

10. I can move to Gibraltar without visiting first.

One of Gibraltar’s many attractions for British expats is how much it has in common with the UK, from a shared language to the same currency, education and legal system. However, that doesn’t mean you should commit to moving there before visiting first. While it is a wonderful place to live and has much to offer, Gibraltar is unique, with its own culture and society that may not be for everyone. You should make at least one trip, if not more, to the Rock so that you can decide if it’s really the right fit for you. Visiting beforehand will also allow you to research the local property market, understand Gibraltar’s personal tax framework and ensure your financial planning aligns with residency requirements.