On 30th October 2024, the UK's Chancellor of the Exchequer, Rachel Reeves, presented the Autumn Budget, confirming a series of significant tax changes particularly affecting non-domiciled individuals (non-doms). These changes aim to reform the UK's tax system, with potential implications for the luxury property market in Mallorca.

Abolition of the Non-Domiciled Regime

From 6th April 2025, the non-domiciled regime will be abolished and replaced by a system based on tax residence. Currently, UK residents who are not domiciled in the country can benefit from the remittance basis for their first 15 years of residence, meaning they do not pay UK tax on foreign income and gains unless they are remitted to the UK. Under the new system, individuals opting for the new regime will not pay UK tax on foreign income and gains for their first four years of tax residence, provided they have not been UK tax residents in the last ten years.

Eligibility Criteria for the New Regime

To qualify for the new regime, individuals must have been non-tax residents in the UK for at least ten consecutive tax years, regardless of their domicile status. This regime will apply during the first four tax years of residence in the UK, including for those domiciled in the UK who return to the country.

Transitional Provisions

Since the new regime represents a significant change for current non-domiciled residents, transitional provisions have been established:

• Asset Revaluation: Individuals who have previously claimed the remittance basis and who are neither domiciled nor deemed domiciled as of 6th April 2025 may opt to revalue their personal assets as valued on 5th April 2017, so they are only taxed on capital gains from that date.
• Temporary Repatriation Facility: Those previously taxed under the remittance basis may opt to remit foreign income and gains earned before 6th April 2025 to the UK at a reduced rate of 12%. This facility will be available only for the 2025/26 and 2026/27 tax years, with the rate increasing to 15% in the 2027/28 tax year.

Implications for Trusts

From 6th April 2025 onwards, the protection from the taxation of future income and gains arising within trust structures will be removed for all non-domiciled and deemed domiciled individuals who do not qualify for the new four-year regime. Under the new regime, while an individual qualifies for the four-year regime, they will not pay UK tax on trust income and gains as they arise or upon receiving trust distributions. Once the individual is no longer eligible for the four-year regime, they will be required to pay UK tax on all gains arising within a trust structure they have established.

Inheritance Tax (IHT)

The freeze on inheritance tax thresholds will be extended for a further two years, until 2030. This means that the first £325,000 of any estate can be inherited tax-free, up to £500,000 if the estate includes a residence passed to direct descendants, and £1 million when transferred to a surviving spouse or civil partner.

Impact on the Luxury Property Market in Mallorca

Mallorca has long been an attractive destination for high-net-worth individuals, including non-domiciled UK residents seeking luxury properties. The abolition of the non-domiciled regime could influence these individuals' decisions regarding purchasing or retaining properties on the island.

• Increased Tax Burden: With the elimination of the non-domiciled regime, high-net-worth individuals may face a higher tax burden in the UK, which could reduce their ability or willingness to invest in luxury properties abroad, including Mallorca.
• Relocation of Residents: Some non-domiciled individuals may consider relocating outside the UK to maintain tax advantages, which could increase the demand for luxury properties in destinations like Mallorca.
• Changes in Market Demand: While some investors may withdraw from the luxury property market in Mallorca due to the new tax policies, others might see the island as an opportunity to diversify their investments outside the UK.

Assessing the Current Landscape in Mallorca's Property Sector

The tax reforms introduced in the UK's Autumn Budget 2024 represent a significant shift in the taxation of non-domiciled individuals. While these measures aim to increase tax revenue and promote fairness, they could also have implications for the investment and residency patterns of high-net-worth individuals. The luxury property market in Mallorca may experience fluctuations in demand as a result of these changes, depending on how investors respond to the new UK tax policies.

I believe it is quite probable that the demand for luxury properties in Mallorca will increase as a result of these new tax measures in the UK.

The main reason is that the elimination of the non-domiciled regime may prompt high-net-worth individuals to seek alternatives that allow them to optimise their tax situation, and Mallorca, with its Mediterranean climate, quality of life, and relative proximity to the UK, presents itself as an attractive destination. In particular, high-net-worth individuals who were benefiting from the tax conditions in the UK might consider moving their residence to a location where they have more flexibility in maintaining their assets with lower tax burdens.

Such buyers tend to prefer destinations of quality and sophistication like Mallorca which, by offering a luxury lifestyle, stability, and opportunities to invest in exclusive properties, becomes a very tempting incentive. The new regulations could also generate a boost in sales for those looking to establish a primary or secondary residence outside the UK, avoiding the new tax implications that could prove costly. Moreover, buyers who previously considered their properties in Mallorca as occasional holiday investments might now seek to consolidate them as primary residences to take advantage of the benefits offered by Spanish tax compared to the new UK system.

In the long term, we might see an adjustment in the profile of buyers: an increase in permanent or semi-permanent residents, more interested in purchasing luxury properties as a medium- to long-term investment. This could result in a price increase in the high-end market, especially in high-value and exclusive areas such as Son Vida, Portals Nous, or Palma Old Town, where demand is already strong.

In short, the UK tax changes, while initially appearing to be a measure to reduce tax avoidance, have the potential to encourage greater migration of capital to destinations like Mallorca, where the combination of quality of life, comparative tax attractiveness, and the value of luxury properties can be a decisive factor for many of these international investors.