Budget: Inheritance Tax based on UK residence from 6 April 2025
Tax residence, not domicile, will determine whether non-UK assets are subject to UK inheritance tax from 6 April 2025
Residence test for IHT on non-UK assets
It is intended that the exposure of non-UK assets to UK inheritance tax (IHT) will, from 6 April 2025, be determined by tax residence rather than domicile. This proposed change, announced but not happening in this Parliamentary session, will affect assets owned by individuals and trusts and is subject to consultation on the detail. It is not only those who are currently non-UK domiciled who will be affected. Individuals currently domiciled and living in the UK who are considering moving overseas, as well as those who are non-UK resident and retain a UK domicile may find their IHT exposure, and that of any trusts they have settled, affected by the new regime.
UK assets are within the scope of the IHT regime for individuals and trusts regardless of the domicile (or residence) status of their owner or the settlor of the trust. This will remain unchanged.
Alongside the Chancellor’s announcement of the abolition of the non-dom regime for income and capital gains from 6 April 2025, a consultation will take place on the detail of new rules that will determine whether non-UK assets are within the scope of IHT based on residence (rather than domicile as currently).
The new residence-based test will see an individual’s non-UK assets being within the scope of IHT once they have been resident in the UK for 10 years. Whether these will need to be 10 consecutive years or a total of 10 years within a longer period will presumably be clarified during the consultation process. Also, presumably the UK Statutory Residence Test will be the test of residence used, although the interaction with tax treaties for dual residents, the interaction of tax years and calendar years, and how years of ‘arrival’ and ‘departure’ will be counted will require consideration.
For individuals leaving the UK it is proposed that there will be a 10-year IHT ‘tail’, seeing non-UK assets remain within the scope of IHT for a longer period after departure than under current rules for some individuals. We anticipate that a case will be made during the consultation for the length of this ‘tail’ to be reduced, for comparative scenarios.
UK expats, both new and existing, may see their non-UK assets fall out of the IHT net sooner than currently under these proposals. Whether or not this turns out to be the case will depend on their individual circumstances as well as the nature of any other further criteria or ‘connecting factors’ that affect the length of the IHT ‘tail’.
The current IHT rules for trusts provide that non-UK assets settled into an ‘excluded property trust’ (EPT) by a non-UK domiciled settlor remain outside the scope of IHT even if the settlor becomes UK domiciled (including under the 15 out of 20 year deemed domicile rule). The announcement confirms that non-UK assets settled into an EPT before 6 April 2025 will continue to be taxed under the current rules. The IHT status of non-UK assets held in EPTs settled from 6 April 2025 will, in contrast, be determined by the IHT status of the settler as determined by their residence position, i.e. the 10-year rule mentioned above, both at the time of the transfer into trust and at the time of other occasions to IHT charge on trusts (being 10-year anniversaries and when assets leave the trust).
The Government appears to appreciate the complexities of the new IHT regime, particularly in relation to trusts. Careful consideration will need to be given to the further detail that emerges during the consultation process and in the legislation to fully comprehend the impact of these new rules. In the meantime, we recommend that those potentially affected seek appropriate advice in advance of the new regime’s commencement.
