Inheritance Tax changes from 6 April 2025 – an update
Labour Government publishes update on plans for changing scope of IHT from a domicile-based tax to being residency-based
Labour Government publishes update on plans for changing scope of IHT from a domicile-base
In the UK Spring Budget on 6 March 2024, the previous Government announced proposals to change the scope of Inheritance Tax (IHT) from a domicile-based tax to a residency-based one. On 29 July 2024 a Policy Summary was published with the new Government’s plans.
The intention remains to implement the changes from 6 April 2025 but the previously promised formal policy consultation will now not go ahead. Instead, stakeholder feedback already provided following the Spring Budget will be reviewed. Further external engagement will be carried out over the summer, ahead of a more detailed update to be published at the Autumn Budget on 30 October 2024.
The basic test for the ‘new’ IHT regime on worldwide assets appears as previously proposed. Reaffirmed is the intention to charge an individual to IHT on their worldwide assets once they have been resident in the UK for 10 years. The individual should then remain within the scope of IHT for a further 10 years if they later become non-UK resident (referred to as the ’10-year tail’).
No further information about transitional provisions was included in the Policy Summary, particularly about how the new test will impact individuals who have already left the UK and die post April 2025, so there could be ‘winners and losers’. There seems more certainty that the former could include ‘Brits abroad’ i.e. UK domiciled individuals who have left the UK more than 10 years ago, who could see their non-UK assets fall outside the IHT net under the new test sooner than the current rules permit.
Individuals should remain close to all aspects of IHT reform. For example, some coming into scope sooner than expected by virtue of the new test, may look to rely on IHT exemptions such as Business Property Relief (BPR) to mitigate their future exposure. But as our article ‘Reform IHT to increase revenue and public support, says Demos’ highlights, speculation about reform of BPR is rife so changes may be made.
From 6 April 2025, the Government proposes that all non-UK assets held in EPTs (excluded property trusts) (meaning non-UK assets held in trusts which were settled by non-UK domiciled individuals), will become subject to IHT, regardless of when the trust was settled. How this is going to be achieved remains unknown with further detail expected in the Autumn Budget on 30 October 2024. It is reasonable to assume following the new test above, if a settlor is UK resident for more than 10 years, in addition to the UK assets that were already within scope of UK IHT, the trustee’s non-UK assets will also be within scope of IHT when assets are added to the trust, when the settlor dies and at the time of other occasions of IHT charges on trusts (being 10 year anniversaries and when assets leave the trust). Alternatively, if the settlor has been non-UK resident for more than 10 years, the trustee’s non-UK assets will likely not be within the scope of IHT. But, this position will be dependent on the application of the 10-year tail.
It was hoped that the formal policy consultation would flesh out complexities of changing the IHT regime, particularly in relation to trusts. One obvious one is confirmation that the new rules will not apply to EPTs where the settlor died before 6 April 2025. The Policy Summary does infer that the Government is aware of the complexity as it refers to “considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing arrangements” and “transitional arrangements for affected settlors”. Further clarification is needed about what this means in practice. Our article ‘The new Government push ahead with Non-Dom Reform’ notes that the Government is exploring whether the Temporary Repatriation Facility (TRF) for non-doms can include stockpiled income and gains in overseas structures, as well as a review of the anti-avoidance rules for transfer of assets abroad and settlements. Might this suggest the Government is considering allowing settlors of EPTs to wind up their trusts at a reduced income tax/capital gains tax cost, if retaining them is no longer cost effective due to the change in IHT treatment?
Careful consideration will need to be given to the further detail published in October 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 6 April 2025
