In the UK Spring Budget 2024, the UK government announced major changes to inheritance tax rules in the UK. What does the change from a domicile-based to a residence-based system mean for non-UK domiciled individuals?
The current domicile-based system
Currently, the UK applies a domicile-based system. Individuals who are UK-domiciled or deemed UK-domiciled are subject to inheritance tax (IHT) on their entire worldwide estate. Non-UK domiciled individuals, however, are only subject to assets situated in the UK.
If the residence-based system announced in the Spring Budget 2024 and currently under consultation is adopted, this will change from 6th April 2025 and the non-dom tax regime will be phased out.
The proposed residence-based system
Under the proposed residence-based system, anyone resident in the UK for 10 years or more will be subject to IHT on their worldwide estate. This differs from the current rules which apply the same rule only if a person has been a UK resident for 15 of the last 20 years. This will necessitate earlier IHT planning for many people entering the UK.
Not only that, but anyone who leaves the UK will continue to be liable for UK IHT for 10 years after they cease being resident. Expatriates moving abroad from the UK will therefore need to be wary of the rules that apply to them and plan accordingly.
Excluded property trusts: an inheritance tax mitigation tool for UK non-doms
The new rules will impact one particular type of trust that is frequently used by UK non-doms planning to move to the UK, as well as British expatriates with non-dom spouses, to mitigate against IHT: Excluded Property Trusts, or EPTs.
EPTs can currently be used to house assets situated outside of the UK and protect them from IHT. The UK government has stated that assets held in EPTs prior to the new regulations being introduced in April 2025 will maintain their excluded property status irrespective of the settlor’s subsequent change of domicile. After that date, any assets settled into an EPT, or added to an existing EPT, by a non-domiciled individual will no longer be excluded from an estate for the calculation of IHT, closing a useful tax mitigation loophole for non-doms.
Non-doms with plans to move to the UK would be wise to think about setting up an EPT before the April 2025 deadline. After the system changes all individuals moving to the UK will automatically acquire UK domicile after 10 years of residence in the UK, which means that IHT will be payable on their worldwide assets when they die.
The same applies to expats married to non-doms. Because non-UK domiciled spouses of UK-domiciled individuals do not benefit from an unlimited spousal exemption, EPTs have been a useful tool for many British expatriates with non-British spouses to pass assets on without paying IHT at 40%. Subject to the outcome of the current consultation, this tax mitigation tool will no longer exist from 6th April 2025.
Valuable IHT tax mitigation option to disappear in April 2025 – act now!
If you want to benefit from an EPT to protect assets outside the UK from IHT, you need to take action now, before the new system is introduced next year.
To discuss whether this solution could benefit you and your spouse, get in touch. Our experienced financial advisers can talk you through the options available to you to minimise a potential inheritance tax liability. But don’t hang about, time is running out!
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