As part of the Autumn Budget delivered on 30 October 2024, the Chancellor, Rachel Reeves, announced a series of sweeping reforms to replace the current tax regime for UK resident, non-UK domiciled individuals (non-doms).
The inheritance tax (IHT) reforms are summarised below. Please see our other articles for more information on the changes made to the income tax and capital gains tax regime for non-doms, and for the changes made to the taxation of trusts.
What are the current rules?
An individual’s liability to IHT is currently based on their domicile status and the situs of the assets held. An individual who has a domicile in the UK (ie a domicile of England and Wales, of Scotland or of Northern Ireland) will be within the scope of IHT in respect of their worldwide assets.
An individual who has a domicile outside the UK, is only subject to IHT in respect of their UK situs assets (and indirect interests in UK residential property).
Once a taxpayer has been UK tax resident in 15 out of the previous 20 tax years, they will be deemed domiciled for UK tax purposes and will therefore be within the scope of IHT in respect of their worldwide assets.
The new rules
Residence based test
The Government has confirmed the move to a new residence-based test for IHT.
From 6 April 2025, the test to determine whether non-UK situated assets are within the scope of IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years, immediately preceding the tax year in which the chargeable event (eg death or transfer into trust) occurs. At this point, a ‘long-term resident’ will be liable to IHT in respect of their worldwide assets.
For individuals below the age of 20, the test is modified such that an individual will be a long-term resident if they have been UK tax resident during at least 50% of the tax years since their birth.
The domicile status of the individual will no longer be of any relevance, and therefore the concept of a ‘formerly domiciled resident’ (someone born in the UK with a UK domicile but who has subsequently acquired a domicile of choice elsewhere) will similarly be abolished.
An individual’s residence status for the purposes of establishing whether they are a long-term resident will be determined using the Statutory Residence Test.
Where an individual is UK tax resident for a tax year under Statutory Residence Test, also resident in another jurisdiction but ‘treaty resident’ in that other jurisdiction under a Double Taxation Agreement, the individual will still be treated as UK tax resident for the purpose of determining if they are a long-term resident.
When an individual comes to or leaves the UK part way through a tax year, they may qualify to split the tax year into a UK tax resident part and non-UK tax resident part if certain conditions are met. Split years will be treated as full years of UK tax residence for the purposes of the long-term resident test.
In a deviation from the previous Conservative Government’s announcements in March earlier this year, there are no references to ‘connecting factors’ for determining an individual’s liability to IHT, rather this new test focuses solely on residence.
A long-term resident will remain fully within the scope of IHT until they have been non-UK tax resident for between three and 10 consecutive tax years. This tail is 10 years if the individual were resident in the UK for 20 tax years or more and will be shortened if the individual was resident in the UK for between 10-19 years, as follows:
- The tail is three tax years where the period of UK residence is between 10-13 years, or
- The tail is increased by one tax year for each additional year of UK residence up to a maximum of 10 years.
This means that an individual’s long term residence status will always be ‘reset’ once they have been non-UK resident for 10 consecutive tax years, which aligns with the new FIG regime.
The new tests apply to UK domiciled individuals in the same way as they do for non-UK domiciled individuals. Therefore, if an individual has been non-UK tax resident for at least 10 full tax years but had not lost their UK domicile status due to continued links to the UK, they will now only be subject to IHT in respect of their UK assets.
Whilst a corporate entity cannot itself be charged IHT, a company will be treated as a long-term resident in a tax year if it is either incorporated in the UK or if it had been UK tax resident at any time during the previous tax year.
Transitional rules
There will be transitional rules that will apply to individuals who are non-UK tax residents in the 2025-26 tax year and are not UK domiciled on 30 October 2024. The IHT status of these individuals will be determined under the existing tests. The new rules, that being 10 years of UK tax residence in the last 20 tax years, will apply if they subsequently return to the UK.
This means that individuals who have already left the UK, or who cease to be UK resident by 6 April 2025, will be subject to an IHT as follows:
- If they are not deemed-domiciled on 6 April 2025 (ie were not resident in 15 or more of the previous 20 tax years), then they will not have an IHT tail, or
- If they are deemed-domiciled on 6 April 2025, they will be subject to the current three-year IHT tail, regardless of the number of tax years they had been UK tax resident for prior to leaving. This will therefore apply to those deemed doms who left the UK after 6 April 2022.
These transitional provisions will not apply to individuals who are UK domiciled under common law on 30 October 2024.
Excluded property
Excluded property is a form of property which is outside the scope of IHT.
Excluded property currently includes non-UK situs assets, holdings in authorised unit trusts, and shares in open-ended investment companies, that are held by individuals who are neither domiciled nor deemed to be domiciled in the UK. It also includes foreign currency UK bank accounts held by an individual who is both non-UK resident and non-UK domiciled at the time of their death.
However, from 6 April 2025, these assets will only be regarded as excluded property if held by an individual who is not a long-term resident (and non-UK resident, where relevant).
Furthermore, from 6 April 2025, interests in national savings certifications and premium savings bonds, which were previously regarded as excluded property if held by an individual who is domiciled in the Channel Islands or the Isle of Man, will no longer be regarded as excluded property, irrespective of whether the individual is regarded as a long-term resident or not.
There will be no change to the treatment of Free of Tax to Residents Abroad (FOTRA) securities, as for most excluded property status of such securities is already currently determined exclusively based on the individual’s tax residence status.
Lifetime gifts
Where an individual makes a lifetime gift to another individual, they should only be within the scope of IHT if they die within seven years of the gift. From 6 April 2025, where an individual is not a long-term resident at the date of the gift, the gift will remain outside the scope of IHT, even if they die within seven years at a time when they are a long-term resident. Similarly, gifts made by long-term residents will be within the scope of IHT, even if they cease to meet the criteria by the date of their death.
From 6 April 2025, if a donor is a long-term resident at the time of their death, and they have reserved a benefit in a gift of non-UK situs property immediately prior to the date of their death, the property will be included in the donor’s estate under the Gift with Reservation of Benefit (GWR) provisions and their estate will be subject to IHT at 40%. This will apply regardless of whether the gift was made when they were a long-term resident or not.
Similarly, if a settlor of a trust has an interest in the settled property, the property comprised in the settlement will be subject to IHT under the GWR provisions if the settlor is a long-term resident at the time of their death.
This is no different to the way that the current GWR provisions are applied to a gift of non-UK situs property by a non-UK domiciled donor, who has reserved a benefit in the gift immediately prior to their death and has since become (and still remains) UK domiciled or deemed to be UK domiciled at the time of their death.
Similarly, if a settlor of a trust can also benefit from said trust, the property comprised in the settlement will be subject to IHT under the GWR provisions if the settlor is a long-term resident at the time of their death. For the avoidance of doubt, this does not apply to excluded property comprised in a settlement by 30 October 2024, where the settlor was a non-UK domiciled when the property first became comprised in the settlement. Please refer to our briefing on the changes made to the taxation of trusts for more details.
Spousal exemption
Under the current rules, transfers between UK domiciled spouses or civil partners are exempt from IHT. Where an individual is UK domiciled and their spouse/civil partner is non-UK domiciled, transfers in excess of £325,000 are within the scope of IHT unless the spouse/civil partner elects to be treated as deemed to be domiciled for IHT purposes. Once an election has been made, the individual will be deemed to be domiciled in the UK for IHT purposes only until they have been non-UK resident for four consecutive tax years.
From 6 April 2025, the election rules will be amended such that a spouse that is not a long-term resident can elect to be treated as a long-term resident. This election will last until the individual has been non-UK resident for 10 consecutive tax years. Therefore, an even greater amount of care and consideration will need to be taken before a decision to make such an election is made.
Elections made prior to 30 October 2024 will remain in place, with the spouse making the election being treated as deemed to be UK domiciled for IHT purposes until 5 April 2025, and then treated as a long-term resident from 6 April 2025, and until they have been non-UK tax resident for four consecutive tax years.
Elections made on or after 30 October 2024 and before 6 April 2025, will be subject to the new rules from 6 April 2025.
Once the election has lapsed, the electing spouse’s IHT position will be determined as normal in accordance with the long-term residence test.
UK double tax treaties
The Government have confirmed that the UK’s 10 IHT Double Tax Conventions will remain intact with no changes to the treaties nor to how they operate.
It is hoped that further guidance will be issued in due course, given that all such treaties refer to the individual’s ‘domicile’ at the applicable time, to clarify that this will be taken to mean whether the individual is a long-term resident or not. However, if an individual who is long-term resident is seeking to rely on a Double Tax Convention to mitigate their exposure to UK IHT, their domicile status is likely to remain relevant.
Other changes to IHT
The Chancellor also announced significant changes to both Agricultural Property Relief (APR) and Business Property Relief (BPR). APR applies to land and property used for agricultural purposes while BPR applies to business assets, including partnership interests and shares in unquoted companies, providing they are not mainly carrying on investment activities.
In addition, pension funds which have not been drawn down or converted into an annuity by an individual are currently exempt from IHT on death, as are death benefits from pension schemes. From April 2027 pension funds and death benefits will be aggregated with an individual’s estate and subject to IHT on a taxpayer’s death.
More information on these other changes to IHT can be found here.
How we can help
These reforms will be wide reaching and significantly impact the inheritance tax position of both non-doms and UK domiciled individuals who have spent time outside of the UK. We urge any individuals impacted to review their affairs and start conversations with their advisors sooner rather than later, to highlight potential planning opportunities ahead of 6 April 2025.
We provide advice and support to UK non-doms and other individuals with international tax complexities. We’re also part of Nexia, a global network of independent accounting and consulting firms that operate internationally in over 122 countries. This means we can provide you with multi-jurisdictional support to find the right solution.
If you’d like to understand more about this topic and the options available to you, please get in touch with Alexandra Britton-Davis, Steven Coelho or your usual Saffery contact.
