A new residence-based system for IHT will be introduced for non-doms, which will affect the scope of property brought into UK IHT for individuals and settlements.
On Wednesday 30, chancellor Rachel Reeves delivered Labour’s first Budget in 14 years, which included the scrapping of the non-dom tax regime and replacing it with a simpler residence-based regime.
Alongside the Budget document, the government published a paper titled: “Reforming the taxation of non-UK domiciled individuals.”
The paper detailed the changes that would come into effect from April 6 2025 which included:
- Implementing a four year foreign income and gains regime
- Replacing the domicile-based system for IHT with a resident-based system
- Introducing a new Temporary Repatriation Facility which will allow individuals previously taxed on the remittance basis to designate amounts from pre-April 2025 FIG, and pay a reduced tax rate for a period of three tax years, starting from 2025 to 2026.
- Reforming Overseas Workday Relief by removing the need to keep the income offshore, extending the period that employees can benefit from the relief from three to four years and introducing an annual financial limit on the amount claimed
Inheritance Tax
From April 6 2025, the test for whether non-UK assets are in scope for 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 (including death) occurred.
The time an individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years.
Those who are resident between 10 and 13 years will remain in the IHT scope for three tax years and will increase by one tax year for each additional year of residence.
IHT will be charged on non-UK assets owned outright when a person is long-term resident, according to the document.
UK assets will remain in scope for IHT on the same as at present, regardless of residence.
Edward Hayes, director at UK law firm Burges Salmon, said: “Of particular interest is the reduction in the inheritance tax 'tail'. This is the idea that those who have lived in the UK for 10 or more tax years become exposed to UK inheritance tax not only whilst they live here but also for some time after they leave.
“It is a particularly important consideration for the internationally mobile. The tail was originally going to be 10 years but now it will depend on how long a person has been a UK resident and can be as few as 3 years.
“Some existing non-UK resident trusts will also continue to benefit from a limited version of their existing inheritance tax protections.”
Settlements for IHT
Currently, non-UK assets in a settlement are excluded property if the settlor was non-domiciled at the time the assets became included in the settlement.
Under the new rules, the excluded property status of non-UK settled assets will not be fixed at the time the assets are added to the settlement.
Assets included in a settlement will only be excluded property and not subject to IHT at times when the settlor is not long-term resident.
Any assets a settlor, who is a long-term resident, has settled will be subject to IHT, this test will apply to all settlements regardless of when the property became comprised in the settlement.
If a settlor of a trust dies on or after the changes come into force, the excluded property status of the trust will depend on their long-term residence status at their death.
