Abolishing the concept of tax domicile has profound implications for chargeability to UK Inheritance Tax (IHT). These fundamental changes commence from 6 April 2025.
Long-term residents
It has been announced that an individual will be chargeable to IHT if they have been resident in the UK for at least 10 out of the 20 previous tax years before the transfer of value (e.g., death or settlement into trust) – ‘long term residents’. This test will reset if the individual has been non-UK tax resident for 10 consecutive years.
This provision means that those who have become non-UK resident could, in the absence of any further provisions, remain chargeable to IHT for 10 years after moving overseas. To prevent this applying to shorter-term residents, there will be a reducing period of exposure according to how long the individual had been UK tax resident before leaving. For those residents between 10 and 13 years, the ‘tax tail’ will exist for a further three years. The tax tail will increase by one year, for each year of previous residence, up to a maximum of 10 (20 years of prior residence).
This means that on death, these long-term resident individuals will be charged to IHT on their world-wide estates, regardless of their common law domicile position, place of birth, family history or otherwise.
Transitional provisions will be available for those that have left the UK prior to 6 April 2025, such that the previous rules will continue to apply, but only if they do not return. However, those domiciled under common law at 30 October 2024 cannot benefit from this, and the new general rules will apply from 2025/26 onwards.
Potentially Exempt Transfers (PETs)
For transfers between individuals, if there is a transfer of excluded property (typically overseas assets gifted from a non-domiciled individual) then these will not be included in a deceased’s estate, even if they are considered a long-term resident at death. However, transfers of assets that were not excluded at the time of gift, will remain chargeable, even if they later become long term resident.
Settlements
Generally, it will no longer be the case that the tax position of the settlor at the time of transfer, will affect the chargeability of assets in trust to IHT. Instead, periodic and exit charges will depend on the status of the settlor at the time of charge. IHT will be due, if the settlor is a long-term resident at the date of the charge. If the settlor dies after 6 April 2025, the excluded property status and therefore all future IHT charges will depend on whether the settlor was long-term resident at the time of their death. Therefore, the property will be excluded, and outside the relevant property regime if the settlor was not long-term resident at their death, or it will be chargeable for evermore, if they were.
There may be further unexpected charges because of the above changes to the legislation. Where a relevant property trust exists (typically a discretionary trust), which holds excluded assets, but the settlor is not long-term resident under new rules, there will be an exit charge as a result of the property become excluded at 6 April 2025.
In contrast, a non-domiciled settlor who is found to be a long-term resident at 6 April 2025, will cause any previous excluded property to be susceptible to IHT on occasions of charge.
Gifts with reservation of benefit
Prior to 6 April 2025, it was possible for non-domiciled individuals to avoid an IHT charge on overseas assets, that were given away, even if they retained a benefit. This will no longer be the case, if they are considered a long-term resident at their date of death, so assets which they may no longer have a legal interest in, will still fall to charge if they still get some benefit from them. This is the same for assets settled on trust.
What’s next?
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