The Spring Budget on 30 October 2024 saw the abolition of our ‘Non-Dom’ regime, and some unpopular proposed changes to some inheritance tax (IHT) reliefs.
Domicile v. Residence, and the IHT Tail
From 6 April 2025, inheritance tax will apply to you and your estate if you have been ‘long-term resident’ in the UK, i.e. resident for 10 of the last 20 years per the existing UK Statutory Residence Test (SRT). Our arguably archaic domicile rules will be abolished. Practitioners have generally welcomed this more transparent approach to IHT for clients as we have been working with the SRT rules since 2013. However, those of us who have worked with the domicile rules for many years will miss the familiarity.
Following a move to the UK, once you become a long-term resident, IHT will apply to your worldwide estate, i.e., your assets, wherever they may be located.
If you are a long-term resident and leave the UK, IHT will continue to apply to you for up to 10 years, referred to as the ‘IHT tail’. For residence between 10 and 19 years, the IHT tail will reduce, i.e. if you have been resident between 10 and 13 years, the IHT tail will follow you for only three tax years, and the tail will increase by one year for every additional year of residence. If you have been UK resident for 18 of the last 20 years, your IHT tail will stay with you for 8 years, and residence for 20 years will result in the entire 10-year IHT tail applying to your worldwide estate.
Breaking the Chain
A full 10 years of non-residence in the UK will take you out of the scope of IHT if you do not have any assets here. However, assets located in the UK and non-UK assets which have a value derived from UK residential property are likely to be caught within the IHT regime regardless of residence, subject to any available relevant reliefs and exemptions.
Transitional Rules
Special rules will apply to individuals who are not domiciled here and also not resident here in the 2025/26 tax year. The existing test to determine tax status will be used, i.e. you would be treated as a long-term resident only if, on 6 April 2025, you had been deemed domiciled here under the existing 15/20 rule (UK residence for 15 of the previous 20 tax years, and at least one of the four years ending with the relevant tax year).
In practice, this means that if you have already left the UK or break your UK residence by 6 April 2025, you would have a 3-year IHT tail rather than the new IHT tail of up to 10 years. If residence is broken, but you then return to the UK, the new 10-year rule will apply.
Changes to Business Property Relief and Agricultural Property Relief
Two valuable reliefs for IHT have been targeted in the new legislation, although these provisions will not be in force until 6 April 2026. Currently, some businesses and agricultural assets can benefit from either Business Property Relief or Agricultural Property Relief on the death of the owner of the asset, or on lifetime transfers in certain circumstances. The new provisions will cap the full reliefs at £1m, and if the value of the assets exceeds £1m, you can claim only 50% of the relief over this amount. The current rate of IHT is 40%, so the IHT on any value exceeding £1m will be 20%.
We have seen the response from farmers, and much discussion in the media, as these proposed changes will significantly impact estates which hold the affected assets. Advice should be sought as there may be succession strategies to help to mitigate these effects.
Excluded Property Trusts
Using a certain form of trust has been a tried and tested way for individuals who are resident but not domiciled here to mitigate their IHT exposure. Putting non-UK assets into a non-UK trust (an ‘excluded property trust’ (EPT)) shields those assets from UK IHT.
In the future, if any non-UK asset is put into a discretionary trust, it cannot be an EPT if the settlor (the individual putting the assets into the trust) is a long-term resident. Encouragingly, if the settlor loses their long-term residence status, their trust can be an EPT, but this might result in an exit charge for IHT.
For trusts created before 30 October 2024, there is a concession which allows assets within an EPT to remain outside the settlor’s estate, but other IHT charges, namely the ongoing ten-year anniversary and exit charges, will apply to the existing trust from 6 April 2025. The only exception to these latter charges applying is where a settlor dies before 6 April 2025 and they were neither UK domiciled nor deemed UK domiciled when the settlement was established.
If these rules affect you, and you might become a long-term resident on 6 April 2025, you might have an unexpected immediate IHT charge within the trust, and it may fall into the IHT regime, which applies to non-EPTs and, therefore, incurs the ongoing charges mentioned above.
Pensions
Currently, UK-registered pension schemes do not come within the scope of IHT. Using a pension to grow a pot of wealth for the next generation has, therefore, been an attractive way of benefitting your family without suffering IHT.
From 6 April 2027, this is going to change, and pensions will now be within the IHT net, so you may want to consider drawing down tax-free cash to make gifts or discuss annuity planning with your wealth advisor.
Conclusion
The new rules are complex, and if you are affected by any of the above changes, you have a short window of time to review your tax position, take any necessary advice, and implement any planning, or to understand the new regime and how it will affect you in the future.
Please get in touch with Amanda Nelson at [email protected] or your usual Lester Aldridge contact.
