Spring Budget 2024: UK inheritance tax changes for non-domiciliaries

In the Spring Budget on 6 March 2024, the chancellor announced large-scale reform to the tax regime for "non-doms". The measures announced include an intention to move to a residence-based regime for inheritance tax (IHT), to take effect no earlier than 6 April 2025 and which will be subject to consultation. 

What we know

Subject to consultation, it is proposed that the new regime will work in the following way:

Regardless of domicile, there will be IHT on worldwide assets owned outright when a person has been resident in the UK for 10 years.

Conversely, a person will only lose liability for IHT on worldwide assets when they have been non-resident for 10 years.

Foreign assets held in trusts set up after 6 April 2025 will be taxable on the trustees if the settlor:

• has been resident for 10 years; or
• (having been taxable on worldwide assets), has been resident at some point during the last 10 years.

It is still possible for a non-domiciled settlor to set up an excluded property (IHT exempt) trust up to 6 April 2025.

What we don't know

The IHT legislation is not scheduled to come into effect until April 2025 (at the earliest) and is also subject to consultation. As there will have been a general election by then, the new government may be a Labour one, with its own view on the optimal form of non-domiciliary tax legislation (having planned to reform it themselves); it may choose to amend or redraft the legislation.

In any event, there will be a consultation which will have specific reference to:

• transitional provisions;
• the length of the residence criteria and tail provision;
• any connecting factors other than residence;
• gifts with reservation;
• domicile elections;
• formerly domiciled residents; and
• calculation of trust charges.

The comprehensive nature of this consultation means that nothing is yet certain.

There are two particular areas of uncertainty to highlight. It is not clear whether the rules apply to settlor interested trusts or all trusts. If someone sets up a trust for their grandchildren and excludes themselves from benefit, while non resident, then moves to the UK for 10 years, is that trust taxable? One would guess not, based on current reservation of benefit principles, but cannot assume this yet.

How does this apply to UK domiciliaries who want to get out of the UK inheritance tax net? It appears to create a huge opportunity (to be resident abroad but spend, say, three months a year in the UK and retain a house and other connections there). However the consultation refers to "connecting factors". Individuals need to know what this means before making decisions about this.

What should people be doing?

Any steps to be taken must be bespoke, particularly given the other changes to non-dom income and capital gains tax changes announced in the Spring Budget, but these points are of general application:

• Absolute lifetime gifts of foreign assets prior to 10 years' residence should be effective. It would be advisable to make these as early as possible.
• Trusts set up before April 2025 should be effective, but it would be wise to wait (or be comfortable with the cost of unwinding them) until the proposals are ratified. This may be a small window given the potential change of government.
• Anyone planning to move to the UK in 2024 should now take these proposals into account.

Other than that, it is safest to wait until there is more detail of the proposals.

Osborne Clarke comment

The big question is to what extent this creates an opportunity for UK domiciliaries to leave the UK IHT net while maintaining a limited presence in the UK. In reducing the tax liability on foreign assets to those who fall within objective criteria (day counting), the UK may become exposed to a wealthy exodus (with limited non-taxable presence) for previously lifelong UK taxpayers.

Depending on the consultation, there may be a helpful decoupling of succession law (based on domicile – intention), from tax law (based on residence – objective day counting). This could enable internationally mobile families to prepare English wills of worldwide assets and opt for domicile of choice (and therefore freedom of testamentary disposition rather than forced heirship) while not suffering the previously automatic liability to worldwide IHT.

The UK estate tax treaties with other counties may need to be renegotiated given that they are based on domicile. It might be possible to counter this by classifying 10 years' residence as deemed domicile in the legislation. However, Indian and Pakistan domiciliaries have benefited from a double tax treaty anomaly where they, in limited circumstances, cannot be subject to deemed domicile rules. This anomaly must be under threat as part of the current overhaul.