Autumn Budget 2024 Series – Part 2: Changes to the ‘non-dom’ regime, IHT

Overview

From 6 April 2025, domicile will be abolished as a concept for UK tax purposes.  With effect from that date, an individual’s UK tax exposure and the application of UK tax rules to trusts established by them will be assessed according to the individual’s UK tax residence status.

In this second part of our article on ‘Changes to the ‘non-dom’ regime’, we focus on the UK Inheritance Tax (“IHT”) implications of the new rules.

Please see Part 1 for information on how the new rules will apply for UK Income Tax and UK Capital Gains Tax purposes.

Property held outright

From 6 April 2025, exposure to IHT on non-UK assets will depend upon an individual’s UK tax residence status at any relevant time.  This will apply to all individuals – whether they would have been UK domiciled or non-UK domiciled under the ‘old’ rules.[1]

IHT will be charged on a person’s non-UK assets if they are a ‘long-term resident’ (“LTR”).

An individual[2] will be a LTR if they have been UK tax resident for at least 10 of the previous 20 tax years.[3]

UK assets will continue to be within scope of IHT regardless of a person’s UK tax residence status.

If a LTR leaves the UK and becomes non-UK tax resident, their LTR status will continue for a period of time, creating an IHT ‘tail’.  The length of the tail (i.e. the individual’s continuing exposure to IHT in respect of non-UK assets) will depend upon how long they were tax resident in the UK (see the table below).

Number of UK tax years in which the individual was UK tax residentNumber of UK tax years for which non-UK assets remain in scope of IHT after an individual becomes non-UK tax resident
10 to 133
144
155
166
177
188
199
20 or more10

If an individual loses their LTR status, their IHT ‘clock’ is effectively reset.  The individual’s non-UK assets will then be excluded property for the following 10 consecutive tax years even if the individual becomes UK tax resident in that period.

As a concession, individuals who were not UK domiciled under common law at 30 October 2024 and are non-UK tax resident in the 2025/2026 tax year will benefit from a tail limited to three tax years. This is assuming they continue to be non-UK tax resident throughout the following (i.e. the fourth) tax year.

If an individual dies before 6 April 2025, their estate will be charged to IHT based on the current rules.

Lifetime transfers

As is currently the case, lifetime transfers may be subject to IHT if the donor dies within seven years of the transfer.

Generally, lifetime transfers of non-UK assets will be assessed according to the LTR status of the donor at the time the gift is made.

If the donor was not a LTR at the time of the transfer, the transfer will be outside the scope of IHT even if the donor was a LTR at the time of death.

If the donor was a LTR at the time of the transfer, the transfer will be within the scope of IHT even if the donor is not a LTR at the time of death.

Gifts with reservation of benefit (“GROB”) and the pre-owned asset tax (“POAT”)

The GROB rules, which can treat gifted property as part of the donor’s estate for IHT purposes if the donor continues to derive a benefit from it, may impose an IHT charge if the donor is a LTR at the time of death or, if the donor’s benefit ceases within seven years of death, at the time the benefit is released.  This will be the case even if the gift was of non-UK property and made at a time when the donor was outside the scope of IHT.

POAT, an annual UK Income Tax charge on a UK tax resident individual if a donor derives a benefit from gifted property where the GROB rules do not apply, may otherwise be payable in respect of gifts which were outside the scope of IHT when made if the donor becomes a LTR but only if the donor is a UK tax resident.

Property held in trust

Overview of trust IHT charges

IHT charges which may apply to a trust depend upon the type of trust and whether the settlor (i.e. the person who settled the trust) may be able to benefit from it.

For IHT purposes, a trust will usually be a qualifying interest in possession trust (a “Qualifying IIP”) or a relevant property trust.

A Qualifying IIP includes a trust established by Will where a person is entitled to the income of the trust.  For IHT purposes, the trust fund is treated as part of the IIP holder’s estate and taxed accordingly.

A relevant property trust includes a discretionary trust where no one beneficiary is entitled to any income or capital from the trust.  Relevant property trusts are subject to their own IHT regime with potential IHT charges of up to 6% on the value of the trust fund at every ten year anniversary of the trust (“ten-year charges”) and on the value of any trust distributions (“exit charges”) – together known as “relevant property charges”.

In addition:

  • a settlor may be subject to an immediate 20% IHT charge on the creation[4] of the trust (an “entry charge”), which may be ‘topped up’ to 40% if the settlor dies within seven years of creating the trust; and
  • IHT may be payable under the GROB rules on the settlor’s death on the value of the trust fund if the settlor was able to benefit from the trust or released the reservation of benefit within seven years of death.

Position up to and including 5 April 2025

A trust created by a settlor who is not UK domiciled or deemed domiciled at the time of its creation falls outside the scope of IHT to the extent that the trust does not hold UK assets.  Such a trust is known as an ‘excluded property trust’.

Where a trust constitutes an excluded property trust, none of the IHT charges referred to above will apply.

Position from and including 6 April 2025

From 6 April 2025, the IHT position of a trust will depend upon whether the settlor is a LTR at the time of a chargeable event[5].

If the settlor (and in some cases a beneficiary) is a LTR at the time of a chargeable event, an IHT charge may arise.

Creation of trust

An entry charge may arise on the creation of the trust if the settlor is a LTR at that time.

Qualifying IIPs

An IHT charge may arise on the death of the IIP holder or otherwise on a Qualifying IIP coming to an end if at that time:

  • the settlor is (or was at the time of their death) a LTR; or
  • the IIP holder is a LTR.

The LTR status of the IIP holder does not need to be considered if the settlor dies before 6 April 2025.

There is some protection for pre-30 October 2024 excluded property Qualifying IIPs such that no IHT will arise to these trusts on the death of the IIP holder or otherwise on the Qualifying IIP coming to an end.

Relevant property trusts

A trust may be subject to relevant property charges if the settlor has become a LTR by the time of a ten-year anniversary or the making of a capital distribution.

If the settlor leaves the UK and ceases to be a LTR, a trust within scope of IHT will, at the point at which the settlor’s IHT tail expires, fall outside of the IHT net.  This will result in an exit charge on the value of the trust fund.

An exit charge will arise to a trust on 6 April 2025 if the settlor is UK domiciled but not a LTR.

If the settlor of a trust dies while LTR, the trust will remain within the scope of IHT for as long as it continues.

If the settlor of a trust dies before 6 April 2025, the ‘old’ domicile rules will apply to determine the IHT position.

GROB

The GROB rules may apply if a settlor can benefit from a trust and is a LTR at the time of death or, if the donor’s reserved benefit ceases within seven years of death, is a LTR at the time the benefit is released.

By way of concession, the GROB rules will not apply to non-UK trust assets which were excluded property before 30 October 2024.[6]

Spouse exemption and election

In most cases, transfers between spouses or civil partners are fully exempt from IHT and will remain so.

Currently, where a transfer is made from a UK domiciled individual to their non-UK domiciled spouse, the transfer is only exempt up to a value equivalent to the nil rate band (currently £325,000).  The non-UK domiciled spouse can elect to be treated as UK domiciled in order for the full spouse exemption to be available and the election will lapse after four consecutive tax years of non-UK tax residence.

From 6 April 2025, the rules will be amended to reflect the new LTR regime – i.e. the spouse exemption will be limited in respect of transfers from a LTR spouse to a non-LTR spouse but the non-LTR spouse can avoid this by electing to be treated as LTR themselves.

Broadly, an election to be treated as LTR will lapse after 10 consecutive tax years of non-UK tax residence (or four consecutive tax years if the election was made before 30 October 2024).

Domicile as a general concept

It is worth noting that domicile will still be relevant for non-tax purposes – such as establishing which succession laws will apply to an estate and whether certain claims may be brought against an estate.

What to think about now

Individuals and trustees should take advice now (or at any relevant later stage) if the new LTR rules are likely to impact them to consider whether any action should be taken.

Possible actions include:

  • if an individual needs or would like to spend some time in the UK, taking UK tax residence advice to avoid becoming UK tax resident;
  • a UK tax resident leaving the UK before 6 April of the tax year in which they will become a LTR (noting that, in some cases, there could still be an IHT tail under the old rules);
  • non-UK tax residents who are LTRs remaining non-UK tax resident until such time as their LTR status is lost;
  • putting in place tax-efficient Wills and obtaining estate planning advice in all relevant jurisdictions to minimise the impact of the LTR rules and take advantage of any available exemptions or reliefs.  Where relevant, consideration should be given to whether any of the UK’s ‘IHT’ Treaties may assist;
  • obtaining life insurance to cover any IHT exposure;
  • individuals approaching LTR status (including non-UK domiciled individuals who will become LTRs on 6 April 2025) making outright gifts of non-UK assets prior to 6 April of the tax year in which they will become a LTR;
  • individuals approaching LTR status (including non-UK domiciled individuals who will become LTRs on 6 April 2025) settling non-UK assets into a settlor-excluded trust (i.e. one they cannot benefit from personally) prior to 6 April of the tax year in which they will become a LTR.  IHT charges may still arise to the trust if the settlor is a LTR at the time of any chargeable event but there would be no entry charge and the value of these assets will then be outside of the individual’s estate, avoiding the potential 40% charge on death;
  • conversely, winding up a trust prior to 6 April of the tax year in which the settlor will become a LTR if there is no particular need for the trust to continue and it can be wound up efficiently;
  • excluding the settlor of a settlor-interested trust prior to 6 April of the tax year in which the settlor will become a LTR to avoid the application of the GROB rules (although pre-30 October 2024 settlor-interested trusts should nonetheless be protected from these rules);
  • trustees ensuring as far as possible that they know the LTR status of a settlor at any given time.  Trustees should consider putting procedures in place for this purpose – for example, requesting confirmation from the settlor on a regular basis and/or prior to any chargeable event.

This note is for guidance purposes only.  It does not constitute advice and no reliance should be placed upon it.  We do not recommend taking any action without first taking comprehensive advice in all relevant jurisdictions.

Please get in touch with us if you would like any advice on how the changes outlined in this article may affect you and to discuss potential planning strategies.  We should be most pleased to assist.

[1] The concept of ‘formerly domiciled residents’ will be abolished – a small win for individuals who were born in the UK with a UK domicile of origin.

[2] Meaning those over the age of 20 years.  An individual who is 20 years old or younger will be a LTR if they have spent at least 50% of all tax years since birth in the UK.

[3] UK tax residence will be established on a straightforward application of the UK’s Statutory Residence Test.  Any period of non-UK tax residence resulting from split year treatment or under the terms of a double tax treaty will be ignored.

[4] Effectively, the funding of the trust in excess of £325,000.

[5] As well as the extent to which it holds UK assets, as has always been the case.

[6] A similar position may apply in respect of the POAT rules.

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