Confirmation of Major IHT Reforms Expected in October Budget
Why British Expats and High Net Worth Individuals Should Act Now to Protect their Assets
In next month’s Budget, Rachel Reeves is expected to confirm reforms1 that will exempt non-UK assets from UK Inheritance Tax (IHT) for expats after 10 years of non-UK residence.
The prospect of these imminent changes highlights the critical importance of putting a robust long term financial plan in place to manage your assets and your estate if you’re a British expat, or a High Net Worth (HNW) Individual currently living in the UK.
One of the most significant tax reforms expected to be confirmed¹ in the Budget on 30 October will mean that if you are a non-UK tax resident for more than 10 years, your overseas assets will no longer be subject to IHT — even if you still consider the UK your permanent home.
If you are a British expatriate or HNW individual, this development presents a unique opportunity to protect your assets from IHT, which under current legislation would see up to 40% of your wealth paid to the Treasury, rather than being passed on to your family and beneficiaries.
Now, more than ever, it’s imperative that you seek expert advice
and put in place a long term plan, to maintain (or to establish) your
non-UK tax resident status, in order to preserve your wealth
for your family and for future generations.
Current Rules: IHT Applies to Your Global Assets as a UK-Domiciled Individual
Currently, IHT applies to your worldwide assets if you are a UK-domiciled individual. This includes your assets held both in the UK and abroad, with the IHT rate of 40% levied on the value of your estate exceeding the £325,000 nil-rate band.
‘Domicile’, a legal concept relating to your country of birth [or permanent home], is separate from ‘residency’ for tax purposes, meaning that currently, even if you live outside the UK for a number of years, your global assets are still likely to be subject to IHT - unless you are able to take [extensive and complex] steps to change your domicile status.
The Proposed IHT Reforms: A New Opportunity
The key change which is expected to be confirmed in this month’s Budget would exempt non-UK assets from IHT after an individual has been a non-UK tax resident for more than 10 years, even if they still consider the UK to be their ‘permanent’ home and retain ties there.
For many, this proposed rule change will be a major incentive to become, or remain, non-UK resident for tax purposes, and to divest themselves of their UK assets, in order to shield their estate from being taxed at the 40% IHT rate.
Worked Example
Consider the following scenario to see how the rule changes could affect your IHT exposure:
Scenario:
- Sarah, a British national, has lived in Dubai for 11 years. She owns property and investments in the UAE worth £3 million, in addition to UK assets valued at £600,000. Although she still considers the UK her permanent home, she has been a non-UK tax resident since her move.
Current IHT Rules: Under the current IHT regime, Sarah's entire estate, including her UAE assets, would be subject to UK inheritance tax if she were to pass away today.
Current Taxable Estate:
- UK assets: £600,000
- UAE assets: £3,000,000
- Total = £3,600,000
- Taxable amount = £3,600,000 - £325,000 = £3,275,000
- IHT liability at 40% = £1,310,000 IHT payable under current rules
With Proposed IHT Rule Changes: If Sarah continues to remain a non-UK tax resident, her UAE assets would be excluded from IHT.
New Taxable Estate:
- UK assets: £600,000
- UAE assets: £0 (exempt after 10 years)
- Taxable amount = £600,000 - £325,000 = £275,000
- IHT liability at 40% = £110,000 IHT payable under proposed new rules
IHT Saving:
£1,310,000 (current rules) - £110,000 (proposed new rules) = £1,200,000 saved in IHT
The potential changes to UK IHT rules underscore the importance of acting now to preserve your wealth
For high net worth and ultra high net worth individuals, this pivotal change in IHT policy offers a compelling financial incentive to re-locate, set the ‘10 year clock’ in motion as soon as possible, and restructure your estate, to negate your IHT exposure.
If you are currently a British expat, and have already established non-UK tax resident status, maintaining that status will become a strategic priority, as returning to the UK could once again bring your overseas assets within the scope of IHT.
Forth Capital - Making the complex simple, for clients worldwide since 2004
Consideration of how the potential tax reforms in next month’s Budget could affect your future wealth make it more important than ever to review your long term financial strategy and put in place a robust plan.
With offices across four continents and dual-qualified advisors authorised and regulated in the UK, the US, Switzerland, the EU, Australia, and Hong Kong, our expertise and international licenses enable us to make the complex simple, and provide our clients with the right international financial planning and wealth management solutions wherever they are in the world.
Speak to our expert team to explore your options today
To understand more about establishing and maintaining your non-UK tax resident status, and how we can help you put in place a long term financial plan to manage and protect your wealth, contact us today to schedule an initial consultation or email us at [email protected]
1. HM Treasury Policy Paper – New residence-based regime for inheritance tax - 8 August 2024
This communication is for information purposes only and does not constitute financial, legal, or tax advice. Please schedule a meeting to receive advice on international financial planning and wealth management.
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