Inheritance Tax shifting to a 'residence' basis creates a compelling opportunity
One of the most significant changes confirmed in the 2024 Autumn Budget was a shift from the current domicile-based system of Inheritance Tax (IHT) to a new residence-based system. The effective date for this reform is 6 April 2025.
This development presents a compelling 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.
Under the new residency basis of IHT¹ an individual will not be treated as a ‘long-term resident’ for inheritance tax purposes in the tax year following 10 consecutive years of non-UK residence – meaning that their non-UK assets will then be outside the scope of IHT.
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 minimise or even negate your IHT exposure.
Now, more than ever, it’s imperative to seek expert advice
and put in place a long term plan to establish
and maintain your non-UK tax resident status,
in order to preserve your wealth for
your family and for future generations.
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.
Worked Example
Consider the following scenario to see how the rule changes could affect your IHT exposure:
Scenario:
- Robert, a British national, has lived in Dubai for 11 years. He owns property and investments in the UAE worth £5 million, in addition to UK assets valued at £500,000. Although he still considers the UK his permanent home, he has maintained non-UK tax resident status since his move.
Current IHT Rules: Under the current IHT regime, Robert’s entire estate, including his UAE assets, would be subject to UK inheritance tax if he were to pass away today.
Current Taxable Estate:
- UK assets: £500,000
- UAE assets: £5,000,000
- Total = £5,500,000
- Taxable amount = £5,500,000 - £325,000 = £5,175,000
- IHT liability at 40% = £2,070,000 IHT payable under current rules
With Proposed IHT Rule Changes: If Robert continues to remain his non-UK tax resident status, his UAE assets would be excluded from IHT.
New Taxable Estate:
- UK assets: £500,000
- UAE assets: £0 (exempt after 10 years)
- Taxable amount = £500,000 - £325,000 = £175,000
- IHT liability at 40% = £70,000 IHT payable under proposed new rules
IHT Saving:
£2,070,000 (current rules) - £70,000 (proposed new rules) = £2,000,000 saved in IHT
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 discuss your circumstances and to receive personal financial planning advice.
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