Globally Speaking | March 18, 2024

Non-dom analysis: inheritance tax (“IHT”)

How are the IHT rules changing?

In the Spring Budget on 6 March 2024, the Conservative government proposed a residence-based test for IHT – as opposed to one based on domicile – which arguably provides greater clarity for those trying to assert a foreign domicile (whether “of origin” or “of choice” having relocated outside the UK). That said, there will be no change to the current taxation of UK situated assets and indirect interests in UK residential property (including “relevant loans” in connection with such) which will remain within scope.

The proposed changes are as follows.

  • Individuals – after ten years of UK residence, an individual’s worldwide assets will fall within the scope of IHT. It is also proposed that there will be a ten-year IHT tail, meaning that assets will remain within scope for ten further years, once the individual ceases to be UK tax resident. This is quite a draconian measure and some might say it invites a departure in year nine. That said, it is seemingly clear and allows individuals to plan with some certainty. It is to be noted that when ascertaining residence status it is actual residence under the UK’s Statutory Residence Test (for further information, please click here), not treaty residence which is relevant for these purposes.
  • Trusts – up to 5 April 2025, trusts that qualify as “excluded property trusts” (loosely those settled by non-UK domiciled individuals that contain non-UK situated assets) will be “grandfathered” and benefit from a generous permanent exemption from IHT, irrespective of the settlor’s residence or domicile status thereafter. New trusts, however, will qualify for exemption from IHT provided the settlor is non-UK resident at the point of potential chargeability to tax: on creation, additions to the trust fund, ten-yearly anniversaries, appointments of capital out of the trust, and death. 

That said, the new residence-based IHT rules are subject to consultation, and the Budget announcement included a reference to “other connecting factors” being potentially relevant, which suggests that some form of multi-factorial test may eventually be introduced; perhaps a bit like the “sufficient ties test” in the UK Statutory Residence Test (watch this space).

The proposed new IHT regime is unlikely to be as simple as the headline proposals suggest, not least because the few IHT double-tax treaties we do have are all based on domicile so there will be some redrafting required to ensure they still function as intended taking into account a residence criterion.

The (current or future) government have an opportunity to provide clarity for clients and advisers alike, which would be hugely welcomed and a great improvement on the current regime, which often relies on subjective justification of domicile, outdated treaties and some quite historic case law.