UK expats potentially stand to benefit from the changes to the taxation of non-UK domiciled individuals originally announced by the Conservative government in the Spring Budget 2024, and confirmed by the Chancellor in her Autumn Budget on 30 October 2024. These changes are due to come into force on 6 April 2025. We discuss below how UK returners and expats will be affected, and how they can take advantage of the new rules after 5 April 2025.
Q1. I am a British expat living abroad. What do the announced reforms mean for me?
British expats are typically UK domiciled but non-UK resident for UK tax purposes. The announced reforms are likely to confer two potential advantages on expats who have been non-UK resident for at least ten consecutive UK tax years; namely:
- they will not be within the scope of UK inheritance tax (“IHT“) on their non-UK situated assets (save for indirect interests in UK residential property or “relevant loans” in connection with such) unless they have been UK tax resident in at least ten out of the previous twenty UK tax years. In addition to reducing their IHT exposure, the reforms also give those who are planning to return to the UK a window of opportunity to make lifetime gifts of non-UK assets, or to settle trusts with non-UK assets, with no, or minimised, IHT consequences (in the case of trusts, on assets entering the trust); and
- from 6 April 2025, they will qualify for a beneficial tax regime on their return under which their foreign income and gains are free of UK tax during their first four tax years of UK residence.
Q2. How will my exposure to IHT change?
UK domiciled individuals are currently subject to IHT on their worldwide estates. However, with effect from 6 April 2025, exposure to IHT on non-UK assets will be based on an individual’s residence, rather than their domicile, status.
Under the new rules, individuals will be subject to IHT if they are a “long term resident” in the UK (“LTR“): meaning that they have been UK resident for at least ten out of the previous twenty UK tax years. An individual will remain subject to IHT for a period following their departure from the UK (“IHT tail“). Individuals who have been UK resident for ten to thirteen out of the previous twenty UK tax years, will be subject to a three-year IHT tail. For each additional year of UK residence, the IHT tail increases by one year, up to a maximum of ten years. For more details on these IHT changes, please see “Non-dom reforms – the inheritance tax need-to-knows“.
For British expats who are no longer an LTR, UK situated assets and/or indirectly held UK residential property interests (including “relevant loans” in connection with such) will continue to be subject to IHT regardless of their residence or domicile status; but such individuals will be in a better position with respect to their non-UK assets because the new regime:
- gives them an opportunity to avoid IHT exposure on their non-UK assets simply by spending ten consecutive UK tax years outside the UK;
- creates planning opportunities to:
- make lifetime gifts of non-UK situated assets, not being indirect interests in UK residential property or relevant loans in connection with such, (“excluded property“) which are not subject to the seven-year survivorship rule and thus fall outside the scope of IHT completely; and
- establish trusts with non-UK situated assets, again, not being indirect interests in UK residential property or relevant loans in connection with such, without an immediate 20% IHT entry charge. If the settlor becomes LTR in the future, any such trust will be liable to IHT relevant property charges at trust level, however. Where the trust is created or funded after 30 October 2025, the settlor would need to be excluded from benefit under the terms of the trust, if the value of the trust is to be excluded from their estate once they are an LTR. Advice should be taken at the relevant time; and
- gives much needed clarity and certainty. Under the current rules, the only way of expats taking themselves outside the IHT net is for them to shed their UK domicile of origin and replace it with a domicile of choice elsewhere. A UK domicile of origin is said to be adhesive and difficult to lose, and requires the formation of an intention to live permanently or indefinitely elsewhere. There is no bright line test to establish whether this has been done and instead an assessment is required of all relevant facts and circumstances. The subjective nature of the existing domicile test leads to uncertainty and has frequently been the subject of HM Revenue & Customs enquiries. These problems are resolved by the reforms and the move to a more factually-based residence test.
A residency-based test for IHT is, however, not without its downsides.
- There is a risk that the periods of non-residence of spouses (or civil partners, the terms are used interchangeably here) may not align. Under current rules, it is relatively easy for spouses to align their actual domiciles, based on their common intentions for the future, or for one of them to elect to be treated as UK domiciled to eliminate a domicile mismatch and ensure that an unlimited IHT spouse exemption is available. A domicile election currently lapses after four consecutive tax years of non-UK residence. Where the residency-based IHT test results in one spouse falling outside the scope of IHT before the other, this can only be “remedied” by an appropriate election being made, which will only lapse after ten years of non-UK residence.
- Those British expats who had acquired a domicile of choice elsewhere and who are, under current rules, outside the scope of IHT in respect of their non-UK assets, will find their global assets brought within the scope of IHT again if, in tax year 2025/26, they satisfy the existing “deemed domicile” test because they were resident in the UK in fifteen out of the last twenty tax years and for at least one of the previous four tax years. Such cases are likely to be rare, but this is a trap to watch out for.
Q3. What will my UK income tax and capital gains tax position be on my return?
From 6 April 2025, where a British expat returns to live in the UK having been non-UK resident for at least ten consecutive UK tax years, they will be able to benefit from a new exemption regime, to be introduced from 6 April 2025, for foreign income and gains (“FIG“). Under this new regime, eligible individuals will not be subject to UK tax on their FIG in the first four years of UK residence provided they make a claim for this “four-year FIG regime” in their UK tax return with respect to those FIG which they wish the regime to apply to. This is more favourable than the current regime because British expats (who, for the purposes of the UK income tax and capital gains tax rules, are defined as “formerly domiciled residents”, being individuals born in the UK with a UK domicile of origin) are ineligible for the remittance basis (even if they have acquired a non-UK domicile of choice) and would immediately be subject to UK tax on their worldwide income and gains on the arising basis on their return to the UK. It may therefore be advantageous for such expats to delay any return to the UK until after 5 April 2025 when they can take advantage of the new four-year FIG regime.
For British expats who return to live in the UK having been non-UK resident for fewer than ten consecutive UK tax years, the four-year FIG regime will not be available. Instead, they will pay UK tax on their worldwide income and gains on an arising basis from the year of their return, subject to any relief available under applicable double tax treaties should the same income and gains trigger a tax charge in another jurisdiction.
For those expats who were: (i) UK resident during at least four of the seven tax years prior to their departure from the UK; and (ii) non-UK resident for five years or less (which, because of the technical detail of how the rules work, often means six tax years), on their return to the UK they will be subject to the “temporary non-residence” anti-avoidance rules (as is the case currently). Where these rules apply, the gains and certain categories of income arising during their period of temporary non-residence will become taxable in the UK in the tax year of the individual’s return to the UK. No changes have been announced to these rules.
Q4. What should I do if I am a British expat planning to return to live in the UK?
We recommend that you seek legal advice in the tax year prior to your return so that any planning opportunities which apply to your personal circumstances can be utilised.
The analysis in this note is based on the new non-dom rules as announced in the Autumn Budget on 30 October 2024, as detailed in the government’s technical note published on 30 October 2024 and the draft legislation published on 7 November 2024. These have given clarity about the framework of the non-dom reforms, although technical changes may be introduced between now and the implementation of the rules on 6 April 2025.