Taxes on inheritances, often called ‘death duties’, have been part of the UK tax system since 1694 when Probate Duty was introduced. The ‘death duty’ currently in force, Inheritance tax (IHT), was introduced in 1986, says Gerry Brown Trust and Estate Planning Consultant at QB Partners.
The features of the eight types of death duty in force since 1694 varied considerably but they all had one thing in common – the domicile status of the deceased was vital to the scope of the tax and could be summarised as;
UK domicile – worldwide assets taxable
Non-UK domicile – UK assets taxable
The Labour party (and many others) has long been opposed to the tax advantages enjoyed by ‘non-doms’ and before the recent election stated that it would remove those advantages. (The rationale behind this approach is the belief that long term UK residents should be taxed on the same basis – whether UK domiciled or not.) The new Labour government intends to replace the current domicile-based system of IHT with a new residence-based system. It is intended that this will come into force from 6 April 2025.
This new system will affect the scope of assets brought into IHT for both individuals and trusts.
All UK assets will remain within the scope of IHT.
The basic test for whether non-UK assets are potentially liable for IHT from 6 April 2025 will be whether an individual owner has been resident in the UK for 10 years prior to the tax year in which death (or other chargeable occasion) arises. In addition an individual will remain potentially liable, in respect of non-UK assets, for 10 years after leaving the UK.
In summary;
| UK Assets | Non-UK Assets | |
| Resident | IHT | IHT |
| Non-Resident | IHT | No charge |
| Arriver | IHT | > 10 yrs. IHT |
| Leaver | IHT | < 10 yrs IHT |
The government has announced that it will end the use of ‘excluded property trusts’ to keep assets out of the scope of IHT. It also intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays the tax. Existing ‘excluded property trusts’ will lose their IHT advantages.
Confirmation of the new rules and their detailed application, including transitional arrangements, will be published in conjunction with the 30 October Budget.
Of course since the introduction of the Statutory Residence Test in 2013 it has, in general, been much easier to determine residence status. Investigating domicile, in complex cases, can be time consuming (and thus costly) and will not always lead to an undisputed outcome.
One feature of the proposed system is the increase in the period in which an individual is potentially liable following arrival in, and departure from, the UK.
An individual will potentially be subject to IHT after 10 year’s UK residence and will remain within the scope of IHT for 10 years after becoming non-UK resident. (Of course UK assets will always be chargeable – subject to any available reliefs and the nil rate band)
Under the current, domiciled based regime, a non-domiciled individual will become ‘deemed domiciled’ after 15 years UK residence in any 20 year period and remain ‘deemed domiciled’ for 3 years after losing UK domicile (perhaps by moving permanently abroad).
The proposed changes will therefore bring an expansion of the IHT ‘net’.
One planning strategy is to become a non-UK resident and to maintain that status for 10 years. However such a strategy requires a consideration of much more than inheritance or indeed wealth taxes!
For those intending to emigrate, term assurance to cover the period from leaving the UK to leaving the IHT regime might be an attractive option.
For those who remain UK resident, traditional trust arrangements will still be attractive as will planning involving assets qualifying for IHT business relief or agricultural relief (assuming these survive in current form).
As IHT will always impact UK assets (regardless of the residence status of the owner) it is well worth holding permissible UK investments in an ‘offshore’ bond.
It is unlikely that there will be any major shift in government approach. It has taken a ‘hard line’ on Winter Fuel Allowance and VAT on school fees. Non-doms can’t expect a softer approach.
