The 2024 Budget brought further changes to the tax regime for non-domiciled individuals. This was well highlighted in advance, but the new rules were not known until after the budget announcement. This document summarises the main changes.
Inheritance Tax (IHT)
Previously, a person who was not domiciled for IHT purposes would be subject to Inheritance Tax only on their UK sited assets. Domicile, as a concept is a ‘Common Law’ concept with the implication that it was open to interpretation and judgement, creating uncertainty. There were a few statutory measures brought in over the past years to clarify the position, such as “deemed domicile” for long term residents, but otherwise it was always a matter of conjecture since a person’s domicile for IHT purposes would only be established on their death.
IHT will (from 6 April 2025) be based on residence, under a statutory test for ‘Long Term Residence‘ (‘LTR’). The draft legislation will determine that a person who has been resident in the UK for 10 or more out of the 20 years preceding the tax year of death will have LTR, and will therefore be subject to IHT on their worldwide assets (subject to the usual exemptions). A person who is not within the LTR test will be subject to IHT only on their UK sited assets (again, subject to the usual exemptions).
For those leaving the UK, it is worth noting that they do not necessarily have to survive 10 years to escape UK IHT. A tapering rule is proposed which will reduce this period depending on how many years a person was resident before leaving the UK.
For persons arriving and becoming resident in the UK, the LTR rules propose that they will remain outside the scope of UK IHT on their overseas assets until the tax year following their 10 consecutive year of residence. There are, of course, anti-avoidance provisions to prevent people moving overseas for six months and one day with a view to re-setting the clock.
It is worth being aware also that, where a non-LTR person is married to a LTR person, inter-spousal gift exemptions will only apply on the death of the LTR partner if the non-LTR spouse elects to be deemed LTR.
Foreign Income and Gains (‘FIG’)
Whereas these were also subject to domicile-based “Remittance Basis” rules in the past, this too will change. The rules concerning this were complex, but in essence, a person who was able to claim non-domicile would only pay UK income tax and capital gains tax on income and gains from overseas sources to the extent that the proceeds of those gains were remitted to the UK. The meaning of the words “non-domicile” and “remitted” have been tweaked over recent years, but there is no need to dwell on that now, as they have become irrelevant.
The new rule will be that foreign income and gains (FIGs)will be fully taxable on an arising basis for any person who is UK tax resident in the year of the income or gain except that 100% tax relief will apply in the first 4 years that the person is tax resident on arrival in the UK. However, this relief will be lost if the person concerned has been UK tax resident in any of the previous 10 consecutive tax years prior to their arrival in the UK. This rule applies to UK citizens returning to the UK after a period overseas (ex-pats) and to new arrivals in the UK.
The new rules summarised above will be important to many of our clients, and will present both challenges and opportunities. We do suggest that anyone who may previously have benefitted from the non-domicile regime should contact us to discuss the impact. Similarly, those thinking of leaving the UK and its delightful weather should also review the impact on their situation with us.
