Inheritance tax – unintended consequences of the Budget

19 April 2024

Buried in the papers published following the Spring Budget 2024 was a major announcement related to inheritance tax (IHT), but not the one most taxpayers and advisers might have been expecting. IHT is here to stay but it will be refocused from a tax based on domicile to one based on residence, although the intended changes are subject to consultation. 

The current regime

Currently, UK domiciled individuals are subject to IHT on gifts and transfers on death of their worldwide assets, whereas non-UK domiciled individuals (non-doms) are only subject to IHT on their UK assets. There is a three-year tail built into the regime which means that those who cease to be UK domiciled or deemed domiciled, remain within the full scope of UK IHT for three years.

The government’s aspiration is that as the concept of domicile for tax purposes is removed from the legislation, the IHT regime will instead pivot to one based on residence. The expectation is that anyone who has been UK resident for at least 10 years will be within the scope of IHT on their worldwide assets. Those that do not meet this residency criteria will suffer an IHT charge on relevant transfers of their UK assets only.

A new sting in the tail

However, there is a sting in the IHT tail. Anyone who has been resident in the UK for 10 years or more and then leaves the UK will remain subject to UK IHT on their worldwide assets for a further 10 years. 

What does this mean in practice? For the vast majority, the changes are purely technical and will have no particular impact on them or any IHT planning they have done or plan to do.

For others, the proposed changes open up a whole new way of thinking about their IHT planning.  

British people have a long history of moving abroad to retire, often as many seek a warmer climate or a cheaper country in which to live. At present, it is by no means certain that those who retire abroad will lose their UK domicile status, as they often retain links to the UK, such as family members, pensions etc and visit frequently. Consequently, there is no IHT benefit to their relocation. 

Or a new opportunity?

The proposed change will ensure that those who become non-UK resident for at least 10 years, and remain so, will only be subject to IHT on their UK assets. It will no longer matter if significant links to the UK are retained, so long as the provisions of the UK’s statutory residence test confirm non-UK residence, as the key criteria will be a person’s place of residence for tax purposes. 

Will this change see a stampede of wealthy retirees leaving the UK as an entirely legitimate IHT mitigation strategy? Firstly, they will need to choose a jurisdiction which doesn’t have high taxes on death. In this regard, neither Australia nor New Zealand have a tax equivalent to IHT, but they are a long way off geographically and other entry restrictions may apply. Closer to home there are more than a handful of countries that either charge no taxes on death or a comparatively low transfer tax (or equivalent). In the no tax corner are the Channel Islands, with Malta, Cyprus, Italy and Portugal charging taxes of 10% or less. A change of residence will certainly therefore appeal to some.

Further potential developments

Lastly, it remains to be seen whether the Labour Party still has changes to IHT on its radar. With funding for some of Labour’s spending plans snatched from her grasp, there will no doubt be pressure on Rachel Reeves to reconsider the party’s position on IHT. Reports suggest it has previously floated the idea of a review of IHT reliefs and this could come back on to the agenda as it looks to replace the loss of revenues from the current government’s scheduled non-dom changes.

For more information, please get in touch with Rachel de Souza or your usual RSM contact.