IHT – unintended consequences from the Budget

12 April 2024

Currently, UK domiciled individuals are subject to UK inheritance tax (IHT) on 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 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 be  based on residence once this proposal has been consulted on. 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 their UK assets only.

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 IHT on their worldwide assets for a further 10 years. Individuals may therefore now need to plan more carefully for IHT when they leave the UK. 

The proposed change will give certainty to anyone who leaves the UK, including UK domiciled individuals, who will not be subject to IHT on their non-UK assets once they have been non-UK resident for 10 years. Neither Australia nor New Zealand have a similar tax on gifts and/or estates, and 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, so we could see a stream of wealthy Brits head for other countries solely as a legitimate IHT mitigation strategy.

The UK has 10 capital tax treaties that determine which country has the primary rights to taxes on death. All of these treaties are based on domicile, and it is unclear how these will apply in the future. However, those domiciled under general law in India, Pakistan, France and Italy, where the existing treaties mean that on death, they can only be subject to IHT on any UK assets, may want to speak to their tax adviser sooner rather than later. 

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 by the IHT changes announced in the Budget, 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 non-dom changes announced in the Budget.