New residence-based system for inheritance tax
By Susan Cattell, Head of Tax Technical Policy
26 August 2024
We take a look at the major changes to inheritance tax that are on the way for non-domiciled individuals (non-doms).
The abolition of the non-dom tax regime is a longstanding Labour policy that was taken up by the Conservatives in their final Budget before the general election. However, it was anticipated that the details wouldn’t remain the same if Labour formed the new government. This was confirmed with the publication on 29 July of a policy paper setting out how the taxation of non-domiciled individuals will change. This article considers the IHT aspects of the proposals.
Residence-based regime for inheritance tax
IHT is currently a domicile-based system, offering UK residents whose permanent home is outside the UK protection from IHT on their non-UK based assets. This will be replaced with a new residence-based system from 6 April 2025, which will alter the scope of property brought within IHT for individuals and trusts.
The proposed basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK.
Excluded Property Trusts
The policy paper also states that “the government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government 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 their taxes here.”
It seems that there may be some scope for measures to facilitate the unwinding of existing trusts, as the paper acknowledges that there will be trusts that have been established and structured to reflect the current rules. The government is therefore considering “how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.”
HMRC engagement sessions
In the paper, the government stated that it wouldn’t carry out a formal policy consultation on the IHT changes, but indicated that officials would instead seek feedback through a series of engagement sessions over the summer.
ICAS attended one of these sessions, following a discussion about the IHT proposals with members of the ICAS Private Client Committee. The aim of the session wasn’t to provide any new details about the final policy design, but it was a useful opportunity to highlight potential problem areas and points that will need clarifying, as well as raise issues that aren’t mentioned in the policy paper but may need to be addressed.
Details of the final design of the policy, together with further details of the wider non-dom reforms, will be published at the Budget in October.
Let us know your views
We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work; email tax@icas.com to share your insights and feedback.
