What the UK Inheritance Tax Changes Mean for Non-Domiciled Individuals

The UK government is preparing to make sweeping changes to the inheritance tax (IHT) system, which could have major implications for non-domiciled (non-dom) individuals living in the UK. If you're a non-dom, these changes could impact your global assets, making it crucial to understand the potential new rules and how they could affect your future plans. Here’s what you need to know from the perspective of a non-dom taxpayer.

From Domicile to Residency-Based Taxation: What’s Changing?

Under the current rules, non-doms who live in the UK can generally avoid paying IHT on their overseas assets, as the tax only applies to UK-based assets. The idea has been that if you’re not domiciled in the UK at the time of your death, your worldwide wealth is beyond the reach of UK inheritance tax. However, the UK government is now proposing to change that. From 6 April 2025, the government is expected to shift IHT from being based on domicile to being based on residence. This means that if you live in the UK for a certain number of years, your global assets could be taxed upon your death, regardless of where your domicile is.

For many non-doms, this could mean a significant rise in tax liability, especially if a large portion of your wealth is held overseas. The days of excluding offshore assets from UK IHT may be coming to an end, and this change will make it more critical to review your estate plans.

Shorter Exclusion Period for Overseas Assets

Another key change you’ll want to watch out for is the expected reduction in the IHT exclusion period for overseas assets. Currently, if you leave the UK, your overseas assets can remain outside the UK inheritance tax net for 15 years. However, the government is likely to shorten this period to 10 years.

This means that, even if you decide to relocate, you may still be liable for IHT on your global assets for a decade after leaving the UK. This shorter exclusion period could force you to rethink your long-term plans, particularly if you're planning to move to a country with more favorable tax laws.

Will the Tax-Free Threshold Change?

The tax-free threshold for inheritance tax in the UK, known as the nil-rate band, has been frozen at £325,000 for over a decade. Any estate valued above this amount is subject to IHT, currently charged at 40%. With asset values steadily rising, more estates are being dragged into the scope of IHT.

Although the government may consider raising this threshold in the future, don’t count on it happening soon. Even if the nil-rate band is increased, the new rules would apply to a wider range of assets, including those you hold overseas. This makes it all the more important to prepare for a potentially larger IHT bill, particularly if the value of your estate exceeds the frozen threshold.

Could an Exit Tax Be on the Horizon?

For non-doms thinking about relocating to avoid the new inheritance tax rules, there may be another complication: an exit tax. Some reports suggest that the government might introduce a tax on individuals leaving the UK, capturing a portion of their wealth as they move abroad.

While the details are still unclear, this potential exit tax could limit your ability to simply relocate and avoid the new IHT rules. If you’re considering leaving the UK, it’s worth monitoring any announcements about this tax and factoring it into your plans.

Offshore Trusts: No Longer a Safe Haven?

Many non-doms have historically used offshore trusts to shield their overseas assets from UK inheritance tax. But with the new rules, the future of these trusts is uncertain. It’s possible that assets held in offshore trusts could face stricter reporting requirements or higher tax rates, making them less effective as an IHT protection strategy.

If you have assets in offshore trusts, you may need to rethink your approach. Some experts suggest winding up these trusts or making distributions before the new rules take effect, but this is not without risks. Waiting for the final details in the upcoming Budget might offer more clarity, but it’s a decision you’ll need to weigh carefully.

What Should Non-Doms Do Now?

If you’re a non-dom in the UK, these changes could significantly impact how your estate is taxed. Here are some steps you might consider taking:

1. Review Your Estate Plan: With global assets potentially coming into the scope of UK IHT, it’s crucial to reassess your estate planning strategies. This could involve restructuring your assets, setting up trusts, or even considering relocation.
2. Consider Relocation Carefully: If you’re thinking about moving to a jurisdiction with lower taxes, keep in mind that a shorter exclusion period and potential exit taxes could still affect your assets for years after leaving the UK.
3. Act Quickly: Depending on the details of the upcoming Budget, there may be opportunities to make changes before the new rules take effect. Whether it’s winding up trusts or making gifts to beneficiaries, acting before 6 April 2025 could give you more control over your estate.
4. Monitor the Budget Announcements: The full details of the inheritance tax changes are expected to be clarified in the Autumn Budget. Staying informed will help you make better decisions about your assets and estate planning.

The upcoming changes to the UK inheritance tax system are set to make life more complicated for non-doms. If you want to avoid unnecessary tax burdens on your global assets, now is the time to take action. With proper planning, you can navigate these changes and protect your wealth, but waiting too long could mean facing hefty taxes that could have been avoided.

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