Proposed UK Inheritance Tax Changes 2024

Jun 13, 2024 | Advice, Estate Planning, Financial Planning, Lewis Sell, Tax

Proposed UK Inheritance Tax Changes 2024

Jun 13, 2024 | Advice, Estate Planning, Financial Planning, Lewis Sell, Tax

A Shift from Domicile to Residency Status Explained

There have been significant proposed changes to the UK’s tax regime concerning non-domiciled individuals and how it impacts inheritance tax (IHT). Here’s an overview based on the latest updates from the Spring Budget 2024

Understanding Domicile Status

Understanding Domicile status and Residency status is an important factor when looking at tax liabilities in any country you are living in. As explained below, a UK domicile refers to a person’s long-term home or permanent legal status, typically inherited from their parents at birth, and it can significantly affect tax liabilities. For example, if you were born in the UK to British parents, you would generally start with a UK domicile of origin. Even if you move to France and become a French resident for most of your adult life, maintaining substantial ties to the UK—such as owning property, holding UK bank accounts, or other significant connections—could mean you are still considered UK domiciled. As a result, you might remain liable for UK taxation on your global income and gains, as well as UK inheritance tax on your worldwide estate, despite living abroad. This distinction is crucial for understanding tax obligations, especially for individuals who live outside the UK but maintain significant economic or personal ties to it.

  1. Domicile of Origin

The Domicile of Origin is assigned at birth and is typically derived from the child’s father at the time of the child’s birth. If the father is not alive at the child’s birth, the domicile might then be derived from the mother. This form of domicile is inherently sticky; it persists until it is actively replaced by a new domicile (a Domicile of Choice). Importantly, a Domicile of Origin can revert if a Domicile of Choice is abandoned without a new one being established. 

  1. Domicile of Choice

An individual can acquire a Domicile of Choice by moving to a new jurisdiction to make a permanent or indefinite stay. Establishing a Domicile of Choice requires clear evidence of both physical presence in the new location and the intention to remain there permanently or indefinitely. Actions like buying property, marrying, settling in a new location, or other significant long-term commitments can demonstrate this intent. If a person leaves the jurisdiction of their Domicile of Choice and does not establish a new one, their Domicile of Origin will automatically be reinstated. 

  1. Domicile of Dependence

Until an individual reaches the age of majority (18 years in the UK), their domicile is typically one of dependence. This means that a child’s domicile will automatically change to reflect that of the parent or guardian upon whom they are legally dependent. When a child reaches the age of 18, their domicile becomes fixed until they actively establish a Domicile of Choice.

The Current UK Tax Regime – Domicile Status

Currently, the rules around UK IHT are quite specific, any UK-domiciled individual who has been living overseas who dies outside of the UK would see that UK IHT could still apply to their worldwide assets, since domicile, rather than residence, is the key factor determining liability for UK IHT.

The IHT regime operates under a threshold system. The basic nil-rate band is £325,000, which means if the estate’s value is below this threshold, no IHT is due. If the estate exceeds this amount, the portion above the threshold is taxed at a standard rate of 40%. However, if at least 10% of the net estate is left to charity, the tax rate on the taxable portion of the estate is reduced to 36%. 

In addition to the nil-rate band of £325,000, there is also an additional allowance known as the residence nil-rate band (RNRB). This extra allowance is designed to make it easier to pass on the family home to direct descendants without a significant IHT liability.

The RNRB applies specifically when passing on a main residence to children, including adopted, foster, stepchildren, or grandchildren. As of the current rules, the RNRB is £175,000 per person. This means that if an individual’s estate includes their primary residence and is being passed to direct descendants, the total IHT threshold can increase to £500,000 when the nil-rate band and the RNRB are combined. For a married couple or civil partners, the combined threshold can potentially reach up to £1 million, as each partner has a nil-rate band and an RNRB, which can be transferred to the surviving spouse upon the first death.

Proposed Changes to a Resident Status Regime

Under the proposed changes to the UK tax regime concerning domicile status announced in the Spring Budget 2024, UK domicile individuals who have lived outside the UK for over 10 years and have not been tax residents during that time will face significant changes, especially concerning the taxation of their worldwide assets and inheritance tax (IHT) liabilities.

Key Changes Impacting UK Domiciled Non-Residents:
  1. Residence-Based Tax Regime: The proposed changes move towards a residence-based tax regime rather than one based strictly on domicile. This means that individuals who are UK domiciled but have not been tax residents for over 10 years would now be assessed for tax purposes primarily based on their tax residence status rather than domicile.
  2. Inheritance Tax (IHT): Under the proposed new rules, IHT on worldwide assets would become applicable based on residence status. Therefore, if a UK domiciled individual has not been resident in the UK for at least 10 years, they might not be liable for UK IHT on their worldwide assets under the new rules. This is a departure from the current rule where UK domiciled individuals are liable for IHT on their global assets regardless of where they reside.
  3. 10-Year Tail for IHT: The government plans to introduce a ‘tail-provision’ for IHT, meaning that even after a UK domiciled individual ceases to be a UK resident, their worldwide assets could still be subject to UK IHT for up to ten years following their departure from the UK. This provision aims to prevent individuals from moving abroad shortly before death to avoid UK IHT.
  4. End of Remittance Basis for Non-Doms: The abolition of the remittance basis for non-domiciled individuals (non-doms) will also affect UK domiciles who may previously have claimed non-dom status for tax purposes. After these changes, such individuals will be taxed on a worldwide basis after they become UK residents for tax purposes, regardless of their domicile status once they exceed four years of residency.
Examples and Implications:
  • A UK domiciled individual who moved to another country and has lived there for over 10 years, while maintaining their UK domicile status but not being a UK tax resident, would previously be subject to UK IHT on their worldwide estate. Under the new rules, if they remain non-resident for at least 10 years before their death, they might not be liable for UK IHT on non-UK assets.
  • If this individual returns to the UK and becomes a resident again, they would initially benefit from the new four-year grace period where foreign income and gains are not taxed, but eventually, they will be taxed on a worldwide basis as per the standard rules for UK residents after this period.

Given these substantial changes, UK domiciled individuals living abroad must review their tax and estate planning strategies, especially if they have been non-residents for extended periods. Consulting with tax professionals who are well-versed in both UK and international tax law is advisable to navigate these changes effectively and optimise tax liabilities.

Written by: Lewis Sell – Independent Financial Adviser

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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