Inheritance Tax changes for Non-Doms

Along with other sweeping reforms to the Non-Dom rules, the Government announced that it would be making changes to the UK Inheritance Tax system too, shifting towards a residence rather than domicile basis.

This is currently in consultation, so we will not know exactly what the Government is going to suggest, but early indications are that it will hinge on a 10-year period of residency, and this may affect those who are currently using the 15-year deemed domiciled rules.

It appears that the new rules could work as follows:

• New arrivals will be given a grace period of 10 years, during which time, if they pass away, their Estates will not be liable for UK IHT, other than on UK situs assets.

• If someone comes to the UK for more than 10 years but then leaves, for the next 10 years, their Estate will continue to be caught by the UK IHT rules for the following 10 years.

This is a departure from current rules and could bring the non-UK assets of those affected into the IHT net up to five years earlier, and leave them within the net for up to an additional seven years.

Current rules for individuals

Presently, UK IHT is charged at a rate of 40%.

All individuals whether resident or not, are entitled to a Nil Rate Band of £325,000, although this may be reduced by the value of certain lifetime gifts, and increased if the Residential Nil Rate Band and any Transferrable Nil Rate Band is available.

Those who are not UK domiciled or Deemed Domiciled escape UK IHT on all but their UK situs assets.  Indirectly held UK residential property is treated as UK situs assets and taxed accordingly.

The current IHT rules have not changed in a very long time, and it is not clear whether the proposed changes for Non-Doms will be part of wider changes.

Offshore Trusts

During the last round of Non-Dom changes, many caught were able to take advantage of the Protected Trust rules, but those too are likely to be scrapped by the current changes, and the Government has been clearer about what those changes will be.

Once the new IHT rules are rolled out, we would expect them to have an impact on the way new offshore trusts can be settled, as well as potentially cause there to be a two-tier system for existing Protected Trusts. Assets settled prior to 6 April 2025 are likely to remain protected for IHT purposes, so all is not lost.

Next Steps

We will need to wait for the results of the Consultation before we know exactly what is in store, and once we do, it will be important to consider how this affects you and what steps need to be taken to put protection in place for overseas assets, and how quickly that needs to be done.

If you have any concerns at this stage, please contact us at [email protected].