Inheritance Tax (IHT) Planning - How proposed changes affects Non-Doms Shipleys Tax Advisors

CONTINUING WITH OUR focus on people pondering a life overseas as the UK faces a period of socio-economic upheaval, combined with the increasing cost of living and increasing tax burdens, in today’s Shipleys Tax brief we have a quick look at the upcoming changes to much maligned non-Dom tax status.

What exactly is Non-Domicile (Non-Dom) Status in the UK?

Non-domicile, or non-Dom status, is broadly a rule that allows individuals who have their permanent home (domicile) outside the UK to benefit from favourable tax treatment. If you are a non-Dom, you can choose to be taxed on a “remittance basis”, meaning you only pay UK tax on the income and gains you bring into the UK, not on your worldwide income or assets.

Domicile of Origin and Tax Planning – Domicile of origin refers to a concept that a UK based person can have another country as their “domicile’, usually based on their father’s domicile if the parents are married or their mother’s if not. For tax purposes, having a non-UK domicile of origin was used to reduce Inheritance Tax (IHT) liabilities by excluding assets from UK tax. Accordingly, individuals with non-UK parents can utilise their “domicile of origin” to reduce their tax liabilities, especially regarding Inheritance Tax (IHT).

For tax purposes, having a non-UK domicile of origin was used to reduce Inheritance Tax (IHT) liabilities by excluding assets from UK tax.

Budget Changes and Their Impact

The UK government announced, quite belatedly, significant changes in the Spring Budget 2024, set to take effect from April 2025. These changes will replace the domicile-based system with a residence-based tax system. Under the new rules:

  • Abolition of Non-Dom Status – The concept of domicile will no longer determine tax liability. Instead, the tax regime will shift to a residence-based system. This means individuals will be taxed based on their UK residence rather than their domicile status​.
  • Four-Year Relief for New Arrivals – New UK residents will benefit from a four-year period where foreign income and gains are exempt from UK tax. This applies only if they have been non-resident for the previous ten consecutive tax years.

The concept of domicile will no longer determine tax liability. Instead, the tax regime will shift to a residence-based system.

  • Inheritance Tax (IHT) Changes – IHT will be based on residence rather than domicile. From April 2025, individuals who have been UK residents for more than ten years will be subject to IHT on their worldwide assets, not just UK assets. This includes assets held in trusts​.
  • Transitional Arrangements – Transitional reliefs include a 50% reduction in the taxable amount of foreign income for the 2025/26 tax year and a temporary 12% tax rate for repatriating previously unremitted foreign income and gains​.
  • Trusts – Foreign assets in some property trusts established before 6 April 2025 will remain outside the scope of IHT, but post-2025 trusts will follow the new residence-based rules​.

Implications for IHT Planning

Given these reforms, the client’s potential IHT exposure and planning strategies need careful reconsideration:

  1. Non-UK Assets and IHT:

Currently, non-Doms are only subject to IHT on UK assets. Post-reform, non-doms resident in the UK for over ten years will face IHT on their worldwide assets. This significantly broadens the IHT net and impacts estate planning strategies​.

  1. Residence-Based IHT:

For clients who have been UK residents for less than ten years, it is critical to understand the timing of their residency and how it will affect their IHT liability under the new rules. Planning should consider the ten-year residence rule to mitigate worldwide IHT exposure​.

  1. Use of Trusts:

Establishing certain trusts before April 2025 may still provide IHT protection for non-UK assets. However, post-2025 trusts will be subject to the new regime, making early planning crucial to enable taxpayers to organise their affairs.

  1. Foreign Income and Gains:

Utilising the transitional reliefs, such as the 50% tax reduction and the temporary repatriation facility, can optimise tax efficiency during the transition period. This may include moving assets before the new rules fully apply​.

Post-reform, non-doms resident in the UK for over ten years will face IHT on their worldwide assets. This significantly broadens the IHT net and impacts estate planning strategies​.

Conclusion

The abolition of the non-Dom regime and the shift to a residence-based IHT system from April 2025 represents a significant change in UK tax law. These reforms necessitate a thorough review of estate planning strategies to ensure tax efficiency and compliance with the new rules. Early planning and strategic use of transitional reliefs can help mitigate the impact of these changes.