Inheritance Tax and Domicile in the Spring 2024 Budget

 

Liability to inheritance tax depends on domicile status and the situs or location of assets. Under the current regime, no inheritance tax is due on the non-UK assets of a non-domiciliary unless the individuals fall within the deemed domicile rules.

Domicile has been the bedrock of determining whether individuals are liable to inheritance tax or not from its inception.  It was also the basis for earlier ‘death related’ taxes including probate duty, legacy duty, succession duty, estate duty and capital transfer tax … which is a lineage dating back to 1698.  It is an ancient lineage so severing the connection with domicile after over 300 years could be seen as seismic.  The decision to move to a residence-based system in 2025 should really have been taken by the 1850’s at the latest but the issue was continually fudged … so the tax is moving into the latter half of the 19th century at last.  It still needs to be further adapted to serve governments well in the 21st century but this is perhaps the first step on that road.

The government will now consult on the best way to move inheritance tax to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK inheritance tax regime.  However, that consultation will need to address the detail of implementing the proposal which will not be a straightforward exercise.

A Few Implications

The technical document published after the budget states that “From 6 April 2025 the government intends to move inheritance tax from a domicile based regime to a residence based regime. This will be subject to consultation.”

Later on in the document it indicates that the current intention (on which views will be sought) is to move to a system where:

  • People who have been tax resident in the UK for 10 years will be subject to inheritance tax on their worldwide assets; whereas
  • People who do not satisfy those criteria will only be subject to inheritance tax on their UK situated assets.

They are also considering a 10 year “tail” such that people remain exposed to inheritance tax on their worldwide assets for a further 10 years after leaving the UK.

One of the reasons that inheritance tax is more difficult to move from a domicile to a residence basis is that any new rules will apply to everyone and presumably part of the purpose of the consultation is to think through how it will affect “regular” expats – e.g. those retiring to sunnier climates. Under the rules as proposed, they would materially reduce their UK inheritance tax exposure after ten years whereas at present they need to prove that they intend to make a new country their permanent home, and not return to the UK, to achieve a similar outcome – i.e. the adhesive quality of domicile.  It is very hard to shake off.

Will This Render Domicile Irrelevant From April 2025?

In a nutshell, NO!

The Government has said that it wants to remove domicile as a linking factor for UK tax. However, there has been no indication that it will lose its relevance in other areas of UK law and those moving to and from the UK will still need to be particularly mindful of its impact on matters such as which jurisdiction’s laws will govern succession to their estates. These changes are just about taxation.  It also looks likely to remain relevant for transitional rules for some years to come.

…and at this early stage there is, of course, no absolute guarantee that the proposal will survive the consultation.  We shall see.

 

Stephen Parnham

March 2024