Overview
For foreign domiciles moving to the UK, Inheritance Tax “IHT” is an often-overlooked tax consequence.
The planned changes to IHT from April 2025 mean that this will be an even more important consideration for foreign domiciles already resident in the UK or planning a move to the UK.
How Do the New IHT Rules Work?
From 6 April 2025 the scope of IHT will cease to be determined by the taxpayer’s domicile status instead being determined by their residence history (under the UK Statutory Residence Test or SRT).
Under the draft legislation, a new concept of “a Long-term UK resident” is established.
Long-term UK residents will be subject to IHT on their worldwide assets, whereas taxpayers who are not Long-term UK residents will have the scope of IHT limited to their UK assets.
A taxpayer will become a Long-term UK resident when they have been UK resident (under the SRT) for at least 10 of the previous 20 years. By comparison, under the current legislation, it takes 15 years of residence in the previous 20 years to become deemed-domiciled in the UK, and achieve the same position.
There are some transitional measures for foreign domiciles already UK-resident, which mean that taxpayers who became UK-resident for the first time after the 2015-16 tax year will not immediately become a Long-term UK resident from 6 April 2025. The length of time before they do will depend on their residence history over the 19 years preceding 2025-26 tax year.
However, once the Long-Term UK-resident status has been triggered the taxpayer will normally need 10 consecutive years of non-UK residence before they will cease to be subject to IHT on their foreign assets.
It is important to understand your exposure to IHT as if your foreign assets are impacted it affects:
- How your will is drawn-up
- The tax consequences for your beneficiaries of inheriting your assets and
- Perhaps most importantly the consequences of succession planning actions, like establishing a family trust, transferring assets to a trust or making a loan to a trust
Settling assets into a family trust can trigger an immediate lifetime charge to IHT – IHT is not simply a tax on your estate when you die!
Can I Use an Excluded Property Trust to Protect My Foreign Assets from IHT?
Traditionally, where taxpayers did consider IHT before a move to the UK, the advice under the current UK tax legislation was to establish an Excluded Property Trust.
An Excluded Property Trust was established while the settlor (often the taxpayer moving to the UK) was non-domiciled in the UK, to hold foreign assets.
However, as part of the changes to IHT, where the settlor meets the definition of a Long-term UK-resident, settlor-interested trusts will no longer be excluded from IHT.
Since most Australian Family Trusts would meet the definition of Settlor-Interested Trusts, this is very significant for many of our clients.
- If you are UK-resident or are planning a move to the UK and
- You have transferred any of your assets into a discretionary trust or are considering doing so
we recommend you approach your Fairway Team to understand how these changes affect you and whether there are any steps you can take to reduce the impact.
We would note too that the UK has very extensive anti-avoidance legislation in relation to offshore trusts and structures. The definition of “settlor” under UK tax law is extremely broad and many of the ways in which trusts are commonly used in Australia would cause a trust to be settlor-interested under UK tax law.
Plans to Bring Pensions within the Scope of IHT
As part of the Autumn 2024 Budget documents a consultation was released in relation to the Government’s plans to bring unused pension fund balances within scope to IHT from 6 April 2027.
At present, UK registered pension fund balances (and many foreign pension balances) are excluded from Inheritance Tax. If these proposals go ahead, this is a very significant change, exposing, often high-value balances, built up in UK and non-UK retirement funds to 40% IHT on death.
The consultation will run for 12 weeks between 30 October 2024 and 22 January 2025. Normally we would then expect to see feedback from the consultation before the introduction of draft legislation to Parliament.
It will therefore be some time before we know whether these proposals will go ahead and if so, what the legislation will look like and whether there will be any transitional measures.
Keep watching our website for updates, as they become available.
DISCLAIMER: The following information is based on published Government policy papers and draft tax legislation. These measures will not become law until enacted, through the legislation passing both Houses of Parliament and receiving Royal Assent. It is possible that the draft legislation may be altered in its passage through Parliament.
