The Finance Bill 2024 introduces substantial amendments to the UK Inheritance Tax (IHT) regime, focusing on simplifying the framework while addressing the complexities of domicile and residency. These changes, primarily impacting individuals with international ties, replace the domicile test with a long-term residence test, altering how excluded property is determined for IHT purposes. Below, we delve into the proposed changes, their implications, and practical examples to help you prepare for this new era of IHT legislation.
To navigate these changes effectively, it’s essential to:
Review your residency and domicile status.
Assess the potential impact on your international assets.
Plan early to mitigate future tax liabilities.
Key Changes in the Finance Bill 2024
1. Domicile Test Replaced by Long-Term Residence Test
The amendments propose replacing the domicile test, previously the cornerstone of IHT treatment for excluded property, with a long-term residence test. This change is reflected in Chapter 4 of the bill, amending relevant provisions of the Inheritance Tax Act 1984 (IHTA 1984), particularly sections 48, 49, and 50.
Under this new framework, individuals who qualify as long-term UK residents will no longer benefit from the excluded property rules tied to non-domicile status.
2. Definition of "Long-Term UK Resident"
The bill introduces a statutory definition of "long-term UK resident", aligning it with the principles of the statutory residence test under the Finance Act 2013. To be classified as a long-term UK resident, an individual must meet specific criteria, including a threshold of 15 out of 20 UK tax years of residence. This definition will form the basis for determining IHT liabilities.
3. Amendments to Excluded Property Rules
Significant changes to sections 6 and 48 of the IHTA 1984 replace references to "domicile" with "long-term UK resident." Key impacts include:
Transfers Between Spouses or Civil Partners: Spouses previously benefitting from the non-domiciled spouse exemption under section 18 will now be assessed based on residence rather than domicile.
Excluded Property Status: Under section 48, foreign property held by trusts established by a settlor classified as a long-term UK resident will no longer be excluded.
These changes aim to prevent individuals from leveraging domicile status to shield foreign assets from UK IHT.
Illustrative example 1:
Worked Example: Definition of "Long-Term UK Resident"
Scenario: Emma, a Non-Domiciled Individual with a Long UK Residency History
Background:
Emma is an Australian citizen and retains her domicile of origin in Australia.
She moved to the UK in 2005 to work and has remained resident in the UK ever since, except for short holidays abroad.
Emma owns a property in Sydney worth £2 million, which she intends to leave to her children.
Applying the Long-Term UK Resident Definition:
Step 1: Determine Emma’s UK Residence History
Emma has been present in the UK for 19 out of the last 20 tax years (from 2005/06 to 2023/24).
Her residence is assessed based on the principles of the statutory residence test under the Finance Act 2013.
Step 2: Threshold for Long-Term UK Resident
According to the Finance Bill 2024, an individual is a long-term UK resident if they have been a resident for 15 out of the last 20 tax years.
Emma satisfies this threshold, as she has been UK-resident for 19 tax years.
Impact on Emma’s Estate Planning:
Excluded Property Status:
Currently, Emma’s Sydney property qualifies as excluded property under section 6 of the IHTA 1984, as she is domiciled outside the UK.
From 6 April 2025, Emma will be classified as a long-term UK resident. This means her Sydney property will no longer be considered excluded property and will be brought into the scope of UK IHT.
Inheritance Tax Liability:
On Emma’s death, her Sydney property will be subject to the 40% IHT charge, resulting in a potential liability of: £2,000,000×40%=£800,000
Previously, this liability did not exist due to the excluded property rules.
Planning Considerations:
Emma should consider estate planning strategies, such as:
Transferring ownership of her Sydney property to a trust or non-UK entity before the rules come into effect.
Revisiting her residence plans to determine whether moving back to Australia could impact her long-term UK resident status.
Outcome: Emma’s classification as a long-term UK resident under the proposed changes significantly alters the tax treatment of her international assets. Without proactive planning, her family could face a substantial IHT bill upon her death.
This example highlights how the new long-term residence test could affect individuals with extended UK residence histories and international estates. Early preparation is essential to mitigate unexpected tax liabilities.
4. Transitional Provisions for Non-Doms.
Section 45(1) introduces transitional provisions for individuals not domiciled in the UK before 30 October 2024. These provisions will safeguard certain non-domiciled individuals from immediate IHT exposure, provided they have not been resident in the UK for the requisite tax years to qualify as long-term UK residents.
If someone would normally be considered a long-term resident of the UK during a specific tax year, they will not be treated as such for inheritance tax purposes if they meet the following conditions:
They were not considered to be living in the UK (domiciled) on 30 October 2024.
They have not lived in the UK at all from the tax year 2025-26 onwards up to the relevant tax year in question.
Additionally, they must either:
Not have lived in the UK at all during the three tax years before the relevant tax year, or
Have lived in the UK for no more than 14 out of the last 20 tax years before the relevant tax year.
When checking if someone was domiciled on 30 October 2024, ignore any rules about deemed domicile or elections regarding domicile status.
Illustrative example 2:
Worked Example: Retroactive Provisions for Deaths Before 6 April 2025
Scenario: John’s Estate and Transitional Provisions
Background:
John, a French national, was domiciled in France but had lived in the UK for 17 years before his death on 1 December 2024.
Under the current rules, John’s domicile of origin in France means that his foreign assets qualify as excluded property for UK IHT.
John’s estate includes:
A holiday villa in the South of France worth £1.5 million.
A portfolio of non-UK shares worth £1 million.
UK assets valued at £500,000.
Impact of the Transitional Provisions:
Step 1: Determining John’s Long-Term UK Resident Status
As of 1 December 2024, John qualifies as a long-term UK resident under the definition introduced in the Finance Bill 2024. He had been resident in the UK for 17 out of the last 20 tax years.
Step 2: Application of Transitional Provisions
The transitional provisions, outlined in Clause 9, ensure that certain deaths occurring before 6 April 2025 are assessed under the new rules.
For John, this means:
His classification as a long-term UK resident retroactively applies, affecting the treatment of his foreign assets for IHT.
Step 3: Calculating the IHT Liability
UK Assets:
These remain fully within the scope of UK IHT. Value: £500,000.
French Villa:
Previously treated as excluded property under section 6 of the IHTA 1984 due to John’s non-UK domicile.
Under the transitional rules, the villa is brought into the UK IHT net as John qualifies as a long-term UK resident. Value: £1.5 million.
Non-UK Shares:
Similarly, the shares were excluded property but are now subject to UK IHT. Value: £1 million.
Step 4: Total IHT Liability The taxable estate is:
£500,000+£1,500,000+£1,000,000=£3,000,000
After applying the nil-rate band (£325,000):
Taxable Estate = £3,000,000−£325,000=£2,675,000
IHT payable at 40%:
£2,675,000×40%=£1,070,000
Outcome:
Under the previous rules, only John’s UK assets (£500,000) would have been subject to IHT, resulting in a tax liability of £70,000.
Due to the transitional provisions, the new long-term resident rules retroactively apply, increasing the liability to £1,070,000.
Planning Considerations:
John’s estate executors could seek professional advice to explore any available reliefs, such as double taxation treaties between the UK and France, which might reduce the IHT burden.
Families of individuals at risk of falling within the new rules should proactively plan before 6 April 2025 to restructure assets or clarify residence statuses.
This example highlights the significance of the transitional provisions and their retroactive effect, underscoring the importance of timely estate planning to manage unexpected liabilities.
Illustrative example 3: Spouse Exemption for a Non-Resident
Scenario: James, a UK-domiciled individual, is married to Laura, an Australian citizen who resides in Australia. James passes away, leaving £1 million to Laura.
Current Rule: The spousal exemption is limited because Laura is non-domiciled.
New Rule: If Laura becomes a long-term UK resident, the new rules apply, and the £1 million transfer may no longer qualify for full spousal exemption, depending on her residence status at the time of James’s death.
5. Reporting and Compliance
The amendments also revise compliance obligations under sections 216–219 of the IHTA 1984, enhancing reporting requirements for estates involving long-term residents. Trustees and executors will need to update their processes to ensure accurate account delivery for international estates.
6. Effective Dates
The majority of these changes are scheduled to take effect from 6 April 2025. Specific provisions apply retroactively for deaths or transfers occurring before this date under transitional arrangements.
Planning Ahead: What You Should Do
The proposed changes in the Finance Bill 2024 are transformative, particularly for individuals with international estates. Here is how you can prepare:
1. Review Your Residency and Domicile Status
Understanding whether you meet the definition of a long-term UK resident is crucial. This involves examining your tax residency history and domicile status.
2. Evaluate the Impact on Your Assets
Property and assets located outside the UK that were previously excluded property may now fall within the scope of UK IHT. A valuation and restructuring of your estate may be necessary.
3. Consider Trust Arrangements
For settlors and beneficiaries of trusts, review how the amendments to section 48 of the IHTA 1984 might affect the excluded property status of assets held in trusts.
4. Seek Professional Advice
Navigating these changes requires expert guidance. A tax advisor or solicitor experienced in international estate planning can help mitigate potential liabilities.
Get Ahead of the Changes
The Finance Bill 2024 ushers in a new chapter for inheritance tax planning. These changes can have significant implications for individuals with cross-border estates, and early planning is key to minimizing liabilities.
Visit www.lexefiscal.com to consult with our experienced tax and legal professionals. Together, we can review your estate, optimise your planning strategies, and ensure compliance with the new regulations. Do not wait—secure your financial future today.
Conclusion
The proposed changes in the Finance Bill 2024 mark a shift from domicile to residency in determining IHT liabilities. While these reforms aim to simplify the framework, they introduce significant challenges for individuals with international ties. By understanding the amendments and planning proactively, you can navigate the evolving IHT landscape with confidence.
Confidentiality and Restriction on Disclosure Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. For tailored advice, contact LEXeFISCAL LLP directly.
Contact us!
Dr Clifford John Frank
LLM (Tax), HDIpICA, PhD, CPA
Senior Partner
Mr Angelo Chirulli
Master’s Degree, ACA, ADIT, BFP
Tax Partner
Email: angelo@lexefiscal.com
Telephone: +44 (0) 208 092 2111
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