Navigating Recent Legislative Changes
The UK government has introduced significant reforms affecting estate planning, particularly concerning domicile status and Inheritance Tax (IHT). These changes have substantial implications for British expatriates.
Understanding the Shift from Domicile to Residency-Based Taxation
Traditionally, the UK's IHT system was based on an individual's domicile status, meaning that UK-domiciled individuals were liable for IHT on their worldwide assets. However, effective from 6 April 2025, the government has reformed the taxation framework, transitioning from a domicile-based system to a residency-based one. This means that IHT liability is now determined by an individual's residency status rather than their domicile.
UK Estate Planning
Key Changes For British Expats
Residency-Based Inheritance Tax (IHT):
Under the new rules, individuals who have been non-UK tax residents for at least ten consecutive years will have their non-UK assets excluded from UK IHT. This marks a departure from the previous system, where domicile status dictated IHT liability on worldwide assets.
Foreign Income and Gains (FIG) Regime:
Starting from 6 April 2025, the remittance basis regime will be replaced with a new residence-based test. This regime will be available for four years to individuals who have been non-UK residents for at least the previous ten tax years, impacting how foreign income and gains are taxed upon returning to the UK.
Treatment of Trusts:
From 6 April 2025, foreign income and gains arising within non-UK trusts will be taxed annually on UK resident settlors. This change aligns the treatment of non-UK domiciled settlors with UK domiciled ones, removing some advantages previously available under the remittance basis.
Inheritance Tax on Pensions:
Effective from 6 April 2027, UK pension funds and death benefits will be included within the scope of IHT. Previously, pensions could often be passed on without IHT implications, but under the new rules, they may be considered part of the estate for IHT purposes.
Implications for British Expats
Expats should reassess their estate plans to ensure they align with the new residency-based IHT rules. This includes evaluating the location and structure of assets to optimise tax efficiency.
Individuals utilising non-UK trusts for estate planning must review these arrangements in light of the new taxation rules to ensure compliance and effectiveness.
With pensions becoming subject to IHT, expats should explore alternative retirement planning strategies to mitigate potential tax liabilities.
Recommendations for British Expats
Engage with Horizon’s advisors who specialise in cross-border taxation and estate planning to navigate the complexities introduced by these legislative changes.
Conduct a thorough review of your asset portfolio, considering the residency-based IHT implications, and restructure holdings if necessary to optimize tax outcomes.
Keep abreast of further legislative developments and adjust your estate planning strategies accordingly to remain compliant and tax-efficient.
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Passing 3 Generations
The age-old proverb, "Wealth does not pass three generations," or its Western counterpart, "shirtsleeves to shirtsleeves in three generations," reflects a historical pattern observed across cultures: the difficulty of maintaining wealth beyond the third generation. While this adage underscores the challenges of preserving financial legacy, it does not dictate an inevitable outcome. With strategic inheritance and estate planning, families can break this cycle of generational wealth loss.
THE VALUE OF INVESTMENTS AND THE INCOME THEY GENERATE CAN FALL AS WELL AS RISE OVER TIME. IT IS IMPORTANT TO NOTE THAT YOU MAY GET BACK LESS THAN YOU ORIGINALLY INVESTED. TAX TREATMENT CAN VARY ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE WITHOUT NOTICE.