In the October 2024 Budget the Labour government announced multiple changes to the UK tax regime effective from 6 April 2025. Amongst these changes were changes to inheritance tax, capital gains tax and reforms to the taxation of carried interest.
1. Inheritance Tax
An Overview of the Changes to the Taxation of Non-Domiciled Individuals in the UK
In the previous Budget the Labour government announced significant changes to the UK’s ‘IHT’ regime, affecting taxpayers formerly known as non-domiciled UK individuals ‘non-doms’. The key change, in this regard, was the abolition of the traditional domicile-based tax, replacing it with a new residence-based tax. This new residence-based system for taxation, referred to as long term residence ‘LTR’, will see an individual’s non-UK assets being within the scope of Inheritance Tax ‘IHT’ once they have been resident in the UK for 10 years or more, upon the occurrence of a chargeable event such as death.
What is Inheritance Tax?
Inheritance tax is a tax payable on an individual’s death. In the UK it is payable on the estate at a rate of 40%. This tax applies to most assets situated in the UK, regardless of the status of the individual. Under the previous ‘IHT’ regime liability to ‘IHT’ on assets outside the UK was determined by the individual’s domicile status and not their residence status.
The New Long-Term Residence ‘LTR’ Test and ‘IHT Tail’
From 6 April 2025, individuals who have been resident in the UK for 10 years will be classified as ‘LTR’s and become subject to UK ‘IHT’ on assets situated both in the UK and abroad (worldwide assets).
Furthermore, once an individual is classified as an ‘LTR’ and then leaves the UK, liability for ‘IHT’ will not stop automatically and there will be an ‘IHT tail’. This means that an ‘LTR’s non-UK assets will remain within the scope of ‘IHT’ after they leave the UK until the ‘IHT tail’ no longer applies. The length of the ‘tail’ will be calculated depending on how long the ‘LTR’ has been in the UK over the 10-year mark. The ‘IHT tail’ will apply for a minimum period of 3 years to a maximum of 10 years. For example, a ‘tail’ of 3 years will apply for an ‘LTR’ who was resident in the UK for 10 to 13 years and after that from 14 to 20 years the ‘tail’ will increase incrementally by one more year.
Foreign Assets Held in a Trust
Once an individual becomes an ‘LTR’, any trust settled by an individual after 6 April 2025, will become subject to a specific ‘IHT’ regime.
Implications for Individuals
The underlined changes highlight the importance of obtaining advice on your residency status. Once an individual has acquired the status of an ‘LTR’, their worldwide assets will effectively fall within the scope of ‘IHT’ from the 11th year of UK tax residence. This means that an individual who does not want to acquire the status of an ‘LTR’ will need to plan ahead to make sure that they do not remain resident in the UK for longer than 9 tax years in any 20-year period.
Get in Touch
Please get in touch if you are concerned about whether these new changes apply to you or if you would like to discuss how the changes could impact you and your family. Speak to one of our Estate Planning or Wills Solicitors to see how they can support you in this process and to benefit from our tax planning, structuring and immigration advice relevant to your specific situation.
This article is authored by Emma Spiteri-Gonzi, Private Client Legal Advisor. Reach him at +44 207 242 1666.