June 13, 2024

For obvious reasons, inheritance tax isn’t something that many of us think about too often. On occasion, however, we are compelled to consider our tax position and take steps to ensure our beneficiaries don’t find themselves with a hefty bill. One such time is when legislation around inheritance tax (IHT) changes.

IHT changes

The most recent alterations to IHT affect non-domiciliaries living in the UK. As you will likely know, UK inheritance tax (IHT) can apply to gifted assets and those settled into trust, as well as being charged upon death. For those whose permanent home is outside the UK, the new legislation is a good opportunity to review their tax position and ensure their plans protect their beneficiaries. Below, we explain the main changes for non-domiciliaries and what they mean.

The recent IHT changes

Under UK IHT law, non-domiciled individuals are only charged UK IHT on their UK ‘situs’ assets (that is, those located in the UK), provided they have lived in the UK for no more than a set period of time.

Previously, non-domiciliaries could remain in the UK for up to 17 of the previous 20 tax years before being considered UK domiciled for UK IHT purposes. On 6 April 2017, however, this was reduced to 15 years. As a consequence, some residents will find themselves considered domiciliaries for UK IHT purposes – and charged as such on their worldwide assets – sooner than expected.

In addition, reasserting non-domicile status for UK tax purposes is not simple. Those who have been resident for 15 or more tax years out of the previous 20 must becomenon-UK resident for a minimum of six years to reclaim their non-domicile status for UK IHT purposes. Four complete tax years must pass in order for their assets to be considerednon-UK domiciled for IHT purposes again, but they themselves must remain outside the UK for six years before returning in order to attain a non-domicile status.

How the changes affect non-domiciliaries

There are, of course, a variety of ways in which thechanges to UK inheritance tax affect non-domiciliaries. For those already living in the UK, preparing to settle any worldwide assets into an overseas trust before being deemed a UK domiciliary is a sensible course of action. An overseas trust retains the domicile status of the settler at the date it’s settled, which means that regardless of subsequent changes to the settler’s domicile status, it remains non-UK domiciled.

The alterations to UK inheritance tax for non-domiciled individuals also affect non-UK residents with property in the UK.Let’s assume Mr A purchases a house in the UK for £800,000 in cash. Some years later he decides to take a mortgage out on it in order to free up funds to buy another property in France. Before the changes, a deduction in UK IHT was allowed for the mortgage; now, however, it is not and the full £800,000 would be charged to UK IHT.

More about the changes

If you a UK non-domiciliary and would like more information about the recent IHT changes, or to review your tax position, speak to an inheritance tax specialist today

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