The Spring Budget published on 6 March 2024 announced fundamental reform to the UK’s existing system of non-domicile and remittance based taxation. From 6 April 2025, the UK is to move to a residency based regime intended to increase tax revenues and reduce complexity for those navigating it. The finer details of the enacting legislation are still subject to consultation and with the looming possibility of a widely predicted change of government later this year, the reforms face an uncertain future.
Looking at inheritance tax (‘IHT’) specifically, if a person is domiciled in the UK at death, their worldwide estate is currently considered for the purposes of calculating the tax. If they are a ‘non-‘dom’ however, only their UK estate is subject to IHT. The new residency based system would disregard a person’s domicile status and instead levy IHT on a person’s worldwide estate where they have been UK resident for 10 years, with liability extended for an additional 10 years after they leave the UK.
These changes could be of particular relevance in Northern Ireland, where many people residing here may still be domiciled in the Republic of Ireland or, although UK domiciled, may have a spouse or civil partner who is domiciled in the Republic, in which case the IHT exemption for assets passing between them is limited to £325k (rather than being unlimited for a couple who are both UK domiciled). Although the proposed reforms are likely to bring greater clarity around the IHT status of many individuals, as opposed to relying on the concept of domicile which can be somewhat uncertain, it is clear that may individuals will need to take careful advice around their IHT planning where they have moved, or are planning to move, between jurisdictions.
The reforms also seek to abolish the previous regime of trust protections established in 2017, that allow trusts with non-UK assets settled by non-domiciled settlors to be permanently excluded from IHT even where the settlor later becomes UK domiciled. The proposed changes will not affect such excluded property trusts established on or before 5 April 2025, however, thereafter IHT will be chargeable on foreign assets held in trusts where the settlor has been resident for 10 years and, once within the scope, IHT will continue to be chargeable for 10 years after they leave the UK. For those eligible for the residency based system, foreign income and gains from trusts will be excluded for the first 4 years of residency.
Although, this represents seismic action by the current government, the reforms do not reflect the most fundamental vision for IHT reform. The abolition or reform of IHT has long been called for by a wide range of critics. Indeed polling indicates that IHT is the most unpopular tax, despite less than 5% of deaths actually resulting in any IHT being paid.
In 2020, a report by the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness proposed a sweeping vision of reform, aimed at reducing complexity and the potential for tax avoidance. The report proposed a flat rate gift tax on both lifetime and death transfers. It would also abolish the majority of reliefs other than the spouse and charity exemptions, including the ‘seven-year rule’ around gifting and associated taper relief, and ending the capital gains tax uplift on death. It was suggested that the axing of the majority of currently available reliefs would be balanced by an annual allowance of £30,000 on gifts made during a person’s lifetime and the continuance of the existing £325,000 nil-rate band for transfers on death. Aside from the APPG report, other options for reform could include a wealth transfer tax which is aimed at taxing the recipient, rather than the estate, which would bring the UK into line with many other legal jurisdictions across the world.
More recently the Institute for Fiscal Studies (IFS) has recommended sweeping changes to the valuable reliefs which currently apply to pensions, agricultural property and business property. At present, pensions are one of the most tax efficient ways of transferring wealth to the next generation, as they can pass free of IHT on death. The IFS would recommend abolishing this treatment. Similarly, Agricultural Property Relief and Business Relief result in crucial IHT savings for farmers and family businesses in particular, but the IFS recommends that the reliefs would instead be capped at a certain threshold.
None of the above is current government policy and indeed it remains to be seen whether any of the proposals will be adopted as policy by any future administration, whether Labour or Conservative. Public comments by the Labour leader Sir Keir Starmer have downplayed any potential reforms of the IHT system, noting the detrimental effect of any further cuts to the budget on their ability to enact their more central policies, and has even gone as far as to suggest that they will row back on any reforms enacted by an outgoing Conservative government. As such, although reforms contained in the Spring Budget represent a radical overhaul of IHT, it remains uncertain as to what final form they will take or whether they will even survive to be enacted in 2025, and the future of IHT generally remains as unclear as ever.
If you have questions about inheritance tax or estate planning, please contact Fiona Kirkpatrick in our Private Client team for more information.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
