Amid the “doom and gloom” predictions of a mass exodus of foreign HNW individuals from the UK following the UK Budget, one client segment is celebrating – long-term UK expatriates. The break in the link between UK domicile and Inheritance Tax (IHT) significantly benefits them.
Under current rules, an individual with a UK domicile of origin retains it until they settle elsewhere and adopt a new “domicile of choice”.
Until then, their worldwide estate remains potentially subject to UK IHT. This creates a major challenge for long-term expatriates who may not intend to stay permanently in their current country, as they cannot lose their UK domicile of origin, even if they don’t plan to return to the UK.
Even when they take steps to adopt a new domicile of choice, there’s always uncertainty about whether they’ve done enough to shed their domicile of origin. If they ultimately leave their adopted domicile, their domicile of origin revives itself.
This outdated basis for taxing an individual’s estate complicates financial planning, as potential UK IHT must always be considered. For example, it can prevent clients from creating trusts for family wealth protection, as transfers above £325,000 can result in a 20% IHT entry charge.
From 6 April 2025, this will change. UK IHT on non-UK assets will only be levied if the transferor has been resident in the UK for at least 10 out of the previous 20 years. This “tax tail” can be as little as three years if, before relocating overseas, the individual had been resident in the UK for more than 10 but less than 19 years.
Long-term expatriates no longer have the “sword of Damocles” of a domicile of origin hanging over them, worrying whether they’ve done enough to adopt a domicile of choice elsewhere to escape UK IHT on their worldwide estate.
This means expatriates can plan with certainty, including creating trusts for legitimate reasons unrelated to tax, such as protecting wealth and loved ones. They can do so without the fear of IHT entry charges. They can also plan based on the country they intend to settle in, without needing to factor in UK IHT.
Furthermore, if they return to the UK after 10 consecutive years’ non-residence, their overseas assets will remain outside the UK IHT net for a further 10 years, giving them ample time to put a long-term planning strategy in place.
In this scenario, a bond from Utmost Wealth Solutions could be a perfect holding vehicle that will remain outside the IHT net, with the ability to transfer it to a suitable trust as the policyholder approaches the 10-year point.