Budget 2024: Understanding the new UK Inheritance Tax Rules

The UK’s Autumn Budget confirmed that the concept of domicile will be dropped from the UK tax system.  Instead, like many other countries, we will look solely at residence (with no changes to the existing Statutory Residence Test).

This means we will also be abolishing the concept of UK resident but non-domiciled (known as being non-dom) and removing domicile as the basis for UK inheritance tax (IHT).

How does IHT apply under the current system?

Currently, IHT applies as follows:

• To the worldwide assets of a UK domiciled person
• To the UK situated assets of a non-UK domiciled person

This means currently if you are non-dom, only your UK assets are subject to IHT.  Also under current rules, you can put your non-UK assets into an offshore trust, and provided you were non-dom at the time, the trust will protect those assets from IHT even if you become UK domiciled (or deemed domiciled) later.

The trust will be classed as an excluded property settlement, as its non-UK situated assets are excluded from IHT.

However, these rules are all being changed and the new system will come into effect from 6 April 2025. Here is a summary of what will change and the potential impact it could have.

New long-term residence test

Instead of domicile, we will look at whether you are long-term UK resident, with this being defined as someone who has been UK resident for at least 10 of the last 20 years.

Once you are long-term UK resident, your worldwide assets will be subject to IHT.

Leaving the UK

There will be an ‘IHT-tail’, which means you will remain liable to UK IHT on your worldwide assets for a period after leaving the UK.  If you have lived in the UK for 20+ years when you leave, the IHT-tail will be 10 tax years.

If you leave the UK after being resident between 10 and 13 years, the IHT-tail will be 3 tax years.  This will then increase by one year for each additional year of residence, so someone who was resident for 15 years will be liable to IHT for 5 years after departure, and someone leaving after 17 years will be liable to IHT for the following 7 years.

There is no indication, yet, as to how HMRC intends to enforce this new rule, and it may be difficult to see how a local lawyer/notary in the country you have moved to is expected to know that UK IHT may still be due.

Offshore Trusts

One of the biggest changes relates to offshore trusts.  As mentioned above, the current system allows you to put your offshore assets into an overseas trust, whilst you are non-dom, and this protects those assets from IHT (provided the trust keeps the assets outside the UK and doesn’t invest directly or indirectly into UK residential property).

This will all change on 6 April 2025.

The new test says that a trust will only be an excluded property settlement (so outside the scope of IHT) at any time the settlor is not classed as a long-term resident.  Or put another way, if the settlor is long-term UK resident, any offshore trust s/he set up (no matter how long ago) will now be within the scope of IHT.

In most cases, the offshore trust will be a discretionary settlement, which means the offshore trustees will need to file special IHT trust returns, and pay IHT, on every tenth anniversary of the trust’s creation and whenever assets are appointed out (as an exit charge).

Currently, the rate of IHT paid by trusts is a maximum of 6%.  As the charges will only apply from 6 April 2025, they will be reduced pro rata.  For example, if your trust’s next 10-year anniversary is in April 2027, that will mean 2 years since the change of rules, so 2/10 (or 1/5^th) of the IHT will be payable.

The rules are different if there is a qualifying life interest in the trust – here the assets are taxed as if the life tenant owned them.  These trusts can only be excluded property settlements if both the settlor and the life tenant are not long-term UK residents.

What if the settlor has died?

If the settlor died before 6 April 2025, the old rules still apply, so you only need to look at the settlor’s domicile on the date the trust was set up/assets were settled.

If the settlor dies after 6 April 2025, you need to know if the settlor was a UK long-term resident at the date of death. If the settlor was not long-term UK resident, then the trust’s non-UK assets are outside the scope of IHT.

But if the settlor was long-term UK resident on the date of death, then all the trust assets (including any situated outside the UK) will be subject to IHT for the duration of the trust.

Gift with reservation of benefit rules

The UK also has a system for taxing gifts where the donor retained a benefit, known as the gift with reservation of benefit or GWR rules.

A classic example is where someone sets up a trust but is still one of the beneficiaries.  The settlor therefore has retained a potential benefit, even if nothing is actually paid out of the trust to the settlor.

Under the current rules, if a non-dom sets up a trust with ‘excluded property’, then it doesn’t matter if the settlor has retained a benefit.  The trust asset will still be outside the scope of IHT even if the settlor has become UK domiciled by the time they die.

Under the new rules, if the settlor retains a benefit in the trust, and is long-term UK resident on the date of death, then the GWR rules mean the whole value of the trust is subject to IHT as part of the settlor’s estate.

Alternatively, if the settlor were to give up the reserved benefit during their lifetime (e.g. by being excluded from benefit) the GWR rules class this as a lifetime gift.  This means the settlor has to survive by at least 7 years to ensure no IHT is due.

Limited ‘grandfathering’

There is a limited grandfathering from these GWR rules, for trusts that had already been set up before 30 October 2024.  These trusts won’t be subject to the GWR rules but only for the non-UK assets that were already in the trust.

The GWR rules would still apply to any UK situated assets, and that remains the case even if those are sold and reinvested offshore.  Similarly, any new additions to the trust will be caught by the GWR rules.

The grandfathering doesn’t stop the trust having to pay the special IHT charges mentioned above, on every tenth anniversary or on capital ‘exits’ from the trust.

Watch out for settlors who leave the UK

There is also an exit charge when a trust ceases to be in the scope of IHT.  This could happen where the settlor is currently long-term resident (which brings the offshore trust into the scope of IHT) but then leaves.

Once the settlor ceases to be long-term resident, the offshore trust would become an excluded property settlement again.  This would result in an exit charge arising.

This means trustees need to keep careful records of:

• Any trust they administer where the settlor is UK resident
• How long the settlor has been UK resident, to see if they are long-term resident
• The value of all the UK trust assets on the tenth anniversary, if the settlor is not long-term UK resident
• The value of all the trust assets, including offshore, on the tenth anniversary if the settlor is long-term UK resident
• The value of any capital distributions (exits) made since the settlor became long-term resident
• When the settlor ceased to be long-term resident, triggering the IHT exit charge.

Offshore trustees may well feel this is a lot to take into account where the settlor is UK resident!

The exit charge would also apply in the much less likely scenario of a UK domiciled person setting up an offshore trust. Under current rules, that trust would be fully within the scope of IHT because of the settlor’s domicile status.

But from 6 April 2025, when the concept of domicile is abandoned as the basis for IHT, the question instead will be whether the settlor is long-term UK resident.

If they are not, there would be an immediate exit charge to IHT on 6 April 2025, but there would be no further IHT charges for the trust provided the settlor remains not long-term resident.

For further advice on how these new rules will affect you, please contact Jo Summers at jo.summers@jurit.com or on +44(0)20 7846 2370.